CarMax 2009 Annual Report Download - page 27

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CRITICAL ACCOUNTING POLICIES
Our results of operations and financial condition as reflected in the consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles. Preparation of financial statements
requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues, expenses and the disclosures of contingent assets and liabilities. We use our historical experience and
other relevant factors when developing our estimates and assumptions. We continually evaluate these estimates and
assumptions. Note 2 includes a discussion of significant accounting policies. The accounting policies discussed
below are the ones we consider critical to an understanding of our consolidated financial statements because their
application places the most significant demands on our judgment. Our financial results might have been different if
different assumptions had been used or other conditions had prevailed.
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 residual cash flows we expect to receive over
the life of the securitized receivables. The fair value of our retained interest in securitization transactions includes
the present value of the residual cash flows we expect to receive over the life of the securitized receivables, reserve
accounts, an undivided ownership interest in certain receivables and retained subordinated bonds.
The present value of the residual cash flows we expect to receive over the life of the securitized receivables is
determined by estimating the future cash flows using our assumptions of key factors, such as finance charge income,
loss rates, prepayment rates, funding costs 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 could have a material impact on the fair value of the retained interest. The fair value of the
retained interest could also be affected by external factors, such as changes in the behavior patterns of customers,
changes in the strength of 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. Note 6 includes a discussion on fair value measurements. 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 we are not the
primary obligor under these service plans, we recognize commission revenue on the ESPs at the time of sale, net of
a reserve for returns. The reserve for ESP cancellations is recorded based on historical experience and trends, and it
could be affected if future ESP cancellations 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 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 8 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 available
carrybacks, 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 28, 2009, will more likely than not be realized. However, if a change in