O'Reilly Auto Parts 2013 Annual Report Download - page 61

FORM 10-K
55
Interest expense:
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates incurred
on its long-term borrowings. Total interest costs capitalized for the years ended December 31, 2013, 2012 and 2011, were $10.6 million,
$6.1 million and $4.7 million, respectively.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs including debt registration
fees, accounting and legal fees and underwriter and book runner fees. These debt issuance costs have been deferred and are being
amortized over the term of the corresponding debt issue and the amortization expense is included as a component of “Interest expense”
in the accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled $11.5 million and $10.1 million, net of
amortization, as of December 31, 2013 and 2012, respectively, of which $1.6 million and $1.5 million were included within “Other current
assets” on the accompanying Consolidated Balance Sheets as of December 31, 2013 and 2012, with the remainder included within “Other
assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2013 and 2012. See Note 5 for further information
concerning debt issuance costs associated with the issuances of or amendments to long-term debt instruments.
Income taxes:
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on differences between the GAAP basis and tax basis of assets and liabilities using enacted
tax rules and rates currently scheduled to be in effect for the year in which the differences are expected to reverse. Tax carry forwards
are also recognized in deferred tax assets and liabilities under this method. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period of the enactment date. The Company would record a valuation allowance against deferred
tax assets to the extent it is more likely than not the amount will not be realized, based upon evidence available at the time of the
determination and any change in the valuation allowance is recorded in the period of a change in such determination. The Company did
not establish a valuation allowance for deferred tax assets as of December 31, 2013 and 2012, as it was considered more likely than not
that deferred tax assets were realizable through a combination of future taxable income, the realization of deferred tax liabilities and tax
planning strategies. The Company regularly reviews its potential tax liabilities for tax years subject to audit. The amount of such liabilities
is based on various factors, such as differing interpretations of tax regulations by the responsible tax authority, experience with previous
tax audits and applicable tax law rulings. Changes in the Company’s tax liability may occur in the future as its assessments change based
on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s opinion, adequate
provisions for income taxes have been made for all years presented. The estimates of the Company’s potential tax liabilities contain
uncertainties because management must use judgment to estimate the exposures associated with the Company’s various tax positions
and actual results could differ from estimates.
Earnings per share:
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the
fiscal period. Diluted earnings per share is calculated by dividing the weighted-average number of common shares outstanding plus, the
common stock equivalents associated with the potential impact of dilutive stock options. Certain common stock equivalents that could
potentially dilute basic earnings per share in the future, were not included in the fully diluted computation because they would have been
antidilutive. Generally, stock options are antidilutive and excluded from the earnings per share calculation when the exercise price exceeds
the market price of the common shares. See Note 17 for further information concerning these common stock equivalents.
New accounting pronouncements:
In July of 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). Under ASU 2013-11, an entity is required
to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the
financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2013. The Company will adopt this guidance beginning with its first
quarter ending March 31, 2014; the application of this guidance affects presentation only and, therefore, it is not expected to have a
material impact on the Company’s consolidated financial condition, results of operations or cash flows.
NOTE 2 – FAIR VALUE MEASUREMENTS
The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial instruments.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement)
and the lowest priority to unobservable inputs (Level 3 measurement). The Company uses the income and market approaches to determine
the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth below: