AutoNation 2001 Annual Report Download - page 55

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The Company's investments in securitizations resulting from its commercial
paper warehouse facility, which has been terminated (See Note 12, Finance
Underwriting and Asset Securitizations), were considered hybrid instruments
under SFAS 133. Included in the hybrid instrument was an embedded derivative
instrument for the interest and prepayment components of the risk of the
securitized installment loan receivables.
50
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 133 required that the Company's embedded derivative instrument be
separated from the host contract and carried at fair value. Because the Company
was not using the embedded derivative instrument as a hedging instrument, SFAS
133 required that the Company report the embedded derivative instrument on its
balance sheet and changes in the fair value of the embedded derivative
instrument currently in earnings.
As of January 1, 2001, the Company adopted SFAS 133 and recorded its
embedded derivative instrument and its caps and floors outstanding at January 1,
2001 on its balance sheet which resulted in an increase to assets and
liabilities of approximately $14.3 million. The effect to earnings was not
material.
The Company recorded the gains and losses from its embedded derivative
contracts and other derivatives as a component of Loan and Lease Underwriting
Losses (Income), Net in the accompanying Consolidated Income Statements. The
fair value of any outstanding derivative contracts is included in other assets
and other liabilities in the accompanying Consolidated Balance Sheets, as
applicable. In 2001, the Company recorded gains and losses relating to the
change in fair value of its embedded derivative contracts offset by the change
in fair value of its other derivative instruments that were not material. At
December 31, 2001, the Company had no derivative financial instruments
outstanding.
REVENUE RECOGNITION
Revenue consists of sales of new and used vehicles and related finance and
insurance ("F&I") products, sales from parts and service and sales of other
products. The Company recognizes revenue in the period in which products are
sold or services are provided. Revenue on finance products represents fees
earned by the Company for notes placed with financial institutions in connection
with customer vehicle purchases financed and is recognized upon acceptance of
credit by the financial institution. Commission revenue on warranty and
insurance products sold in connection with vehicle sales is recognized upon
sale. An estimated allowance for chargebacks against revenue recognized from
sales of F&I products is established during the period in which the related
revenue is recognized. The Company may reinsure some or all of the underwriting
risk related to extended warranty and credit insurance products sold and
administered by certain independent third parties through its captive insurance
subsidiaries. Revenue and related direct costs from these reinsurance
transactions are deferred and recognized over the life of the policies. For
installment loans not securitized, revenue from retail financing and certain
loan underwriting costs are recognized over the term of the contract using the
interest method. As further discussed in Note 12, Finance Underwriting and
Assets Securitizations, as of December 2001, the Company has exited the auto
loan underwriting business. Manufacturer incentives and rebates, including,
holdbacks, are recognized when earned in accordance with the respective
manufacturers' programs.
The Company's revenue recognition policy is in accordance with the
provisions of Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements.