O'Reilly Auto Parts 2015 Annual Report Download - page 59

FORM 10-K
51
advertising costs as incurred. The Company also participates in cooperative advertising arrangements with certain of its suppliers.
Advertising expense, net of cooperative advertising allowances from suppliers that were incremental to the advertising program, specific
to the product or event and identifiable for accounting purposes, included as a component of "Selling, general and administrative
expenses" ("SG&A") on the accompanying Consolidated Statements of Income amounted to $79.3 million, $79.0 million and $78.3
million for the years ended December 31, 2015, 2014 and 2013, respectively.
Share-based compensation and benefit plans:
The Company sponsors employee share-based benefit plans and employee and director share-based compensation plans. The Company
recognizes compensation expense over the requisite service period for its share-based plans based on the fair value of the awards on the
date of the grant, award or issuance. Share-based plans include stock option awards issued under the Company's employee incentive
plans and director stock plan, stock issued through the Company's employee stock purchase plan and restricted stock awarded to employees
and directors through other compensation plans. See Note 9 for further information concerning the Company's share-based compensation
and plans.
Pre-opening expenses:
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to SG&A as incurred.
Costs associated with the opening of new distribution centers, which consist primarily of payroll and occupancy costs, are included as a
component of "Cost of goods sold, including warehouse and distribution expenses" on the accompanying Consolidated Statements of
Income as incurred.
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, 2015, 2014 and 2013, were $7.4 million,
$11.5 million and $10.6 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. Debt issuance costs related to the Company's long-term senior
notes are recorded as a reduction of the principal amount of the corresponding senior notes. Debt issuance costs related to the Company's
unsecured revolving credit facility are recorded as an asset. 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 $8.3 million and $9.9 million, net of accumulated amortization,
as of December 31, 2015 and 2014, respectively, of which $1.2 million and $1.7 million were included within "Other assets, net" as of
December 31, 2015 and 2014, respectively, with the remainder included within "Long-term debt, less current portion" on the accompanying
Consolidated Balance Sheets.
The Company issued its long-term senior notes at a discount. The original issuance discount on the senior notes is recorded as a reduction
of the principal amount due for the corresponding senior notes and is accreted over the term of the applicable senior note, with the accretion
expense included as a component of "Interest expense" in the accompanying Consolidated Statements of Income. Original issuance
discounts, net of accretion, totaled $2.9 million and $3.4 million as of December 31, 2015 and 2014, respectively.
See Note 5 for further information concerning debt issuance costs and original issuance discounts associated with the Company's issuances
of 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, 2015 and 2014, 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