O'Reilly Auto Parts 2013 Annual Report Download - page 44

FORM 10-K
38
balances. We have historically been able to provide a timely and accurate measurement of shrink and have not experienced material
adjustments to our estimates. If unrecorded shrink changed 10% from the estimate that we recorded based on our historical experience
at December 31, 2013, the financial impact would have been approximately $1 million or 0.1% of pretax income for the year ended
December 31, 2013.
 Accounts Receivable – We provide credit to our commercial customers in the ordinary course of business. We estimate the allowance
for doubtful accounts on these receivables based on historical loss ratios and other relevant factors. Actual results have consistently
been within management’s expectations, and we do not believe there is a reasonable likelihood that there will be a material change
in the future that will require a significant change in the assumptions or estimates we use to calculate our allowance for doubtful
accounts. However, if actual results differ from our estimates, we may be exposed to losses or gains. If the allowance for doubtful
accounts were changed 10% from our estimated allowance at December 31, 2013, the financial impact would have been approximately
$1 million or 0.1% of pretax income for the year ended December 31, 2013.
 Valuation of Long-Lived Assets and Goodwill - We evaluate the carrying value of long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. As part of the
evaluation, we review performance at the store level to identify any stores with current period operating losses that should be
considered for impairment. A potential impairment has occurred if the projected future undiscounted cash flows realized from the
best possible use of the asset are less than the carrying value of the asset. The estimate of cash flows includes management’s
assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the assets. Our impairment analyses contain estimates due to the inherently judgmental nature of
forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual results
could differ from these estimates, which could materially impact our impairment assessment.
We review goodwill for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the
carrying value of these assets might exceed their current fair values. We have not historically recorded an impairment to goodwill.
The process of evaluating goodwill for impairment involves the determination of the fair value of our Company using the market
approach. Inherent in such fair value determinations are certain judgments and estimates, including estimates which incorporate
assumptions marketplace participants would use in making their estimates of fair value. In the future, if events or market conditions
affect the estimated fair value to the extent that an asset is impaired, we will adjust the carrying value of these assets in the period
in which the impairment occurs; however, we do not believe there has been any change of events or circumstances that would indicate
that a reevaluation of goodwill is required as of December 31, 2013, nor do we believe goodwill is at risk of failing impairment
testing. If the price of O’Reilly stock, which was a primary input used to determine our market capitalization during step one of
goodwill impairment testing, changed by 10% from the value used during testing, the results and our conclusions would not have
changed and no further steps would have been required.
 Vendor Concessions – We receive concessions from our vendors through a variety of programs and arrangements, including co-
operative advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising
allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting purposes,
are reported as a reduction of advertising expense in the period in which the advertising occurred. All other material vendor concessions
are recognized as a reduction to the cost of inventory. Amounts receivable from vendors also include amounts due to us relating to
vendor purchases and product returns. Management regularly reviews amounts receivable from vendors and assesses the need for
a reserve for uncollectible amounts based on our evaluation of our vendors’ financial position and corresponding ability to meet their
financial obligations. Based on our historical results and current assessment, we have not recorded a reserve for uncollectible amounts
in our consolidated financial statements, and we do not believe there is a reasonable likelihood that our ability to collect these amounts
will differ from our expectations. The eventual ability of our vendors to pay us the obliged amounts could differ from our assumptions
and estimates, and we may be exposed to losses or gains that could be material.
 Warranty Reserves – We offer warranties on certain merchandise we sell with warranty periods ranging from 30 days to limited
lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of our vendors. Certain vendors provide
upfront allowances to us in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, we bear the risk
of loss associated with the cost of warranty claims. Differences between vendor allowances received in lieu of warranty obligations
and estimated warranty expense are recorded as an adjustment to cost of sales. Estimated warranty costs, which are recorded as
obligations at the time of sale, are based on the historical failure rate of each individual product line. Our historical experience has
been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims has been driven by volume of
units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. If warranty reserves were
changed 10% from our estimated reserves at December 31, 2013, the financial impact would have been approximately $3 million
or 0.3% of pretax income for the year ended December 31, 2013.