O'Reilly Auto Parts 2014 Annual Report Download - page 54

FORM 10-K
47
suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as
of December 31, 2014 or 2013.
Inventory:
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market.
Inventory also includes capitalized costs related to procurement, warehousing and distribution centers ("DCs"). Cost has been determined
using the last-in, first-out ("LIFO") method, which more accurately matches costs with related revenues. Over time, as the Company's
merchandise inventory purchases have increased, the Company negotiated improved acquisition costs from its suppliers and the
corresponding price deflation exhausted the Company's LIFO reserve balance. The Company's policy is to not write up the value of its
inventory in excess of its replacement cost, and accordingly, the Company's merchandise inventory has been effectively recorded at
replacement cost since December 31, 2013. The replacement cost of inventory was $2.56 billion and $2.38 billion as of December 31,
2014 and 2013, respectively. LIFO costs exceeded replacement costs by $61.4 million and $21.6 million at December 31, 2014 and
2013, respectively.
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated using the straight-line method generally 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 execute renewal 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 recognized in the Company's Consolidated
Statements of Income. 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.
Notes receivable:
The Company had notes receivable from suppliers and other third parties amounting to $17.5 million and $17.2 million at December 31,
2014 and 2013, respectively. The notes receivable, which do not bear interest, are due in varying amounts through March 22, 2022. The
Company regularly reviews its notes receivable for collectability and assesses the need for a reserve for uncollectable amounts based on
an evaluation of the Company's borrowers' financial positions and corresponding abilities to meet financial obligations. Management
does not believe there is a reasonable likelihood that the Company will be unable to collect the notes receivable and the Company did
not record a reserve for uncollectable notes receivable in the consolidated financial statements as of December 31, 2014 or 2013.
Goodwill and other intangibles:
The accompanying Consolidated Balance Sheets at December 31, 2014 and 2013, include goodwill and other intangible assets recorded
as the result of acquisitions. The Company reviews 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, rather than systematically amortizing
goodwill against earnings. During 2014 and 2013, the goodwill impairment test included a quantitative assessment, which compared the
fair value of the reporting unit to its carrying amount, including goodwill. The Company operates as a single reporting unit, and the
Company determined that its fair value exceeded its carrying value, including goodwill, as of December 31, 2014 and 2013; as such, no
goodwill impairment adjustment was required as of December 31, 2014 and 2013. Finite-lived intangibles are carried at cost. Amortization
is calculated using the straight-line method, generally over the estimated useful lives of the intangibles.
Impairment of long-lived assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future
cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than
the carrying value of the assets, the Company measures the amount of impairment loss as the amount by which the carrying amount of
the assets exceeds the fair value of the assets. The Company has not historically recorded any material impairment to its long-lived assets
and the Company did not record an impairment to its long-lived assets during the year ended December 31, 2014 or 2013.
Valuation of investments:
The Company has an unsecured obligation to pay, in the future, the value of deferred compensation and a Company match relating to
employee participation in the Company’s nonqualified deferred compensation plan (the "Deferred Compensation Plan") (see Note 9).
The future obligation is adjusted to reflect the performance, whether positive or negative, of selected investment measurement options,
chosen by each participant. The Company invests in various marketable securities with the intention of selling these securities to fulfill
its future obligations under the Deferred Compensation Plan. The investments in this plan were stated at fair value based on quoted
market prices (see Note 2), were accounted for as trading securities and were included as a component of "Other assets, net" on the
accompanying Consolidated Balance Sheets as of December 31, 2014.