AutoNation 2005 Annual Report Download - page 23

Table of Contents
tax matters related to items previously reported in discontinued operations. In 2005 and 2004, we also recognized losses totaling $9.0 million
and $15.7 million, respectively, net of income taxes, related to stores that were sold or for which we had entered into a definitive sale
agreement. Certain amounts reflected in the accompanying Consolidated Financial Statements for the years ended December 31, 2005,
2004, and 2003, have been adjusted to classify the results of the stores described above as discontinued operations.
During 2005, we acquired 11.8 million shares of our common stock for an aggregate purchase price of $237.1 million leaving
approximately $71.3 million available for share repurchases under the repurchase program authorized by our Board of Directors. The
indenture for our senior notes contains restrictions on our ability to make share repurchases. See further discussion under the heading
“Financial Condition.” During 2005, 9.8 million shares of our common stock were issued upon the exercise of stock options resulting in
proceeds of $112.8 million.
Critical Accounting Policies
We prepare our Consolidated Financial Statements in conformity with generally accepted accounting principles which require us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual outcomes could differ
from those estimates. Set forth below are the policies that we have identified as critical to our business operations and the understanding of
our results of operations or that involve significant estimates. For detailed discussion of other significant accounting policies see Note 1,
Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements.
Intangible and Long-Lived Assets — Intangible and long-lived assets are a significant component of our consolidated balance sheets.
Our policies regarding the valuation of intangible assets affect the amount of future amortization and possible impairment charges we may
incur. Intangible assets consist primarily of the cost of acquired businesses in excess of the fair value of net assets acquired, using the
purchase method of accounting.
Acquired intangible assets are 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 our intent to do so. Our principal
identifiable intangible assets are rights under franchise agreements with vehicle manufacturers. We generally expect our franchise
agreements to survive for the foreseeable future, and, when the agreements do not have indefinite terms, anticipate routine renewals of the
agreements without substantial cost. We believe that our franchise agreements will contribute to cash flows for the foreseeable future and
have indefinite lives.
Goodwill and intangibles with indefinite lives are tested for impairment annually at June 30 or more frequently when events or
circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that intangible assets
become impaired due to decreases in the fair market value of the related underlying business.
We estimate the depreciable lives of our property, plant and equipment, including leasehold improvements, and review them for
impairment when events or circumstances indicate that their carrying amounts may be impaired. We periodically evaluate the carrying value
of assets held for sale to determine if, based on market conditions, the values of these assets should be adjusted. Although we believe our
property, plant and equipment and assets held for sale are appropriately valued, the assumptions and estimates used may change and we
may be required to record impairment charges to reduce the value of these assets.
Revenue Recognition — Revenue consists of the sales of new and used vehicles and commissions from related finance and insurance
products and sales of parts and services. We recognize revenue in the period in which products are sold or services are provided. We
recognize vehicle and finance and insurance revenue when a sales contract has been executed, the vehicle has been delivered and payment
has been received or financing has been arranged. Revenue on finance and insurance products represents commissions earned by us for:
(i) loans and leases placed with financial institutions in connection with customer vehicle purchases financed and (ii) vehicle protection
products sold. An estimated liability for chargebacks against revenue recognized from sales of finance and vehicle protection products is
established during the period in which the
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