AutoNation 2007 Annual Report Download - page 58

Table of Contents
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placed with financial institutions in connection with customer vehicle purchases financed and (ii) vehicle protection products sold.
We sell and receive a commission, which is recognized upon sale, on the following types of products: extended service contracts,
maintenance programs, guaranteed auto protection (known as “GAP,” this protection covers the shortfall between a customer’s loan balance and
insurance payoff in the event of a casualty), “tire and wheel” protection, and theft protection products. The products we offer include products
that are sold and administered by independent third parties, including the vehicle manufacturers’ captive finance subsidiaries. Pursuant to our
arrangements with these third-party providers, we primarily sell the products on a straight commission basis; however, we may sell the
product, recognize commission, and participate in future profit pursuant to retrospective commission arrangements, which are recognized as
earned. Certain commissions earned from the sales of finance, insurance, and other protection 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. Our estimated liability for chargebacks is based primarily on our historical
chargeback experience, and is influenced by increases or decreases in early termination rates resulting from cancellation of vehicle protection
products, defaults, refinancings and payoffs before maturity, and other factors. Chargeback liabilities were $62.5 million at December 31,
2007, and $70.1 million at December 31, 2006.
Insurance
Under our self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles, and claims-handling expenses
as part of our various insurance programs, including property and casualty, employee medical benefits, automobile, and workers’
compensation. Costs in excess of this retained risk per claim may be insured under various contracts with third party insurance carriers. We
review our claim and loss history on a periodic basis to assist in assessing our future liability. The ultimate costs of these retained insurance
risks are estimated by management and by third-party actuarial evaluation of historical claims experience, adjusted for current trends and
changes in claims-handling procedures.
Advertising
We expense 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’ programs, which is typically after we
have incurred the corresponding advertising expenses. Advertising expense, net of allowances, was $211.2 million in 2007, $215.8 million in
2006, and $199.8 million in 2005. Advertising allowances from manufacturers were $28.8 million in 2007, $32.6 million in 2006, and
$41.2 million in 2005.
Income Taxes
We file a consolidated federal income tax return. Deferred income taxes have been provided for 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 combined weighted average number of common shares and common share
equivalents outstanding, which include, where appropriate, the assumed exercise of dilutive options.
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