CarMax 2014 Annual Report Download - page 30

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respectively. The majority of the increases in auto loan receivables are accompanied by increases in non-
recourse notes payable, which are reflected as cash provided by financing activities. Excluding the increases in
auto loan receivables, net cash provided by operating activities would have been $711.0 million in fiscal 2014
versus $213.8 million in fiscal 2013, with the increase primarily driven by changes in inventory, accounts
payable and net income.
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 regularly 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.
Financing and Securitization Transactions
We maintain a revolving securitization program composed of two warehouse facilities (“warehouse facilities”) that
we use to fund auto loan receivables originated by CAF until we elect to fund them through a term securitization or
alternative funding arrangement. We recognize transfers of auto loan receivables into the warehouse facilities and
term securitizations as secured borrowings, which result in recording the auto loan receivables and the related non-
recourse notes payable on our consolidated balance sheets. CAF income included in the consolidated statements of
earnings primarily reflects the interest and fee income generated by the auto loan receivables less the interest
expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct
CAF expenses.
Auto loan receivables include amounts due from customers related to retail vehicle sales financed through CAF.
The receivables are presented net of an allowance for estimated loan losses. The allowance for loan losses
represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the
applicable reporting date and anticipated to occur during the following 12 months. The allowance is primarily based
on the credit quality of the underlying receivables, historical loss trends and forecasted forward loss curves. We also
take into account recent trends in delinquencies and losses, recovery rates and the economic environment. The
provision for loan losses is the periodic expense of maintaining an adequate allowance.
See Notes 2(F), 2(I) and 4 for additional information on securitizations and auto loan receivables.
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. As part of our customer service strategy, we guarantee the retail vehicles we sell with a
5-day, money-back guarantee. We record a reserve for estimated returns based on historical experience and trends, and
results could be affected if future vehicle returns differ from historical averages.
We also sell ESPs and GAP on behalf of unrelated third parties, who are the primary obligors, to customers who
purchase a vehicle. The ESPs we offer on all used vehicles provide coverage up to 72 months (subject to mileage
limitations), while GAP covers the customer for the term of their finance contract. We recognize commission revenue at
the time of sale, net of a reserve for estimated customer cancellations. Periodically, we may receive additional
commissions based upon the level of underwriting profits of the third parties who administer the products. These
additional commissions are recognized as revenue when received. The reserve for cancellations is evaluated for each
product, and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit
mix of the customer base. Our risk related to customer cancellations is limited to the commissions that we receive.
Cancellations fluctuate depending on the volume of ESP and GAP sales, customer financing default or prepayment
rates, and shifts in customer behavior related to changes in the coverage or term of the product. Results could be
affected if actual events differ from our estimates. A 10% change in the estimated cancellation rates would have
changed cancellation reserves by approximately $7.2 million as of February 28, 2014. See Note 8 for additional
information on cancellation reserves.
Customers applying for financing who are not approved by CAF may be evaluated by other financial institutions.
Depending on the credit profile of the customer, third-party finance providers generally either pay us or are paid a
fixed, pre-negotiated fee per contract. We recognize these fees at the time of sale.