U-Haul 2005 Annual Report Download - page 25

24 I AMERCO ANNUAL REPORT
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
assumptions฀be฀made฀to฀estimate฀the฀value฀of฀the฀entity฀
and฀a฀judgment฀be฀made฀as฀to฀whether฀or฀not฀the฀entity฀
has฀ the฀ financial฀ strength฀ to฀ fund฀ its฀ own฀ operations฀
and฀ execute฀ its฀ business฀ plan฀ without฀ the฀ subordinated฀
financial฀support฀of฀another฀company.
In฀February,฀2004,฀SAC฀Holding฀Corporation฀restructured฀
the฀indebtedness฀of฀three฀subsidiaries฀and฀then฀distributed฀
its฀ interest฀ in฀ those฀ subsidiaries฀ to฀ its฀ sole฀ shareholder.฀
This฀ triggered฀ a฀ requirement฀ to฀ reassess฀ AMERCO’s฀
involvement฀ with฀ those฀ subsidiaries,฀ which฀ led฀ to฀ the฀
conclusion฀that฀based฀on฀then฀existing฀current฀contractual฀
and฀ ownership฀ interests฀ between฀ AMERCO฀ and฀ this฀
entity,฀ AMERCO฀ ceased฀ to฀ have฀ a฀ variable฀ interest฀ in฀
those฀three฀subsidiaries฀at฀that฀date.
Separately,฀ in฀ March฀ 2004,฀ SAC฀ Holding฀ Corporation฀
restructured฀ its฀ indebtedness,฀ triggering฀ a฀ similar฀
reassessment฀of฀SAC฀Holding฀Corporation฀that฀led฀to฀the฀
conclusion฀that฀SAC฀Holding฀Corporation฀was฀not฀a฀VIE฀
and฀that฀AMERCO฀ceased฀to฀be฀the฀primary฀beneficiary฀of฀
SAC฀Holding฀Corporation฀and฀its฀remaining฀subsidiaries,฀
based฀ on฀SAC฀ Holding฀Corporation’s฀ability฀ to฀fund฀ its฀
own฀operations฀and฀execute฀its฀business฀plan฀without฀any฀
future฀subordinated฀financial฀support.
Accordingly,฀ at฀ the฀ dates฀ AMERCO฀ ceased฀ to฀ have฀ a฀
variable฀interest฀and฀ceased฀to฀be฀the฀primary฀beneficiary,฀
it฀deconsolidated฀those฀entities.฀The฀deconsolidation฀was฀
accounted฀ for฀ as฀ a฀ distribution฀ of฀ AMERCO’s฀ interests฀
to฀ the฀ sole฀ shareholder฀ of฀ the฀ SAC฀ entities.฀ Because฀ of฀
AMERCO’s฀ continuing฀ involvement฀ with฀ SAC฀ Holding฀
Corporation฀and฀its฀current฀and฀former฀subsidiaries,฀the฀
distributions฀do฀not฀qualify฀as฀discontinued฀operations฀as฀
defined฀by฀SFAS฀No.฀144.
It฀ is฀ possible฀ that฀ SAC฀ Holding฀ Corporation฀ could฀ take฀
actions฀ that฀ would฀ require฀ us฀ to฀ re-determine฀ whether฀
SAC฀ Holding฀ Corporation฀ was฀ a฀ VIE฀ or฀ whether฀ we฀
have฀ become฀ the฀ primary฀ beneficiary฀ of฀ SAC฀ Holding฀
Corporation.฀Should฀this฀occur,฀we฀could฀be฀required฀to฀
re-consolidate฀ some฀or฀all฀of฀SAC฀ Holding฀Corporation฀
with฀our฀financial฀statements.
Similarly,฀SAC฀Holding฀II฀Corporation฀could฀take฀actions฀
that฀would฀require฀us฀to฀re-determine฀whether฀it฀is฀a฀VIE฀
or฀ whether฀ we฀ continue฀ to฀ be฀ the฀ primary฀ beneficiary฀
of฀our฀variable฀interest฀in฀ SAC฀ Holding฀II฀Corporation.฀
Should฀ we฀ cease฀ to฀ be฀ the฀ primary฀ beneficiary,฀ we฀
would฀ be฀ required฀ to฀ de-consolidate฀ some฀ or฀ all฀ of฀ our฀
variable฀interest฀in฀SAC฀Holding฀II฀Corporation฀from฀our฀
financial฀statements.
