CarMax 1999 Annual Report Download - page 57

Property held under capital lease is stated at the lower of the
present value of the minimum lease payments at the inception of
the lease or market value and is amortized on a straight-line basis
over the lease term or the estimated useful life of the asset,
whichever is shorter.
(G) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the
Company adopted the American Institute of Certified Public
Accountants Statement of Position 98-1, “Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use.” Once the capitalization criteria of the SOP have been met,
external direct costs of materials and services used in the develop-
ment of internal-use software and payroll and payroll-related
costs for employees directly involved in the development of inter-
nal-use software are capitalized. Amounts capitalized are amor-
tized on a straight-line basis over a period of three to five years.
(H) PRE-OPENING EXPENSES: Expenses associated with the open-
ing of new stores are deferred and amortized ratably over the period
from the date of the store opening to the end of the fiscal year.
(I) INCOME TAXES: Income taxes are accounted for in accordance
with SFAS No. 109, “Accounting for Income Taxes.” Deferred
income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial
reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. A
deferred tax asset is recognized if it is more likely than not that a
benefit will be realized.
(J) DEFERRED REVENUE: The Circuit City Group sells its own
extended warranty contracts and extended warranty contracts on
behalf of unrelated third parties. The contracts extend beyond the
normal manufacturer’s warranty period, usually with terms
(including the manufacturer’s warranty period) between 12 and 60
months. All revenue from the sale of the Circuit City Group’s own
extended warranty contracts is deferred and amortized on a
straight-line basis over the life of the contracts. Incremental direct
costs related to the sale of contracts are deferred and charged to
expense in proportion to the revenue recognized. Commission
revenue for the unrelated third-party extended warranty plans is
recognized at the time of sale.
(K) INTER-GROUP INTEREST: Prior to the offering, the Circuit
City Group held a 100 percent Inter-Group Interest in the
CarMax Group. The Circuit City Group held a 76.6 percent
Inter-Group Interest in the CarMax Group at February 28, 1999, a
77.3 percent Inter-Group Interest at February 28, 1998, and a 77.5
percent Inter-Group Interest at February 28, 1997. For purposes of
these group financial statements, the Circuit City Group accounts
for the Inter-Group Interest in a manner similar to the equity
method of accounting. Accordingly, the Circuit City Group’s
Inter-Group Interest in the Company’s equity value that is
attributed to the CarMax Group is reflected as “Inter-Group
Interest in the CarMax Group” on the Circuit City Group balance
sheets. Similarly, the net losses of the CarMax Group attributed to
the Circuit City Group’s Inter-Group Interest are reflected as “Net
loss related to Inter-Group Interest in the CarMax Group” on the
Circuit City Group statements of earnings. All amounts corre-
sponding to the Circuit City Group’s Inter-Group Interest in the
CarMax Group in these group financial statements represent the
Circuit City Group’s proportional interest in the businesses, assets
and liabilities and income and expenses of the CarMax Group.
The carrying value of the Circuit City Group’s Inter-Group
Interest in the CarMax Group has been decreased proportionally
for the net loss of the CarMax Group. In addition, in the event of
any dividend or other distribution on CarMax Stock, an amount
that is proportionate to the aggregate amount paid in respect to
shares of CarMax Stock would be transferred to the Circuit City
Group from the CarMax Group with respect to its Inter-Group
Interest and would reduce the related book value.
(L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Oper-
ating profits generated by the finance operation are recorded as a
reduction to selling, general and administrative expenses.
(M) ADVERTISING EXPENSES: All advertising costs are expensed
as incurred.
(N) NET EARNINGS PER SHARE: On December 15, 1997, the
Company adopted SFAS No. 128, “Earnings per Share.” All
prior period earnings per share data presented has been restated to
conform with the provisions of SFAS No. 128.
Basic net earnings per share is computed by dividing net
earnings attributed to Circuit City Stock, including the Circuit
City Group’s 100 percent interest in the losses of the CarMax
Group for periods prior to the offering and the Circuit City
Group’s retained interest in the CarMax Group subsequent to the
offering, by the weighted average number of common shares out-
standing. Diluted net earnings per share is computed by dividing
net earnings attributed to Circuit City Stock, which includes the
Circuit City Group’s retained interest in CarMax, by the weighted
average number of common shares outstanding and dilutive
potential common shares.
(O) STOCK-BASED COMPENSATION: On March 1, 1996, the
Company adopted SFAS No. 123, “Accounting for Stock-Based
Compensation.” The Company has elected to continue applying
the provisions of the Accounting Principles Board Opinion No.
25, “Accounting for Stock Issued to Employees,” and to provide
the pro forma disclosures of SFAS No. 123.
(P) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters
into interest rate swap agreements to manage exposure to interest
rates and to more closely match funding costs to the use of fund-
ing. Interest rate swaps relating to long-term debt are classified as
held for purposes other than trading and are accounted for on a
settlement basis. To qualify for this accounting treatment, the
swap must synthetically alter the nature of a designated underly-
ing financial instrument. Under this method, payments or receipts
due or owed under the swap agreement are accrued through each
settlement date and recorded as a component of interest expense.
If a swap designated as a synthetic alteration were to be termi-
nated, any gain or loss on the termination would be deferred and
recognized over the shorter of the original contractual life of the
swap or the related life of the designated long-term debt.
The Company also enters into interest rate swap agreements
as part of its asset securitization programs. Swaps entered into by
a seller as part of a sale of financial assets are considered proceeds
at fair value in the determination of the gain or loss on the sale. If
CIRCUIT CITY GROUP
CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT 55