AutoZone 2003 Annual Report Download - page 38

35 AutoZone, Inc. 2003 Annual Report
Notes to Consolidated Financial Statements
Note A— Significant Accounting Policies
Business: The Company is principally a retailer of automotive parts and accessories. At the end of fiscal 2003, the Company operated 3,219
domestic auto parts stores in 48 states and the District of Columbia and 49 auto parts stores in Mexico. Each store carries an extensive
product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items
and accessories.
In addition, the Company also has a domestic commercial program that provides commercial credit and delivery of parts and other products
to local, regional and national repair garages, dealers and service stations. The Company also sells products online at autozone.com and sells
ALLDATA automotive diagnostic and repair software which is also available through alldatapro.com and alldatadiy.com.
Fiscal Year: The Company’s fiscal year consists of 52 or 53 weeks ending on the last Saturday in August.
Basis of Presentation: The consolidated financial statements include the accounts of AutoZone, Inc. and its wholly owned subsidiaries (the
Company). All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent liabilities to prepare these financial statements. Actual results could differ from those estimates.
Cash Equivalents: Cash equivalents consist of investments with original maturities of 90 days or less at the date of purchase.
Merchandise Inventories: Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method. Included in inventory
are related purchasing, storage and handling costs.
Property and Equipment: Property and equipment is stated at cost. Depreciation is computed principally using the straight-line method over
the following estimated useful lives: buildings, 40 to 50 years; building improvements, 5 to 15 years; equipment, 3 to 7 years; and leasehold
improvements, 5 to 15 years, not to exceed the remaining lease term.
Impairment of Long-Lived Assets: The Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) on September 1, 2002. SFAS 144 establishes accounting standards for the
impairment of long-lived assets such as property and equipment . In accordance with SFAS 144, the Company evaluates the recoverability of
the carrying amounts of the assets covered by this standard whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. As part of the evaluation, the Company reviews performance at the store level to identify any stores with current
period operating losses that should be considered for impairment . The Company compares the sum of the undiscounted expected future
cash flows with the carrying amounts of the assets. If impairments are indicated, the amount by which the carrying amount of the assets
exceeded the fair value of the assets is recognized as an impairment loss. The adoption of SFAS 144 did not have a significant impact on the
Company’s Consolidated Financial Statements.
Intangible Assets: The cost in excess of fair value of net assets of businesses acquired is recorded as goodwill. Prior to the adoption of
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) in fiscal 2002, goodwill was amor-
tized on a straight-line basis over 40 years. Since the adoption of SFAS 142 on August 26, 2001, amortization of goodwill was discontinued.
Under the provisions of SFAS 142, an annual test of goodwill is required to compare the fair value of goodwill to the carrying amount to
determine if any impairment exists. The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless
circumstances dictate more frequent assessments. No impairment loss resulted from the 2003 or 2002 tests performed under SFAS 142.
Refer to Note C for additional disclosures regarding the adoption of SFAS 142.
Derivative Instruments and Hedging Activities: AutoZone is exposed to market risk from, among other things, changes in interest rates, foreign
exchange rates and fuel prices. From time to time, the Company uses various financial instruments to reduce such risks. To date, based upon
the Company’s current level of foreign operations, hedging costs and past changes in the associated foreign exchange rates, no instruments
have been utilized to reduce this market risk. All of the Company’s hedging activities are governed by guidelines that are authorized by
AutoZone’s Board of Directors. Further, the Company does not buy or sell financial instruments for trading purposes.
AutoZone’s financial market risk results primarily from changes in interest rates. At times, AutoZone reduces its exposure to changes in
interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements
and forward starting interest rate swaps. The Company complies with Statement of Financial Accounting Standards Nos. 133, 137 and 138
(collectively “SFAS 133”) pertaining to the accounting for these derivatives and hedging activities which require all such interest rate hedge
instruments to be recognized on the balance sheet at fair value. All of the Company’s interest rate hedge instruments are designated as cash
flow hedges. Refer to Note B for additional disclosures regarding the Company’s derivatives instruments and hedging activities.