CarMax 2016 Annual Report Download - page 51
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Please find page 51 of the 2016 CarMax annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.47
(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 ESP and GAP products 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 revenue at the time of sale, net of a reserve
for estimated contract cancellations. Periodically, we may receive additional revenue based upon the level of underwriting profits
of the third parties who administer the products. These additional amounts 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 revenue 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 accrued expenses and 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, labor and overhead 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
$142.2 million in fiscal 2016, $124.3 million in fiscal 2015 and $114.6 million in fiscal 2014.
(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 period, which is generally the vesting
period of the award. We estimate the fair value of stock options using a binomial valuation model. Key assumptions used in
estimating the fair value of options are dividend yield, expected volatility, risk-free interest rate and expected term. The fair values
of restricted stock and stock-settled performance stock units are based on the volume-weighted average market value on the date
of the grant. The fair value of stock-settled restricted stock units is determined using a Monte-Carlo simulation based on the
expected market price of our common stock on the vesting date and the expected number of converted common shares. Cash-
settled restricted stock units are liability awards with fair value measurement based on the market price of CarMax common stock
as of the end of each reporting period. Share-based compensation expense is recorded in either cost of sales, CAF income or
SG&A expenses based on the recipients’ respective function.
We record deferred tax assets for awards that result in deductions on our income tax returns, based on the amount of compensation
expense recognized and the statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the
deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are
recorded in capital in excess of par value (if the tax deduction exceeds the deferred tax asset) or in the consolidated statements of