AutoNation 2015 Annual Report Download - page 27

Table of Contents
The quantitative impairment test for franchise rights requires the comparison of the franchise rights’ estimated fair value to carrying value by store. Fair
values of rights under franchise agreements are estimated using Level 3 inputs by discounting expected future cash flows of the store. The forecasted cash
flows contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, working capital requirements, capital
expenditures, and cost of capital, for which we utilize certain market participant-based assumptions, using third-party industry projections, economic
projections, and other marketplace data we believe to be reasonable. If, hypothetically, the fair value of each of the franchise rights for these seven stores had
been determined to be 10% lower as of the valuation date, the resulting aggregate pre-tax impairment charge would have been approximately $2.5 million
(approximately $1.5 million after-tax). The effect of a hypothetical 10% decrease in fair value estimates is not intended to provide a sensitivity analysis of
every potential outcome.
As a result of the unresolved issues related to Volkswagen as noted above in “Market Conditions,” during the fourth quarter of 2015, we performed a
quantitative impairment test of the franchise rights recorded at our Volkswagen stores. As a result of this test, we recorded non-cash impairment charges of
$15.4 million ($9.6 million after-tax) to reduce the carrying values of the Volkswagen franchise rights to their estimated fair values. See Note 16 of the Notes
to Consolidated Financial Statements for more information.
Long-Lived Assets
We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review them for impairment when events or
changes in circumstances indicate that their carrying amounts may be impaired. Such events or changes may include a significant decrease in market value, a
significant change in the business climate in a particular market, a current expectation that more-likely-than-not a long-lived asset will be sold or otherwise
disposed of significantly before the end of its previously estimated useful life, or a current-period operating or cash flow loss combined with historical losses
or projected future losses.
When evaluating potential impairment of long-lived assets held and used, we first compare the carrying amount of the asset group to the asset group’s
estimated future undiscounted cash flows. If the estimated future undiscounted cash flows are less than the carrying amount of the asset group, we then
compare the carrying amount of the asset group to the asset group’s estimated fair value to determine if impairment exists. The fair value measurements for
our long-lived assets held and used were based on Level 3 inputs, which considered information obtained from third-party real estate valuation sources. See
Note 16 of the Notes to Consolidated Financial Statements for more information about our fair value measurements. We recognize an impairment loss if the
amount of the asset group’s carrying amount exceeds the asset group’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount
of the asset group becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that
asset.
During 2015, we recorded non-cash impairment charges of $3.1 million related to long-lived assets held and used in continuing operations. The non-cash
impairment charges are included in Other Income, Net (within Operating Income) in our Consolidated Statements of Income and are reported in the
“Corporate and other” category of our segment information.
When property and equipment is identified as held for sale, we reclassify the held for sale assets to Other Current Assets and cease recording depreciation.
We measure each long-lived asset or disposal group at the lower of its carrying amount or fair value less cost to sell and recognize a loss for any initial
adjustment of the long-lived asset’s or disposal group’s carrying amount to fair value less cost to sell in the period the “held for sale” criteria are met. We
periodically evaluate the carrying value of assets held for sale to determine if, based on market conditions, the values of these assets should be adjusted. Any
subsequent change in the fair value less cost to sell (increase or decrease) of each asset held for sale is reported as an adjustment to its carrying amount, except
that the adjusted carrying amount cannot exceed the carrying amount of the long-lived asset or disposal group at the time it was initially classified as held for
sale. Such valuations include estimations of fair values and incremental direct costs to transact a sale. The fair value measurements for our long-lived assets
held for sale were based on Level 3 inputs, which considered information obtained from third-party real estate valuation sources, or, in certain cases, pending
agreements to sell the related assets.
We had assets held for sale in continuing operations of $47.1 million at December 31, 2015, and $64.7 million at December 31, 2014. During 2015, we
recorded non-cash impairment charges of $3.0 million related to long-lived assets held for sale in continuing operations. These non-cash impairment charges
are included in Other Income, Net (within
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