Recoverability฀of฀Property,฀Plant฀and฀Equipment
Property,฀ plant฀ and฀ equipment฀ is฀ stated฀ at฀ cost.฀
Interest฀ cost฀ incurred฀ during฀ the฀ initial฀ construction฀ of฀
buildings฀ and฀ rental฀ equipment฀ is฀ considered฀ part฀ of฀
cost.฀ Depreciation฀ is฀ computed฀ for฀ financial฀ reporting฀
purposes฀principally฀using฀the฀straight-line฀method฀over฀
the฀ following฀ estimated฀ useful฀ lives:฀ rental฀ equipment฀
2-20฀ years฀ and฀ buildings฀ and฀ non-rental฀ equipment฀
3-55฀ years.฀ Major฀ overhauls฀ to฀ rental฀ equipment฀ are฀
capitalized฀and฀are฀amortized฀over฀the฀estimated฀period฀
benefited.฀ Routine฀ maintenance฀ costs฀ are฀ charged฀ to฀
operating฀ expense฀ as฀ they฀ are฀ incurred.฀ Gains฀ and฀
losses฀ on฀ dispositions฀ of฀ property,฀ plant฀ and฀ equipment฀
are฀ netted฀ against฀ depreciation฀ expense฀ when฀ realized.฀
Depreciation฀ is฀ recognized฀ in฀ amounts฀ expected฀ to฀
result฀in฀the฀recovery฀of฀estimated฀residual฀values฀upon฀
disposal,฀i.e.,฀no฀gains฀or฀losses.฀During฀the฀first฀quarter฀
of฀fiscal฀ year฀ 2005,฀the฀ Company฀lowered฀its฀ estimates฀
for฀residual฀values฀on฀new฀rental฀trucks฀and฀rental฀trucks฀
purchased฀off฀TRAC฀leases฀from฀25%฀of฀the฀original฀cost฀
to฀20%.฀In฀determining฀the฀ depreciation฀rate,฀historical฀
disposal฀ experience,฀ holding฀ periods฀ and฀ trends฀ in฀ the฀
market฀for฀vehicles฀are฀reviewed.
We฀regularly฀perform฀reviews฀to฀determine฀whether฀facts฀
and฀circumstances฀exist฀which฀indicate฀that฀the฀carrying฀
amount฀ of฀ assets,฀ including฀ estimates฀ of฀ residual฀ value,฀
may฀not฀be฀recoverable฀or฀that฀the฀useful฀life฀of฀assets฀is฀
shorter฀ or฀ longer฀ than฀ originally฀ estimated.฀ Reductions฀
in฀residual฀values฀(i.e.,฀the฀price฀at฀which฀we฀ultimately฀
expect฀to฀dispose฀of฀revenue฀earning฀equipment)฀or฀useful฀
lives฀ will฀ result฀ in฀ an฀ increase฀ in฀ depreciation฀ expense฀
over฀ the฀ life฀ of฀ the฀ equipment.฀ Reviews฀ are฀ performed฀
based฀on฀vehicle฀class,฀generally฀subcategories฀of฀trucks฀
and฀ trailers.฀ We฀ assess฀ the฀ recoverability฀ of฀ the฀ cost฀ of฀
our฀assets฀by฀comparing฀the฀projected฀undiscounted฀net฀
cash฀flows฀associated฀with฀the฀related฀asset฀or฀group฀of฀
assets฀over฀their฀estimated฀remaining฀lives฀against฀their฀
respective฀carrying฀amounts.฀We฀consider฀factors฀such฀as฀
current฀and฀expected฀future฀market฀price฀trends฀on฀used฀
vehicles฀and฀the฀expected฀life฀of฀vehicles฀included฀in฀the฀
fleet.฀ Impairment,฀ if฀ any,฀ is฀ based฀ on฀ the฀ excess฀ of฀ the฀
carrying฀amount฀over฀the฀fair฀value฀of฀those฀assets.฀If฀the฀
remaining฀cost฀of฀assets฀is฀determined฀to฀be฀recoverable,฀
but฀the฀useful฀lives฀are฀shorter฀or฀longer฀than฀originally฀
estimated,฀the฀net฀book฀value฀of฀the฀assets฀is฀depreciated฀
over฀the฀newly฀determined฀remaining฀useful฀lives.
During฀the฀fourth฀quarter฀of฀fiscal฀year฀2005,฀based฀on฀an฀
economic฀ market฀ analysis,฀ the฀ Company฀ decreased฀ the฀
estimated฀residual฀value฀of฀certain฀rental฀trucks.฀The฀effect฀
of฀the฀change฀decreased฀pre-tax฀income฀for฀fiscal฀2005฀
by฀$2.1฀million.฀The฀in-house฀analysis฀of฀sales฀of฀trucks฀
compared฀the฀truck฀model,฀size,฀age฀and฀average฀residual฀
value฀of฀units฀sold.฀Based฀on฀the฀analysis,฀the฀estimated฀
residual฀ values฀ are฀ decreased฀ to฀ approximately฀ 20%฀ of฀
historic฀cost.฀The฀adjustment฀reflects฀management’s฀best฀
estimate,฀based฀on฀information฀available,฀of฀the฀estimated฀
residual฀value฀of฀these฀rental฀trucks.