CarMax 2015 Annual Report Download - page 28

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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 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 currently offer on all used vehicles provide coverage up to 60 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 contract 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 contract 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 $9.4 million as of February 28, 2015. See Note 8 for additional information on cancellation reserves.
Customers applying for financing who are not approved by CAF may be evaluated by other third-party finance
providers. These providers generally either pay us or are paid a fixed, pre-negotiated fee per contract. We recognize
these fees at the time of sale.
We collect sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale. These
taxes are accounted for on a net basis and are not included in net sales and operating revenues or cost of sales.
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