O'Reilly Auto Parts 2007 Annual Report Download - page 35

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Notes to Consolidated Financial Statements (continued)
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets. The lease term includes
renewal options determined by management at lease inception for which failure to renew options would result in a substantial economic penalty
to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are
eliminated and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
fully recoverable.
(In thousands) Original Useful Lives December 31, 2007 December 31, 2006
Land $ 220,950 $ 171,048
Buildings and building improvements 15 – 39 years 501,598 394,810
Leasehold improvements 3 – 25 years 189,097 147,357
Furniture, fixtures and equipment 3 – 20 years 429,217 351,889
Vehicles 5 – 10 years 102,665 90,240
Construction in progress 36,252 59,510
1,479,779 1,214,854
Less: accumulated depreciation and amortization 389,619 331,759
Net property and equipment $ 1,090,160 $ 883,095
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average rates paid for long-term
borrowings. Total interest costs capitalized for the years ended December 31, 2007, 2006 and 2005 were $2,554,000, $2,639,000 and
$2,885,000, respectively.
Leases
The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the estimated economic life of those assets.
Generally, for stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain
renewal option periods for which renewal is reasonably assured and failure to exercise the renewal option would result in a significant economic
penalty. The calculation for straight-line rent expense is based on the same lease term.
Notes Receivable
The Company had notes receivable from vendors and other third parties amounting to $32,119,000 and $36,955,000 at December 31, 2007 and
2006, respectively. The notes receivable, which bear interest at rates ranging from 0% to 10%, are due in varying amounts through August 2017.
Goodwill
The accompanying consolidated balance sheets at December 31, 2007 and 2006 include goodwill recorded as the result of previous acquisitions.
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, requires the Company to assess goodwill for
impairment rather than systematically amortize goodwill against earnings. The goodwill impairment test compares the fair value of a reporting
unit to its carrying amount, including goodwill. The Company operates as one reporting unit, and its fair value exceeds its carrying value,
including goodwill. Therefore, the Company has determined that no impairment of goodwill existed at December 31, 2007 and 2006.
At December 31, 2007 and 2006, the carrying value of the Company’s goodwill was as follows:
(In thousands) December 31, 2007 December 31, 2006
Beginning balance $ 49,065 $ 48,069
Acquisitions 1,382 996
Ending balance $ 50,447 $ 49,065
Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation,
general liability, vehicle liability, property loss, and employee health care benefits. With the exception of employee health care benefit liabilities,
which are limited by the design of these plans, the Company obtains third-party insurance coverage to limit its exposure. The Company
estimates its self-insurance liabilities by considering a number of factors, including historical claims experience and trend-lines, projected
medical and legal inflation, and growth patterns and exposure forecasts.