O'Reilly Auto Parts 2004 Annual Report Download - page 43

2004 ANNUAL REPORT 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and long-term
debt, as reported in the accompanying consolidated balance sheets, approximates fair value.
Notes Receivable
The Company had notes receivable from vendors and other third parties amounting to $25,108,000 and $27,742,000 at December 31, 2004 and
2003, respectively. The notes receivable, which bear interest at rates ranging from 0% to 10%, are due in varying amounts through August 2017.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The standard requires that abnormal
amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. The provision is effective for
fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial
position, results of operations or cash flows.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary
Transactions. SFAS 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the
asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance.
SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of this standard to have a material effect on its financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock Based
Compensation, and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, which is third quarter
2005 for calendar year companies, although early adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a “modified
prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial
statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on
the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the
requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on
pro forma disclosures made in accordance with SFAS 123. The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure
the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use
of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption
of SFAS 123R. See Note 8 for further information. SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized
compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because
they depend on, among other things, when employees exercise stock options. However, the amount of operating cash flows recognized in prior periods for
such excess tax deductions, as shown in the Company’s Consolidated Statement of Cash Flows, were $4.5 million, $5.5 million, and $1.5 million, for the
years ended December 31, 2004, 2003, and 2002, respectively. The Company currently expects to adopt SFAS 123R effective July 1, 2005; however, the
Company has not yet determined which of the aforementioned adoption methods it will use and is still evaluating the standard.
Reclassifications
The Company made certain reclassifications to prior periods to conform to current year presentation.
Leases
The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the estimated economic life of those assets. Generally, for
stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain renewal option periods for
which renewal is reasonably assured and failure to exercise the renewal option would result in an economic penalty. The calculation for straight-line rent
expense is based on the same lease term. Previously, leasehold improvements were amortized over a period of time which included both the base lease term
and the first renewal option period of the lease and rent expense was recorded as paid.
As a result, the Company’s 2004 statement of income includes an adjustment to correct its lease accounting of $10.4 million ($3.5 million related to
2004), $6.5 million, net of tax. Prior years’ financial statements will not be restated due to the immateriality of the issue to the results of operations
and statement of financial position for the current year or any individual year. As the correction relates solely to accounting treatment, it does not
affect the Company’s historical or future cash flows.
The effect from these corrections, which is reflected in the financial statements, is an increase in depreciation expense of $6.0 million ($2.6 million related
to 2004), an increase in rent expense of $4.4 million ($0.9 million related to 2004), and a decrease in income tax expense of $3.9 million.