AutoNation 2001 Annual Report Download - page 54

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AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method. Additionally acquired intangible assets should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so.
SFAS 142, upon adoption, eliminates goodwill amortization over its
estimated useful life. However, goodwill will be subject to an annual assessment
for impairment by applying a fair-value based test. Intangible assets with
definitive lives will need to be amortized over their useful lives.
The provisions of SFAS 142 applied immediately to all acquisitions
completed after June 30, 2001. Goodwill and intangible assets with indefinite
lives existing at June 30, 2001 were amortized until December 31, 2001.
Effective January 1, 2002 such amortization ceased, as companies were required
to adopt the new rules on that date. By the end of the first quarter of calendar
year 2002, the Company will, as required, begin to perform an impairment
analysis of intangible assets. SFAS 142 requires the Company upon adoption and
at least annually to reassess the intangible assets, including goodwill,
previously recorded in connection with earlier purchase acquisitions, as well as
their useful lives. Furthermore, the Company will, as required, complete the
first step of the goodwill transition impairment test by June 30, 2002 which
requires determining the fair value of the reporting unit, as defined by SFAS
142, and comparing it to the carrying value of the net assets allocated to the
reporting unit. If this fair value exceeds the carrying value, no further
analysis is required. If the fair value of the reporting unit is less than the
carrying value of the net assets, the Company must perform step two of the SFAS
142 impairment test, which requires the Company to allocate the implied fair
value of the reporting unit to all underlying assets and liabilities, including
both recognized and unrecognized tangible and intangible assets, based on their
fair value. Any impairment noted must be recorded at the date of adoption
restating first quarter results, if necessary. Impairment charges, if any, that
result from the application of the above test would be recorded as the
cumulative effect of a change in accounting principle in the first quarter of
the year ending December 31, 2002.
The Company will not be able to determine the ultimate impact of SFAS 142
on its Consolidated Financial Statements until such time as the Company applies
its provisions.
DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the derivative
instrument's fair value be recognized currently in earnings. The accounting for
the portion reported in earnings due to changes in fair value of the derivative
instrument depends on whether the derivative qualifies as a hedge. If the
derivative instrument does not qualify as a hedge, the gains or losses are
reported in earnings when they occur. Special accounting for qualifying hedges
allows a derivative instrument's gains and losses to offset related results on
the hedged item in earnings, to the extent effective, and requires that a
company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
The Company maintains an overall risk management strategy that utilizes a
variety of interest rate financial instruments to mitigate its exposure to
fluctuations caused by volatility in interest rates. The Company does not use
derivative financial instruments for trading purposes.