AutoZone 2004 Annual Report Download - page 24
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LitigationandOtherContingentLiabilities: Wehavereceivedclaimsrelatedtoandbeennotifiedthatweareadefendantinanumberoflegal
proceedingsresultingfromourbusiness,suchasemploymentmatters,productliabilityclaimsandgeneralliabilityclaimsrelatedtoour
storepremises.Wecalculatecontingentlossaccrualsusingourbestestimateofourprobableandreasonablyestimablecontingentliabilities,
suchaslawsuitsandourretainedliabilityforinsuredclaims.
VendorAllowances: AutoZonereceivesvariouspaymentsandallowancesfromitsvendorsbasedonthevolumeofpurchasesorforservices
thatAutoZoneprovidestothevendors.Moniesreceivedfromvendorsincluderebates,allowancesandpromotionalfunds.Typicallythese
fundsaredependentonpurchasevolumesandadvertisingplans.Theamountstobereceivedaresubjecttochangesinmarketconditions,
vendormarketingstrategiesandchangesintheprofitabilityorsell-throughoftherelatedmerchandise.
Rebatesandothermiscellaneousincentivesareearnedbasedonpurchasesorproductsales.Thesemoniesaretreatedasareductionof
inventoriesandarerecognizedasareductiontocostofsalesastheinventoriesaresold.
Certainvendorallowancesareusedexclusivelyforpromotionsandtopartiallyorfullyoffsetcertainotherdirectexpenses.Suchvendorfund-
ingarrangementsthatwereenteredintoonorbeforeDecember31,2002,wererecognizedasareductiontooperating,selling,generaland
administrativeexpenseswhenearned.However,forsuchvendorfundingarrangementsenteredintoormodifiedafterDecember31,2002,
AutoZoneappliedthenewguidancepursuanttotheEmergingIssuesTaskForceIssueNo.02-16,“AccountingbyaCustomer(includinga
Reseller)forCashConsiderationReceivedfromaVendor”(“EITF02-16”).Accordingly,allvendorfundsfromarrangementsenteredintoor
modifiedafterDecember31,2002,wererecognizedasareductiontocostofsalesastheinventoriesweresold.
ThisaccountingpronouncementforvendorfundinghasnotimpactedthewayAutoZonerunsitsbusinessoritsrelationshipswithvendors.
Itdoes,however,requirethedeferralofcertainvendorfundingwhichiscalculatedbaseduponvendorinventoryturns.Basedonthetiming
oftheissuanceofthepronouncementandguidelinesduringfiscal2003,wewereprecludedfromadoptingEITF02-16asacumulative
effectofachangeinaccountingprinciple.OurtimingandaccountingtreatmentofEITF02-16wasnotdiscretionary.
Impairments: InaccordancewiththeprovisionsofStatementofFinancialAccountingStandardsNo.144,“AccountingfortheImpairment
orDisposalofLong-LivedAssets”(“SFAS144”),weevaluatetherecoverabilityofthecarryingamountsoflong-livedassets,suchasprop-
erty and equipment,coveredbythisstandardwhenever events or changes incircumstances dictatethatthecarrying valuemay not be
recoverable.Aspartoftheevaluation,wereviewperformanceatthestoreleveltoidentifyanystoreswithcurrentperiodoperatinglosses
thatshouldbeconsideredforimpairment.Wecomparethesumoftheundiscountedexpectedfuturecashflowswiththecarryingamounts
oftheassets.
UndertheprovisionsofStatementofFinancialAccountingStandardsNo.142,“GoodwillandOtherIntangibleAssets”(“SFAS142”),weper-
formanannualtestofgoodwilltocomparetheestimatedfairvalueofgoodwilltothecarryingamounttodetermineifanyimpairmentexists.We
performtheannualimpairmentassessmentinthefourthquarterofeachfiscalyear,unlesscircumstancesdictatemorefrequentassessments.
Ifimpairmentsareindicatedbyeitheroftheaboveevaluations,theamountbywhichthecarryingamountoftheassetsexceedsthefair
valueoftheassetsisrecognizedasanimpairmentloss.Suchevaluationsrequiremanagementtomakecertainassumptionsbasedupon
informationavailableatthetimetheevaluationisperformed,whichcoulddifferfromactualresults.
QuantitativeandQualitativeDisclosuresAboutMarketRisk
AutoZoneisexposedtomarketriskfrom,amongotherthings,changesininterestrates,foreignexchangeratesandfuelprices.Fromtime
totime,weusevariousfinancialinstrumentstoreduceinterestrateandfuelpricerisks.Todate,baseduponourcurrentlevelofforeign
operations,hedgingcostsandpastchangesintheassociatedforeignexchangerates,noinstrumentshavebeenutilizedtoreduceforeign
exchangeraterisk.AllofourhedgingactivitiesaregovernedbyguidelinesthatareauthorizedbyourBoardofDirectors.Further,wedonot
buyorsellfinancialinstrumentsfortradingpurposes.
InterestRateRisk: AutoZone’sfinancialmarketriskresultsprimarilyfromchangesininterestrates.Attimes,wereduceourexposure
tochangesininterestratesbyenteringintovariousinterestratehedgeinstrumentssuchasinterestrateswapcontracts,treasurylock
agreementsandforward-startinginterestrateswaps.
AutoZonehasutilizedinterestrateswapstoconvertvariableratedebttofixedratedebtandtolockinfixedratesonfuturedebtissuances.At
August28,2004,weheldafive-yearforward-startinginterestrateswapwithanotionalamountof$300million.ThisswaphasanOctober
2004settlementandeffectivedatetocoincidewithananticipateddebttransaction.Itisexpectedthatuponsettlementoftheagreement,the
realizedgainorlosswillbedeferredinothercomprehensiveincomeandreclassifiedtointerestexpenseoverthelifeoftheunderlyingdebt.
AtAugust30,2003,weheldaninterestrateswapcontract,whichwassettledinSeptember2003,tohedge$25millionofvariablerate
debtassociatedwithcommercialpaperborrowings.AtAugust30,2003,wealsoheldtreasurylockagreementswithnotionalamountsof