CarMax 2008 Annual Report Download - page 32

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Securitization Transactions
We use a securitization program to fund substantially all of the auto loan receivables originated by CAF. The
securitization transactions are accounted for as sales. A gain, recorded at the time of the securitization transaction,
results from recording a receivable equal to the present value of the expected residual cash flows generated by the
securitized receivables. The fair value of our retained interest in securitization transactions includes the present
value of the expected residual cash flows generated by the securitized receivables, cash reserve accounts, an
undivided ownership interest in certain receivables and retained subordinated bonds.
The present value of the expected residual cash flows generated by the securitized receivables is determined by
estimating the future cash flows using management’ s assumptions of key factors, such as finance charge and fee
income, cost of funds, loss rates, prepayment rates and discount rates appropriate for the type of asset and risk.
These assumptions are derived from historical experience and projected economic trends. Adjustments to one or
more of these assumptions may have a material impact on the fair value of the retained interest. The fair value of
the retained interest may also be affected by external factors, such as changes in the behavior patterns of customers,
changes in the economy and developments in the interest rate and credit markets. Note 2(C) includes a discussion of
accounting policies related to securitizations. Note 4 includes a discussion of securitizations and provides a
sensitivity analysis showing the hypothetical effect on the retained interest if there were variations from the
assumptions used. In addition, see the “CarMax Auto Finance Income” section of this MD&A for a discussion of
the effect of changes in our assumptions.
Revenue Recognition
We recognize revenue when the earnings process is complete, generally either at the time of sale to a customer or
upon delivery to a customer. We recognize used vehicle revenue when a sales contract has been executed and the
vehicle has been delivered, net of a reserve for returns under our 5-day, money-back guarantee. A reserve for
vehicle returns is recorded based on historical experience and trends, and it could be affected if future vehicle
returns differ from historical averages.
We also sell ESPs on behalf of unrelated third parties to customers who purchase a vehicle. Because these third
parties are the primary obligors under these programs, we recognize commission revenue on the ESPs at the time of
the sale, net of a reserve for returns. The reserve for ESP returns is recorded based on historical experience and
trends, and it could be affected if future ESP returns differ from historical averages.
Income Taxes
Estimates and judgments are used in the calculation of certain tax liabilities and in the determination of the
recoverability of certain of the deferred tax assets. In the ordinary course of business, transactions occur for which
the ultimate tax outcome is uncertain at the time of the transactions. We adjust our income tax provision in the
period in which we determine that it is probable that our actual results will differ from our estimates. Tax law and
rate changes are reflected in the income tax provision in the period in which such changes are enacted. Note 7
includes information regarding income taxes.
We evaluate the need to record valuation allowances that would reduce deferred tax assets to the amount that will
more likely than not be realized. When assessing the need for valuation allowances, we consider future reversals of
existing temporary differences and future taxable income. Except for a valuation allowance recorded for a capital
loss carryforward that may not be utilized before its expiration, we believe that our recorded deferred tax assets as of
February 29, 2008, will more likely than not be realized. However, if a change in circumstances results in a change
in our ability to realize our deferred tax assets, our tax provision would increase in the period when the change in
circumstances occurs.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and the extent to which, additional taxes will be due. If payments of these
amounts ultimately prove to be unnecessary, the reversal of the liabilities would result in tax benefits being
recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities
proves to be less than the ultimate assessment, a further charge to expense would result in the period of
determination.