CarMax 2014 Annual Report Download - page 63

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59
8. CANCELLATION RESERVES
We recognize commission revenue for ESPs and GAP products at the time of sale, net of a reserve for estimated
contract cancellations. Cancellations of these services may result from early termination by the customer, or default
or prepayment on the finance contract. 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.
CANCELLATION RESERVES
As of February 28
(In millions) 2014 2013
Balance as of beginning of year $ 32.7 $ 28.5
Cancellations
(36.9) (27.5)
Provision for future cancellations 76.7 31.7
Balance as of end of year $ 72.5
$ 32.7
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. The current portion
of estimated cancellation reserves is recognized as a component of other accrued expenses with the remaining
amount recognized in other liabilities.
Correction of Error. In the fourth quarter of fiscal 2014, the company reviewed the assumptions used in developing
its cancellation reserves for ESP and GAP products and incorporated additional data into a more sophisticated model
as part of our evaluation of the cancellation rates. This additional data included changes in the product and
administration of the product by the company and changes in the credit mix of the customer base. The data was
previously available, but had not been considered in our evaluation of the reserve balances. Based on our evaluation
using a more sophisticated model, we determined that this additional data should have been considered in our
previous assessments of cancellation reserves. We corrected this accounting error by increasing the cancellation
reserves and reducing other sales and revenue. Fiscal 2014 net earnings were reduced by $11.9 million (net of tax of
$7.6 million), or $0.05 per share, pertaining to fiscal 2013 and fiscal 2012. The out of period error was not material
to fiscal 2014 or any previously reported interim or annual period.
9. INCOME TAXES
INCOME TAX PROVISION
Years Ended February 28 or 29
(In thousands) 2014 2013 2012
Current:
Federal $ 283,174 $ 232,652 $ 223,548
State 38,747 30,557 30,439
Total 321,921 263,209 253,987
Deferred:
Federal (15,129) 4,705 54
State (2,056) (847) (926)
Total (17,185) 3,858 (872)
Income tax provision $ 304,736 $ 267,067 $ 253,115