O'Reilly Auto Parts 2009 Annual Report Download - page 66

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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 Company has entered into various derivative financial instruments to mitigate the risk of interest rate fluctuations on its variable
rate long-term debt. If the market interest rate on the Company’s net derivative positions with counterparties exceeds a specified
threshold, the counterparty is required to transfer cash in excess of the threshold to the Company. Conversely, if the market value of
the net derivative positions falls below a specified threshold, the Company is required to transfer cash below the threshold to the
counterparty. The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative contracts used in
these hedging activities. The counterparties to the Company’s derivative contracts are major financial institutions and the Company
has not experienced nonperformance by any of its counterparties.
Other than derivative instruments and the Company’s 6¾% Exchangeable Notes (see Note 4), the Company’s non-financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable and long-term debt, as reported in the
accompanying Consolidated Balance Sheets, approximate fair value. The carrying value of the Company’s derivative financial
instruments has been adjusted to fair value in the accompanying Consolidated Balance Sheets.
New Accounting Pronouncements
In December 2007, the FASB issued the Consolidation Topic (“ASC 810”) of the FASB ASC, which is effective for fiscal years
beginning after December 15, 2008. ASC 810 states that accounting and reporting for minority interests will be recharacterized as
noncontrolling interests and classified as a component of equity. The calculation of earnings per share will continue to be based on
income amounts attributable to the parent. ASC 810 applies to all entities that prepare consolidated financial statements, but will affect
only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. The
provisions of ASC 810 were effective for the Company beginning January 1, 2009, and are applied prospectively. The adoption of
ASC 810 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In March 2008, the FASB issued the Derivatives and Hedging Topic (“ASC 815”) of the FASB ASC, which requires entities that
utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well
as any details of credit-risk-related contingent features contained within derivatives. ASC 815 also requires entities to disclose
additional information about the amounts and location of derivatives located within the financial statements, how the provisions of
ASC 815 have been applied, and the impact that hedges have on an entity’s financial position, financial performance and cash flows.
ASC 815 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The
Company has adopted the provisions of ASC 815 beginning with its condensed consolidated financial statements for the quarter ended
March 31, 2009.
In May 2008, the FASB issued the Debt with Conversions and Other Options Topic (“ASC 470”) of the FASB ASC, which clarifies
the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion and
specifies that issuers of such instruments should separately account for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent
periods. ASC 470 requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in the Company’s consolidated statement of operations.
ASC 470 is effective for fiscal years and interim periods beginning after December 15, 2008, with early application prohibited. The
Company adopted the provisions of ASC 470 beginning with its condensed consolidated financial statements for the quarter ended
March 31, 2009; however, the retrospective adoption of ASC 470 did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows (see Note 4).
In April 2009, the FASB issued the Financial Instruments Topic (“ASC 825”) of the FASB ASC. This Topic requires quarterly
disclosure of the methods and significant assumptions used to estimate the fair values of all financial instruments, and is effective for
interim and annual periods ended after June 15, 2009. The Company adopted the provisions of ASC 825 beginning with its condensed
consolidated financial statements for the quarter ended June 30, 2009. The application of this guidance affects disclosures only and
therefore did not have an impact on the Company’s financial condition, results of operations or cash flows.