Avis 2010 Annual Report Download - page 58

Table of Contents
Vehicles. We present vehicles at cost, net of accumulated depreciation, on the Consolidated Balance Sheets. We record the initial cost of the
vehicle net of incentives and allowances from manufactures. We acquire our rental vehicles either through repurchase and guaranteed
depreciation programs with certain automobile manufacturers or outside of such programs. For rental vehicles purchased under such programs,
we depreciate the vehicles such that the net book value on the date of sale or return to the manufacturers is intended to equal the contractual
guaranteed residual values. For vehicles acquired outside of manufacturer repurchase and guaranteed depreciation programs, we depreciate
based on the vehicles’ estimated residual market values and their expected dates of disposition. See Note 2 to our Consolidated Financial
Statements.
Income Taxes.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we
consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income,
tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize deferred income tax
assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the
provision for income taxes. Currently we do not record valuation allowances on the majority of our tax loss carryforwards as there are adequate
deferred tax liabilities that could be realized within the carryforward period.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required to determine our
worldwide provision for income taxes and to record the related assets and liabilities. In the ordinary course of business, there are many
transactions and calculations where the ultimate tax determination is uncertain. Pursuant to the Tax Sharing Agreement entered into in
connection with the Separation and the Separation Agreement, we are entitled to indemnification for non-Avis Budget Car Rental tax
contingencies for taxable periods prior to and including the Separation.
The rules governing taxation are complex and subject to varying interpretations. Therefore, our tax accruals reflect a series of complex
judgments about future events and rely heavily on estimates and assumptions. Although we believe the estimates and assumptions supporting our
tax accruals are reasonable, the potential result of an audit or litigation related to tax could include a range of outcomes, and could result in tax
liabilities for the Company that are materially different than those reflected in the Consolidated Financial Statements.
See Notes 2 and 8 to our Consolidated Financial Statements for more information regarding income taxes.
Financial Instruments.
We estimate fair values for each of our financial instruments, including derivative instruments. Most of these financial
instruments are not publicly traded on an organized exchange. In the absence of quoted market prices, we must develop an estimate of fair value
using dealer quotes, present value cash flow models, option pricing models or other valuation methods, as appropriate. The use of these fair
value techniques involves significant judgments and assumptions, including estimates of future interest rate levels based on interest rate yield
curves, credit spreads of the Company and counterparties, volatility factors, and an estimation of the timing of future cash flows. The use of
different assumptions may have a material effect on the estimated fair value amounts recorded in the financial statements, which are disclosed in
Note 20 to our Consolidated Financial Statements. In addition, hedge accounting requires that, at the beginning of each hedge period, we justify
an expectation that the relationship between the changes in fair value of derivatives designated as hedges compared to changes in the fair value
of the underlying hedged items will be highly effective. This effectiveness assessment, which is performed at least quarterly, involves an
estimation of changes in fair value resulting from
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