AutoNation 2015 Annual Report Download - page 69

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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, (ii) vehicle
service contracts sold, and (iii) other 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 is recognized as earned. Certain commissions earned from the sales of finance and insurance products are
subject to chargeback should the contracts be terminated prior to their expirations. An estimated liability for chargebacks against revenue recognized from
sales of finance and insurance 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 the volume of vehicle sales in recent years and increases or decreases in early
termination rates resulting from cancellation of vehicle service contracts and other protection products, defaults, refinancings and payoffs before maturity,
and other factors. Chargeback liabilities were $97.3 million at December 31, 2015, and $84.9 million at December 31, 2014. See Note 18 of the Notes to
Consolidated Financial Statements for more information regarding chargeback liabilities.
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. See Note 6 of the Notes to Consolidated
Financial Statements for more information on our self-insurance reserves.
Manufacturer Incentives and Other Rebates
We receive various incentives from manufacturers based on achieving certain objectives, such as specified sales volume targets, as well as other
objectives, including maintaining standards of a particular vehicle brand, which may include but are not limited to facility image and design requirements,
customer satisfaction survey results, and training standards, among others. These incentives are typically based upon units purchased or sold. These
manufacturer incentives are recognized as a reduction of new vehicle cost of sales when earned, generally at the time the related vehicles are sold or upon
attainment of the particular program goals, whichever is later.
We also receive manufacturer rebates and assistance for holdbacks, floorplan interest, and non-reimbursement-based advertising expenses (described
below), which are reflected as a reduction in the carrying value of each vehicle purchased by us. We recognize holdbacks, floorplan interest assistance, non-
reimbursement-based advertising rebates, cash incentives, and other rebates received from manufacturers that are tied to specific vehicles as a reduction to
cost of sales as the related vehicles are sold.
Advertising
We generally expense the cost of advertising as incurred, net of earned manufacturer reimbursements for specific advertising costs and other discounts.
Advertising expense, net of manufacturer advertising reimbursements, was $188.5 million in 2015, $164.9 million in 2014, and $166.4 million in 2013, and
is reflected as a component of Selling, General, and Administrative Expenses in the accompanying Consolidated Statements of Income.
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