O'Reilly Auto Parts 2014 Annual Report Download - page 41

FORM 10-K
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We also record a reserve to reduce the carrying value of our perpetual inventory to account for quantities in our perpetual records
above the actual existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results of our
extensive and frequent cycle counting programs and periodic, full physical inventories. To the extent that our estimates do not
accurately reflect the actual unrecorded inventory shrinkage, we could potentially experience a material impact to our inventory
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 the shrink reserve changed 10% from the estimate that we recorded based on our historical experience
at December 31, 2014, the financial impact would have been approximately $1 million or 0.1% of pretax income for the year ended
December 31, 2014.
• 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 never 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, 2014, 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.
• Supplier Concessions – We receive concessions from our suppliers 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 supplier
concessions are recognized as a reduction to the cost of sales. Amounts receivable from suppliers also include amounts due to us
relating to supplier purchases and product returns. Management regularly reviews amounts receivable from suppliers and assesses
the need for a reserve for uncollectible amounts based on our evaluation of our suppliers' 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 suppliers 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 suppliers. Certain suppliers
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 supplier 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, 2014, the financial impact would have been approximately $3
million or 0.3% of pretax income for the year ended December 31, 2014.
• Self-Insurance Reserves – We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities
from workers' compensation, general liability, vehicle liability, property loss, and Team Member health care benefits. With the
exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial
litigation and certain regulatory matters, we obtain third-party insurance coverage to limit our exposure for any individual workers'
compensation, general liability, vehicle liability or property loss claim. When estimating our self-insurance liabilities, we consider