AutoZone 2004 Annual Report Download - page 32
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flowswiththecarryingamountsoftheassets.Ifimpairmentsareindicated,theamountbywhichthecarryingamountoftheassetsexceeds
thefairvalueoftheassetsisrecognizedasanimpairmentloss.Nosignificantimpairmentlosseswererecordedinthethreeyearsended
August28,2004.
Goodwill:Thecostinexcessoffairvalueofidentifiablenetassetsofbusinessesacquiredisrecordedasgoodwillandisreflectednetof
$32.2millioninaccumulatedamortizationasofAugust28,2004andAugust30,2003.InaccordancewiththeprovisionsofStatement
ofFinancialAccountingStandardsNo.142,“GoodwillandOtherIntangibleAssets”(“SFAS142”),goodwillhasnotbeenamortizedsince
fiscal2001,butananalysisisperformedatleastannuallytocomparethefairvalueofgoodwilltothecarryingamounttodetermineifany
impairmentexists.TheCompanyperformsitsannualimpairmentassessmentinthefourthquarterofeachfiscalyear,unlesscircumstances
dictatemorefrequentassessments.NoimpairmentlosseswererecordedinthethreeyearsendedAugust28,2004.
Derivative Instruments and Hedging Activities: AutoZone is exposed to market risk from, among other things, changes in interest rates,
foreignexchangeratesandfuelprices.Fromtimetotime,theCompanyusesvariousfinancialinstrumentstoreducesuchrisks.Todate,
basedupontheCompany’scurrentlevelofforeignoperations,hedgingcostsandpastchangesintheassociatedforeignexchangerates,no
instruments have been utilized to reduce this market risk. All of the Company’s hedging activities are governed by guidelines that are
authorizedbyAutoZone’sBoardofDirectors.Further,theCompanydoesnotbuyorsellfinancialinstrumentsfortradingpurposes.
AutoZone’sfinancialmarketriskresultsprimarilyfrom changesininterestrates.Attimes,AutoZonereducesitsexposuretochangesin
interestratesbyenteringintovariousinterestratehedgeinstrumentssuchasinterestrateswapcontracts,treasurylockagreementsand
forward-startinginterestrateswaps.TheCompanycomplieswithStatementofFinancialAccountingStandardsNos.133,137,138and
149(collectively“SFAS133”)pertainingtotheaccountingforthesederivativesandhedgingactivitieswhichrequireallsuchinterestrate
hedgeinstrumentstoberecognizedonthebalancesheetatfairvalue.AlloftheCompany’sinterestratehedgeinstrumentsaredesignated
ascashflowhedges.RefertoNoteBforadditionaldisclosuresregardingtheCompany’sderivativesinstrumentsandhedgingactivities.
Financial Instruments: The Company has financial instruments, including cash, accounts receivable, other current assets and accounts
payable.Thecarryingamountsofthesefinancialinstrumentsapproximatefairvaluebecauseoftheirshortmaturities.Adiscussionofthe
carryingvaluesandfairvaluesoftheCompany’sdebtisincludedinNoteE,whileadiscussionoftheCompany’sfairvaluesofitsderivatives
isincludedinNoteB.
IncomeTaxes:TheCompanyaccountsforincometaxesundertheliabilitymethod.Deferredtaxassetsandliabilitiesaredeterminedbased
ondifferencesbetweenfinancialreportingandtaxbasesofassetsandliabilitiesandaremeasuredusingtheenactedtaxratesandlaws
thatwillbeineffectwhenthedifferencesareexpectedtoreverse.
RevenueRecognition:TheCompanyrecognizessalesatthetimethesaleismadeandtheproductisdeliveredtothecustomer.
VendorAllowancesandAdvertisingCosts:TheCompanyreceivesvariouspaymentsandallowancesfromitsvendorsbasedonthevolumeof
purchasesorforservicesthatAutoZoneprovidestothevendors.Moniesreceivedfromvendorsincluderebates,allowancesandpromotional
funds.Typically,thesefundsaredependentonpurchasevolumesandadvertisingplans.Theamountstobereceivedaresubjecttochanges
inmarketconditions,vendormarketingstrategiesandchangesintheprofitabilityorsell-throughoftherelatedmerchandise.
Rebatesandothermiscellaneousincentivesareearnedbasedonpurchasesorproductsales.Thesemoniesaretreatedasareductionof
inventoriesandarerecognizedasareductiontocostofsalesastheinventoriesaresold.
Certainvendorallowancesare used exclusivelyforpromotionsandtopartiallyorfullyoffsetcertainotherdirectexpenses. Suchvendor
fundingarrangements,which were entered intoon or beforeDecember 31,2002,were recognized as a reductionto operating, selling,
generalandadministrativeexpenseswhenearned.However,forsuchvendorfundingarrangementsenteredintoormodifiedafterDecember
31,2002,theCompanyappliedthenewguidancepursuanttotheEmergingIssuesTaskForceIssueNo.02-16,“AccountingbyaCustomer
(IncludingaReseller)forCashConsiderationReceivedfromaVendor”(“EITF02-16”).Accordingly,allvendorfundsfromarrangements
enteredintoormodifiedafterDecember31,2002,wererecognizedasareductiontocostofsalesastheinventoriesweresold.Asaresult
oftheadoptionofEITF02-16, operating,selling,generaland administrativeexpenseswereapproximately $138 millionhigherinfiscal
2004and $53 millionhigherinfiscal 2003,whilegrossprofitwasapproximately$138 millionhigherinfiscal 2004 and$43 million
higherinfiscal2003thansuchamountswouldhavebeenpriortotheaccountingchange.
Advertisingexpensewasapproximately$98.1millioninfiscal2004,$32.5millioninfiscal2003,and$17.5millioninfiscal2002.Prior
totheadoptionofEITF02-16duringfiscal2003,vendorallowancesforadvertisingwerenettedagainstadvertisingexpense.TheCompany
expensesadvertisingcostsasincurred.
WarrantyCosts:TheCompanyorthevendorssupplyingitsproductsprovideitscustomerswithlimitedwarrantiesoncertainproducts.
EstimatedwarrantyobligationsforwhichtheCompanyisresponsibleareprovidedatthetimeofsaleoftheproductandarechargedto
costofsales.