U-Haul 2011 Annual Report Download - page 66

AMERCO AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Derivative Financial Instruments
The Company’s objective for holding derivative financial instruments is to manage interest rate risk exposure
primarily through entering interest rate swap agreements. An interest rate swap is a contractual exchange of
interest payments between two parties. A standard interest rate swap involves the payment of a fixed rate times
a notional amount by one party in exchange for a floating rate times the same notional amount from another
party. As interest rates change, the difference to be paid or received is accrued and recognized as interest
expense or income over the life of the agreement. The Company does not enter into these instruments for
trading purposes. Counterparties to the Company’s interest rate swap agreements are major financial
institutions. In accordance with ASC 815 - Derivatives and Hedging, the Company recognizes interest rate swap
agreements on the balance sheet at fair value, which is classified as prepaid expenses (asset) or accrued
expenses (liability). Derivatives that are not designated as cash flow hedges for accounting purposes must be
adjusted to fair value through income. If the derivative qualifies and is designated as a cash flow hedge,
changes in its fair value will either be offset against the change in fair value of the hedged item through earnings
or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. See Note
11, Derivatives of the Notes to Consolidated Financial Statements.
Inventories, net
Inventories, net were as follows:
2011 2010
Truck and trailer parts and accessories (a) $ 53,212
$
46,304
Hitches and towing components (b) 12,797 13,644
Moving supplies and propane (b) 7,822 7,452
Subtotal 73,831 67,400
Less: LIFO reserves (13,294) (11,963)
Less: excess and obsolete reserves (595) (2,600)
Total $ 59,942 $ 52,837
(a) Primarily held for internal usage, including equipment manufacturing and repair
(b) Primarily held for retail sales
(In thousands)
March 31,
Inventories consist primarily of truck and trailer parts and accessories used to manufacture and repair rental
equipment as well as products and accessories available for retail sale. Inventory is held at Company owned
locations; our independent dealers do not hold any of the Company’s inventory.
Inventory cost is primarily determined using the last-in first-out method (“LIFO”). Inventories valued using
LIFO consisted of approximately 95% of the total inventories for both March 31, 2011 and 2010, respectively.
Had the Company utilized the first-in first-out method (“FIFO”), stated inventory balances would have been
$13.3 million and $12.0 million higher at March 31, 2011 and 2010, respectively. In fiscal 2011, the positive
effect on income due to liquidation of a portion of the LIFO inventory was $0.7 million.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Interest expense incurred during the initial construction of
buildings and rental equipment is considered part of cost. Depreciation is computed for financial reporting
purposes using the straight line or an accelerated method based on a declining balance formula over the
following estimated useful lives: rental equipment 2-20 years and buildings and non-rental equipment 3-55
years. The Company follows the deferral method of accounting based on ASC 908 - Airlines for major overhauls
in which engine overhauls are capitalized and amortized over five years and transmission overhauls are
capitalized and amortized over three years. 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
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