AutoNation 2005 Annual Report Download - page 51

Table of Contents
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
as reimbursement for services or costs incurred. The adoption of EITF 02-16 resulted in a cumulative effect of accounting change, net of
$9.1 million of income tax, totaling $14.6 million to reflect the deferral of certain allowances, primarily floorplan assistance, into inventory
cost in 2003. Additionally, the adoption of EITF 02-16 impacted the accounting for certain manufacturers’ advertising allowances resulting in a
reclassification that increased Selling, General and Administrative Expenses and, correspondingly, reduced Cost of Sales by $18.6 million
for the year ended December 31, 2003 to reflect these allowances as a reduction of Cost of Sales.
Inventory
Inventory consists primarily of new and used vehicles held for sale valued using the specific identification method. Cost includes
acquisition, reconditioning, dealer installed accessories and transportation expenses. Parts and accessories are valued at the lower of cost
(first-in, first-out) or market.
In December 2004, the FASB issued SFAS 151, “Inventory Costs”, SFAS 151 requires abnormal amounts of inventory costs related to
idle facility, freight, handling and wasted materials to be recognized as current period expenses. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is not expected to have a material impact on the Company’s consolidated financial statements.
Investments
Investments, included in Other Assets in the accompanying Consolidated Balance Sheets, consist of marketable securities. Restricted
investments, included in Other Assets, consist primarily of marketable corporate and government debt securities. Marketable securities
include investments in debt and equity securities and are primarily classified as available for sale and are stated at fair value with unrealized
gains and losses included in Accumulated Other Comprehensive Income (Loss) in the Company’s Consolidated Balance Sheets. Other-
than-temporary declines in investment values are recorded as a component of Other Income (Expense), Net in the Company’s Consolidated
Income Statements. Fair value is estimated based on quoted market prices.
Property and Equipment, net
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, while minor
replacements, maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in Other Losses (Gains), Net in the
Consolidated Income Statements.
Depreciation is provided over the estimated useful lives of the assets involved using the straight-line method. Leasehold improvements
are amortized over the estimated useful life of the asset or the respective lease term, whichever is shorter. The estimated useful lives are:
fifteen to forty years for buildings and improvements, three to ten years for equipment and seven to ten years for furniture and fixtures.
The Company continually evaluates property and equipment, including leasehold improvements, to determine whether events and
circumstances have occurred that may warrant revision of the estimated useful life or whether the remaining balance should be evaluated for
possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the property and
equipment in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by
which the carrying amount of the asset exceeds the fair value. Fair values generally are estimated using prices for similar assets and/or
discounted cash flows.
In March 2005, the FASB issued Interpretation (“FIN”) No. 47, Accounting for Conditional Asset Retirement Obligation — an
Interpretation of FASB Statement No. 143.” This interpretation clarifies the
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