CarMax 2008 Annual Report Download - page 56

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(R) Income Taxes
We file a consolidated federal income tax return for a majority of our subsidiaries. Certain subsidiaries are required
to file separate partnership or corporate federal income tax returns. 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. Changes in tax laws and tax rates are
reflected in the income tax provision in the period in which the changes are enacted.
We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that
certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured
at the highest tax benefit that is greater than 50% likely of being realized upon settlement. The current portion of tax
liabilities is included in accrued income taxes and any noncurrent portion of tax liabilities is included in deferred
revenue and other liabilities. To the extent that the final tax outcome of these matters is different from the amounts
recorded, the differences impact income tax expense in the period in which the determination is made. Interest and
penalties related to income tax matters are included in selling, general and administrative expenses.
(S) Net Earnings Per Share
Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares of
common stock outstanding. Diluted net earnings per share is computed by dividing net earnings by the sum of the
weighted average number of shares of common stock outstanding and dilutive potential common stock.
(T) Risks and Uncertainties
We sell used and new vehicles. The diversity of our customers and suppliers and the highly fragmented nature of
the U.S. automotive retail market reduce the risk that near term changes in our customer base, sources of supply or
competition will have a severe impact on our business. However, unanticipated events could have an adverse effect
on our business, results of operations and financial condition.
(U) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’ s presentation.
3. CARMAX AUTO FINANCE INCOME
Years Ended February 29 or 28
(In millions) 2008 2007 2006
Total gain income ...................................................................... $ 48.5 $ 99.7 $ 77.1
Other CAF income:
Servicing fee income .............................................................. 37.4 32.4 27.6
Interest income ....................................................................... 33.3 26.6 21.4
Total other CAF income ............................................................ 70.7 59.0 49.0
Direct CAF expenses:
CAF payroll and fringe benefit expense................................. 15.9 12.0 10.3
Other direct CAF expenses..................................................... 17.4 14.0 11.5
Total direct CAF expenses......................................................... 33.3 26.0 21.8
CarMax Auto Finance income................................................... $ 85.9 $ 132.6 $ 104.3
CAF provides financing for qualified customers at competitive market rates of interest. Throughout each month, we
sell substantially all of the loans originated by CAF in securitization transactions as discussed in Note 4. The
majority of CAF income is generated by the spread between the interest rates charged to customers and the related
cost of funds. A gain, recorded at the time of securitization, results from recording a receivable approximately equal
to the present value of the expected residual cash flows generated by the securitized receivables. The cash flows are
calculated taking into account expected prepayments and losses.
CAF income does not include any allocation of indirect costs or income. We present this information on a direct
basis to avoid making arbitrary decisions regarding the indirect benefit or costs that could be attributed to CAF.
Examples of indirect costs not included are retail store expenses and corporate expenses such as human resources,
administrative services, marketing, information systems, accounting, legal, treasury and executive payroll.