CarMax 2000 Annual Report Download - page 57

CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 55
CIRCUIT CITY GROUP
(H) 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 cur-
rently enacted tax laws. A deferred tax asset is recognized if it is more
likely than not that a benefit will be realized.
(I) DEFERRED REVENUE: The Circuit City Group sells its own extended
warranty contracts and extended warranty contracts on behalf of unre-
lated third parties. The contracts extend beyond the normal manufac-
turer’s warranty period,usually with terms (including the manufacturer’s
warranty period) between 12 and 60 months. Inasmuch as the Company
is the primary obligor on these contracts, 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. Incre-
mental 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 recog-
nized at the time of sale,since the third parties are the primary obligors
under these contracts.
(J) INTER-GROUP INTEREST: The Circuit City Group held a 74.7 percent
Inter-Group Interest in the CarMax Group at February 29,2000,a 76.6
percent Inter-Group Interest at February 28,1999,and a 77.3 percent
Inter-Group Interest at February 28,1998. 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. Accord-
ingly, 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 earnings (loss) of the CarMax Group attributed
to the Circuit City Group’s Inter-Group Interest are reflected as “Net earn-
ings (loss) related to Inter-Group Interest in the CarMax Group”on the
Circuit City Group statements of earnings. All amounts corresponding 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 adjusted proportionally for the net earnings
(loss) of the CarMax Group. In addition,in the event of any dividend or
other distribution on CarMax Group Stock,an amount that is proportion-
ate to the aggregate amount paid in respect to shares of CarMax Group
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.
(K) SELLING,GENERAL AND ADMINISTRATIVE EXPENSES: Operating profits
generated by the finance operation are recorded as a reduction to selling,
general and administrative expenses.
(L) ADVERTISING EXPENSES: All advertising costs are expensed as incurred.
(M) NET EARNINGS PER SHARE: The Company calculates earnings per share
based upon SFAS No.128,“Earnings per Share.”Basic net earnings per
share is computed by dividing net earnings attributed to Circuit City
Group Stock,including the Circuit City Group’s retained interest in the
CarMax Group,by the weighted average number of common shares
outstanding. Diluted net earnings per share is computed by dividing
net earnings attributed to Circuit City Group Stock,which includes
the Circuit City Group’s retained interest in the CarMax Group, by the
weighted average number of common shares outstanding and dilutive
potential common shares.
(N) STOCK-BASED COMPENSATION: The Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion
No.25,“Accounting for Stock Issued to Employees,”and provides the
pro forma disclosures of SFAS No. 123,“Accounting for Stock-Based
Compensation.”
(O) 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 funding. 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 underlying financial instrument. Under this method,pay-
ments 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 recog-
nized 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 such a swap were to be
terminated,the impact on the fair value of the financial asset created
by the sale of the related receivables would be estimated and included
in earnings.
(P) RISKS AND UNCERTAINTIES: The Circuit City Group is a leading national
retailer of brand-name consumer electronics,personal computers,major
appliances and entertainment software. The diversity of the Circuit City
Group’s products,customers,suppliers and geographic operations signifi-
cantly reduces the risk that a severe impact will occur in the near term as
a result of changes in its customer base,competition,sources of supply or
markets. It is unlikely that any one event would have a severe impact on
the Circuit City Group’s operating results.
Because of the Inter-Group Interest, the Circuit City Group also is subject
to risks and uncertainties related to the CarMax Group. The CarMax
Group is a used- and new-car retail business. The diversity of the CarMax
Group’s customers and suppliers reduces the risk that a severe impact will
occur in the near term as a result of changes in its customer base or
sources of supply. However, because of the CarMax Group’s limited overall
size,management cannot assure that unanticipated events will not have a
negative impact on the Circuit City Group.