CarMax 2015 Annual Report Download - page 52

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independent actuaries using a number of assumptions provided by CarMax. Key assumptions used in measuring the
plan obligations include the discount rate, rate of return on plan assets and mortality rate. See Note 10 for additional
information on our benefit plans.
(O) Insurance Liabilities
Insurance liabilities are included in accrued expenses and other current liabilities. We use a combination of insurance
and self-insurance for a number of risks including workers’ compensation, general liability and employee-related
health care costs, a portion of which is paid by associates. Estimated insurance liabilities are determined by
considering historical claims experience, demographic factors and other actuarial assumptions.
(P) 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.
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 EPP sales, customer financing default or prepayment rates, and shifts in customer
behavior, including those 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 current liabilities with the remaining amount recognized
in other liabilities. See Note 8 for additional information on cancellation reserves.
Customers applying for financing who are not approved or are conditionally approved by CAF are generally 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.
(Q) Cost of Sales
Cost of sales includes the cost to acquire vehicles and the reconditioning and transportation costs associated with
preparing the vehicles for resale. It also includes payroll, fringe benefits and parts and repair costs associated with
reconditioning and vehicle repair services. The gross profit earned by our service department for used vehicle
reconditioning service is a reduction of cost of sales. We maintain a reserve to eliminate the internal profit on vehicles
that have not been sold.
(R) Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses primarily include compensation and benefits, other than
payroll related to reconditioning and vehicle repair services; depreciation, rent and other occupancy costs; advertising;
and IT expenses, insurance, bad debt, travel, preopening and relocation costs, charitable contributions and other
administrative expenses.
(S) Advertising Expenses
Advertising costs are expensed as incurred and substantially all are included in SG&A expenses. Total advertising
expenses were $124.3 million in fiscal 2015, $114.6 million in fiscal 2014 and $108.2 million in fiscal 2013.
(T) Store Opening Expenses
Costs related to store openings, including preopening costs, are expensed as incurred and are included in SG&A
expenses.
(U) Share-Based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees and non-employee
directors. We measure share-based compensation cost at the grant date, based on the estimated fair value of the award,
and we recognize the cost on a straight-line basis (net of estimated forfeitures) over the grantee’s requisite service