CarMax 2016 Annual Report Download - page 52
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earnings (if the deferred tax asset exceeds the tax deduction and no capital in excess of par value exists from previous awards). See
Note 12 for additional information on stock-based compensation.
(V) Derivative Instruments and Hedging Activities
We enter into derivative instruments to manage certain risks arising from both our business operations and economic conditions
that result in the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates. We
recognize the derivatives at fair value as either current assets or current liabilities on the consolidated balance sheets, and where
applicable, such contracts covered by master netting agreements are reported net. Gross positive fair values are netted with gross
negative fair values by counterparty. The accounting for changes in the fair value of derivatives depends on the intended use of
the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether
the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We may enter into derivative contracts
that are intended to economically hedge certain risks, even though hedge accounting may not apply or we do not elect to apply
hedge accounting. See Note 5 for additional information on derivative instruments and hedging activities.
(W) Income Taxes
We file a consolidated federal income tax return for a majority of our subsidiaries. Certain subsidiaries are required to file separate
partnership or corporate federal income tax returns. Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. A deferred tax asset is recognized if it is more likely than not that a
benefit will be realized. Changes in tax laws and tax rates are reflected in the income tax provision in the period in which the
changes are enacted. We evaluate the need to record valuation allowances that would reduce deferred tax assets to the amount
that will more likely than not be realized. When assessing the need for valuation allowances, we consider available loss carrybacks,
tax planning strategies, future reversals of existing temporary differences and future taxable income.
We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that certain positions
may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the highest tax benefit that
is greater than 50% likely of being realized upon settlement. The current portion of these tax liabilities is included in accrued
income taxes and any noncurrent portion is included in other liabilities. To the extent that the final tax outcome of these matters
is different from the amounts recorded, the differences impact income tax expense in the period in which the determination is
made. Interest and penalties related to income tax matters are included in SG&A expenses. See Note 9 for additional information
on income taxes.
(X) Net Earnings Per Share
Basic net earnings per share is computed by dividing net earnings available for basic common shares by the weighted average
number of shares of common stock outstanding. Diluted net earnings per share is computed by dividing net earnings available
for diluted common shares by the sum of the weighted average number of shares of common stock outstanding and dilutive
potential common stock. Diluted net earnings per share is calculated using the “if-converted” treasury stock method. See Note
13 for additional information on net earnings per share.
(Y) Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (FASB ASU 2014-8)
related to discontinued operations (FASB ASC Topic 205). The standard raises the threshold for disposals to qualify as a
discontinued operation by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial
results. The standard also requires additional disclosures for discontinued operations and new disclosures for individually material
disposal transactions that do not meet the definition of discontinued operations. We adopted this pronouncement for our fiscal
year beginning March 1, 2015 and there was no effect on our consolidated financial statements.
In November 2015, the FASB issued an accounting pronouncement (FASB ASU 2015-17), which simplifies the balance sheet
classification of deferred taxes. This pronouncement requires that all deferred tax assets and liabilities be classified as noncurrent
in the classified balance sheet, rather than separating such deferred taxes into current and noncurrent amounts, as is required under
current guidance. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2016, and may be applied either prospectively or retrospectively. We early adopted this pronouncement, on
a retrospective basis, for our fiscal year ending February 29, 2016. As a result, we have reclassified $8.1 million of deferred taxes
from current assets to noncurrent assets for the fiscal year ended February 28, 2015 to conform to the current year presentation.
In February 2015, the FASB issued an accounting pronouncement (FASB ASU 2015-2) related to the elimination of guidance
which has allowed entities with interests in certain investment funds to follow earlier consolidation guidance and makes changes
to both the variable interest model and the voting model (FASB ASC 810). This standard will require all entities to re-evaluate
consolidation conclusions regarding variable interest entities. This pronouncement is effective for fiscal years, and for interim