CarMax 2006 Annual Report Download - page 43

CARMAX 2006 41
(F) Inventory
Inventory is comprised primarily of vehicles held for sale or undergoing reconditioning and is stated at the
lower of cost or market. Vehicle inventory cost is determined by specific identification. Parts and labor used to
recondition vehicles, as well as transportation and other incremental expenses associated with acquiring and
reconditioning vehicles, are included in inventory. Certain manufacturer incentives and rebates for new car
inventory, including holdbacks, are recognized as a reduction to new car inventory when CarMax purchases
the vehicles. Volume-based incentives are recognized as a reduction to cost of sales when achievement of
qualifying sales volumes is determined to be probable.
(G) Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are calculated using the straight-line method over the shorter of the asset’s estimated useful life or
the lease term, if applicable. Property held under capital lease is stated at the lower of the present value of the
future minimum lease payments at the inception of the lease or fair value. Amortization of capital lease assets is
computed on a straight-line basis over the shorter of the initial lease term or the estimated useful life of the asset
and is included in depreciation expense. Costs incurred during new store construction are capitalized as
construction in progress and reclassified to the appropriate fixed asset category when the store opens.
ESTIMATED USEFUL LIVES
Life
Buildings..................................................................... 25—40 years
Capital leases.............................................................. 10—20 years
Leasehold improvements........................................... 8—15 years
Furniture, fixtures, and equipment ........................... 5—15 years
The company reviews long-lived assets for impairment when circumstances indicate the carrying amount of
an asset may not be recoverable. Impairment is recognized when the sum of undiscounted estimated future
cash flows expected to result from the use of the asset is less than the carrying value.
(H) Other Assets
Computer Software Costs
External direct costs of materials and services used in the development of internal-use software and payroll and
payroll-related costs for employees directly involved in the development of internal-use software are capitalized.
Amounts capitalized are amortized on a straight-line basis over five years.
Goodwill and Intangible Assets
The company reviews goodwill and intangible assets for impairment annually or when circumstances indicate
the carrying amount may not be recoverable. No impairment of goodwill or intangible assets resulted from the
annual impairment tests in fiscal 2006 or fiscal 2005.
Restricted Cash Deposits
Included in other assets at February 28, 2006, and February 28, 2005, were restricted cash deposits of $17.7
million and $12.0 million, respectively, which were associated with certain insurance deductibles. Restricted
cash deposits were previously reported in Cash and Cash Equivalents.
(I) Defined Benefit Plan Obligations
Defined benefit retirement plan obligations are included in accrued expenses and other current liabilities on the
company’s consolidated balance sheets. The defined benefit retirement plan obligations are determined by
independent actuaries using a number of assumptions provided by the company. Key assumptions used in
measuring the plan obligations include the discount rate, the estimated rate of salary increases, and the
estimated future return on plan assets.
(J) Insurance Liabilities
Insurance liabilities are included in accrued expenses and other current liabilities on the company’s
consolidated balance sheets. The company uses a combination of insurance and self-insurance for a number of
risks including workers’ compensation, general liability, and employee-related health care benefits, a portion of
which is paid by associates. Estimated insurance liabilities are determined by considering historical claims
experience, demographic factors, and other actuarial assumptions.