AutoNation 2015 Annual Report Download - page 89

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Table of Contents
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franchise rights, and no impairment charges resulted from the quantitative test. As a result of the unresolved issues related to Volkswagen associated with
certain of its diesel engine vehicles, 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. The non-cash impairment charges are reflected as Franchise Rights Impairment in the
accompanying Consolidated Statements of Income.
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. The development of the assumptions used in our annual impairment tests are
coordinated by our financial planning and analysis group, and the assumptions are reviewed by management.
We performed a qualitative assessment of franchise rights impairment as of April 30, 2014, and determined that we should perform a quantitative test for
certain franchise rights, and no impairment charges resulted from the quantitative test.
Long-Lived Assets
The fair value measurement valuation process for our long-lived assets is established by our corporate real estate services group. Fair value measurements,
which are based on Level 3 inputs, and changes in fair value measurements are reviewed and assessed each quarter for properties classified as held for sale, or
when an indicator of impairment exists for properties classified as held and used, by the corporate real estate services group. Our corporate real estate services
group utilizes its knowledge of the automotive industry and historical experience in real estate markets and transactions in establishing the valuation
process, which is generally based on a combination of the market and replacement cost approaches.
In a market approach, the corporate real estate services group uses transaction prices for comparable properties that have recently been sold. These
transaction prices are adjusted for factors related to a specific property. The corporate real estate services group also evaluates changes in local real estate
markets, and/or recent market interest or negotiations related to a specific property. In a replacement cost approach, the cost to replace a specific long-lived
asset is considered, which is adjusted for depreciation from physical deterioration, as well as functional and economic obsolescence, if present and
measurable.
To validate the fair values determined under the valuation process noted above, our corporate real estate services group also obtains independent third-
party appraisals for our properties and/or third-party brokers’ opinions of value, which are generally developed using the same valuation approaches
described above, and evaluates any recent negotiations or discussions with third-party real estate brokers related to a specific long-lived asset or market.
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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.
During 2014, there were no impairment charges recorded for the carrying value of long-lived assets held and used in continuing operations.
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