O'Reilly Auto Parts 2006 Annual Report Download - page 36

o’reilly automotive 2006 annual report
page 34
notes to consolidated financial statements (continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, accounts receivable
and notes receivable.
The Company grants credit to certain customers who meet the Company's pre-established credit requirements. Concentrations of credit risk with
respect to these receivables are limited because the Company’s customer base consists of a large number of smaller customers, thus spreading the credit
risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. Generally, the Company does not require
security when credit is granted to customers. Credit losses are provided for in the Company's consolidated financial statements and consistently have
been within management's expectations.
The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and long-term
debt, as reported in the accompanying consolidated balance sheets, approximates fair value.
Reclassifications
The accompanying consolidated financial statements for prior years contain certain reclassifications to conform with the presentation used in 2006.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, a revision of SFAS No. 123 that supersedes APB No. 25.
In April 2005, the SEC adopted a rule permitting implementation of SFAS No. 123R at the beginning of the first fiscal year commencing after June 15,
2005. Among other items, SFAS No. 123R eliminated the use of APB No. 25 and the intrinsic value method of accounting, and requires companies
to recognize in the financial statements the cost of employee services received in exchange for awards of equity instruments, based on the grant date
fair value of those awards. SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost
be reported as a financing cash flow, rather than as an operating cash flow as required under APB No. 25. The Company was required to adopt SFAS
No. 123R beginning in its quarter ended March 31, 2006. Under the provisions of SFAS No. 123R, the Company had the choice of adopting the
fair-value-based method of expensing of stock options using (a) the “modified prospective method”, whereby the Company recognizes the expense
only for periods beginning after December 31, 2005, or (b) the “modified retrospective method”, whereby the Company recognizes the expense for all
years and interim periods since the effective date of SFAS No. 123. The Company adopted SFAS No. 123R using the modified prospective method.
See Note 9, “Share-Based Employee Compensation Plans”, for information regarding expensing of stock options in 2006 and for pro forma information
regarding the Company’s accounting for stock options for years 2005 and 2004.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”), that prescribes a recognition
threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return.
Additionally, FIN No. 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain
tax positions. This interpretation is effective for the Company beginning January 1, 2007. The cumulative effect of initially adopting FIN 48 will be
recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. Only tax positions that meet the more
likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. The Company is in the process of determining
the effect, if any, the adoption of FIN No. 48 will have on the Company’s consolidated financial statements. Based on the Company’s current assessment,
and subject to any changes that may result from the completion of the Company’s assessment and additional technical guidance issued by the FASB,
the adoption of FIN 48 is not expected to have a material effect on our financial position, results of operations or cash flows.
note 2 – accounting changes
The Company’s inventory consists of automotive hard parts, maintenance items, accessories and tools. During the fourth quarter of 2004, the Company
changed its method of applying its LIFO accounting policy for inventory costs. Under the new method, the Company has included in inventory certain
procurement, warehousing and distribution center costs. The Company’s previous method was to recognize those costs as incurred, reported as a
component of costs of goods sold. The Company believes the change in application of the LIFO accounting method is preferable as it better matches
revenues and expenses and is the prevalent method used by other entities within the Company’s industry. The cumulative effect of this change in
application of accounting method was $21,892,000 as of January 1, 2004, net of the related deferred tax effect of $13,303,000. The change increased
2004 net income by $2,722,000 or $0.02 per share.