AutoNation 2006 Annual Report Download - page 52

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Table of Contents
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Revenue Recognition
Revenue consists of sales of new and used vehicles and related finance and insurance (“F&I”) products, sales of parts and services
and sales of other products. The Company recognizes revenue in the period in which products are sold or services are provided. The
Company recognizes vehicle and finance and insurance revenue when a sales contract has been executed, the vehicle has been delivered
and payment has been received or financing has been arranged. Revenue on finance and insurance products represents commissions
earned by the Company for: (i) loans and leases placed with financial institutions in connection with customer vehicle purchases financed
and (ii) vehicle protection products sold. Rebates, holdbacks, floorplan assistance and certain other dealer credits received directly from
manufacturers are recorded as a reduction of the cost of the vehicle and recognized into income upon the sale of the vehicle or when earned
under a specific manufacturer program, whichever is later.
The Company sells and receives a commission, which is recognized upon sale, on the following types of products: extended
warranties, guaranteed auto protection (“GAP,” which covers the shortfall between loan balance and insurance payoff), credit insurance,
lease “wear and tear” insurance and theft protection products. The products the Company offers include products that are sold and
administered by independent third parties, including the vehicle manufacturers’ captive finance subsidiaries. Pursuant to the Company’s
arrangements with these third-party providers, it primarily sells the products on a straight commission basis; however, it may sell the
product, recognize commission and participate in future profit pursuant to retrospective commission arrangements, which are recognized
as earned over the life of the policies. Certain commissions earned from the sales of finance, insurance and other protection products are
subject to chargebacks should the contracts be terminated prior to their expirations. An estimated liability for chargebacks against revenue
recognized from sales of F&I products is recorded in the period in which the related revenue is recognized. Chargeback liabilities were
$70.1 million and $67.7 million at December 31, 2006 and 2005, respectively.
Advertising
The Company expenses the cost of advertising as incurred or when such advertising initially takes place, net of earned
manufacturer credits and other discounts. Manufacturer advertising credits are earned in accordance with the respective manufacturers’
program, which is typically after the Company has incurred the corresponding advertising expenses. Advertising expense, net of
allowances was $221.7 million, $206.2 million and $202.4 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Advertising allowances from manufacturers were $34.2 million, $43.1 million and $47.6 million for the years ended December 31, 2006,
2005 and 2004, respectively.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Deferred income taxes have been provided to show
the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and
between the tax basis of assets and liabilities and their reported amounts in the financial statements.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) per share is based on the combined weighted average number of common shares and
common share equivalents outstanding which include, where appropriate, the assumed exercise of dilutive options.
New Accounting Pronouncements
As of January 1, 2006, the Company adopted SFAS No. 123R and related interpretive guidance. See “Stock Options” section of
Note 1 of Notes to the Consolidated Financial Statements for additional discussion.
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