Napa Auto Parts 2008 Annual Report Download - page 24

management’s discussion and analysis of nancial condition and results of operations (cont.)
2008
critical accounting estimates
General
Management’s Discussion and Analysis of Financial Condition and
Results of Operations is based upon our consolidated financial state-
ments, which have been prepared in accordance with U.S. generally
accepted accounting principles. e preparation of our consolidated
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, net
sales and expenses and related disclosure of contingent assets and
liabilities. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for mak-
ing judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are uncertain at the time the estimate is made and if
different estimates that reasonably could have been used, or changes
in the accounting estimates that are reasonably likely to occur
periodically, could materially impact the consolidated financial
statements. Management believes the following critical accounting
policies reflect its most significant estimates and assumptions used
in the preparation of the consolidated financial statements. For
further information on the critical accounting policies, see Note 1
of the notes to our consolidated financial statements.
Inventories – Provisions for Slow Moving and Obsolescence
e Company identifies slow moving or obsolete inventories and es-
timates appropriate loss provisions related thereto. Historically, these
loss provisions have not been significant as the vast majority of the
Company’s inventories are not highly susceptible to obsolescence and
are eligible for return under various vendor return programs. While
the Company has no reason to believe its inventory return privileges
will be discontinued in the future, its risk of loss associated with obso-
lete or slow moving inventories would increase if such were to occur.
Allowance for Doubtful Accounts – Methodology
e Company evaluates the collectibility of accounts receivable
based on a combination of factors. Initially, the Company estimates
an allowance for doubtful accounts as a percentage of net sales based
on historical bad debt experience. is initial estimate is periodically
adjusted when the Company becomes aware of a specific customer’s
inability to meet its financial obligations (e.g., bankruptcy filing)
or as a result of changes in the overall aging of accounts receivable.
While the Company has a large customer base that is geographically
dispersed, a general economic downturn in any of the industry seg-
ments in which the Company operates could result in higher than
expected defaults and, therefore, the need to revise estimates for bad
debts. For the years ended December 31, 2008, 2007 and 2006,
the Company recorded provisions for bad debts of $23.9 million,
$13.5 million, and $16.5 million, respectively.
Consideration Received from Vendors
e Company enters into agreements at the beginning of each year
with many of its vendors providing for inventory purchase incentives
and advertising allowances. Generally, the Company earns inventory
purchase incentives upon achieving specified volume purchasing lev-
els and advertising allowances upon fulfilling its obligations related
to cooperative advertising programs. e Company accrues for the
receipt of inventory purchase incentives as part of its inventory cost
based on cumulative purchases of inventory to date and projected
inventory purchases through the end of the year and, in the case of
advertising allowances, upon completion of the Company’s obliga-
tions related thereto. While management believes the Company will
continue to receive such amounts in 2009 and beyond, there can
be no assurance that vendors will continue to provide comparable
amounts of incentives and allowances in the future.
Impairment of Property, Plant and Equipment
and Goodwill and Other Intangible Assets
At least annually, the Company evaluates property, plant and equip-
ment, goodwill and other intangible assets for potential impairment
indicators. e Company’s judgments regarding the existence of im-
pairment indicators are based on market conditions and operational
performance, among other factors. Future events could cause the
Company to conclude that impairment indicators exist and that as-
sets associated with a particular operation are impaired. Evaluating
the impairment also requires the Company to estimate future oper-
ating results and cash flows which require judgment by management.
Any resulting impairment loss could have a material adverse impact
on the Company’s financial condition and results of operations.
Employee Benefit Plans
e Company’s benefit plan committees in the U.S. and Canada
establish investment policies and strategies and regularly monitor
the performance of the Company’s pension plan assets. e pension
plan investment strategy implemented by the Company’s manage-
ment is to achieve long-term objectives and invest the pension assets
in accordance with the applicable pension legislation in the U.S. and
Canada and fiduciary standards. e long-term primary objectives
for the pension plan funds are to provide for a reasonable amount of
long-term growth of capital without undue exposure to risk, protect
the assets from erosion of purchasing power and provide investment
results that meet or exceed the pension plan’s actuarially assumed
long term rate of return.
Based on the investment policy for the U.S. pension plan, as well
as an asset study that was performed based on the Company’s asset
allocations and future expectations, the Company’s expected rate of
return on plan assets for measuring 2009 pension expense or income
is 8.00% for the U.S. plan. e asset study forecasted expected rates
of return for the approximate duration of the Company’s benefit
obligations, using capital market data and historical relationships.
e discount rate is chosen as the rate at which pension obligations
could be effectively settled and is based on capital market conditions
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