AutoNation 2003 Annual Report Download - page 59

Table of Contents
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
connection with customer vehicle purchases financed and (ii) vehicle protection products sold. Rebates, holdbacks, floorplan assistance and
certain other dealer credits received directly from manufacturers are recorded as a reduction of the cost of the vehicle and recognized into
income upon the sale of the vehicle or when earned under a specific manufacturer program, whichever is later.
The Company sells and receives a commission, which is recognized upon sale, on the following types of insurance products: extended
warranties, guaranteed auto protection (“GAP,” which covers the shortfall between loan balance and insurance payoff), credit insurance,
lease “wear and tear” insurance and theft protection products. The Company may also participate in future underwriting profit, pursuant to
retrospective commission arrangements, that would be recognized over the life of the policies. Certain commissions earned from the sales of
insurance products are subject to chargebacks should the contracts be terminated prior to their expirations. An estimated liability for
chargebacks against revenue recognized from sales of F&I products is recorded in the period in which the related revenue is recognized.
Chargeback liabilities were $64.4 million and $62.4 million at December 31, 2003 and 2002, respectively.
Through 2002, the Company reinsured through its captive insurance subsidiaries a portion of the underwriting risk related to extended
warranty and credit insurance products sold and administered by certain independent third parties. Revenue and related direct costs from
these reinsurance transactions were deferred and are recognized over the life of the policies. Effective January 1, 2003, the Company no
longer reinsures any new extended warranty and credit insurance products.
For installment loans and leases that in the past had been underwritten by the Company and not securitized, revenue from retail
financing and certain loan underwriting costs were recognized over the term of the contract using the interest method. As of December 2001,
the Company had exited the auto loan and lease underwriting business, and in July 2003, sold all of its finance receivables portfolio. (See
further discussion in Note 12, Finance Underwriting and Asset Securitizations).
Advertising
The Company expenses the cost of advertising as incurred or when such advertising initially takes place, net of earned manufacturer
credits and other discounts. Manufacturer advertising credits are earned in accordance with the respective manufacturers’ program, which is
typically after the Company has incurred the corresponding advertising expenses. Advertising expense, net of allowances was
$216.5 million, $190.2 million and $183.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. Advertising
allowances from manufacturers were $58.0 million, $67.4 million and $64.2 million for the years ended December 31, 2003, 2002 and
2001, respectively.
As of January 1, 2003, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor.” See Note 1, Summary of Significant Accounting Policies —
Cumulative Effect of Accounting Change, for additional discussion.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Accordingly, deferred income taxes have been provided to
show the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes
and between the tax basis of assets and liabilities and their reported amounts in the financial statements.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) per share is based on the
52