SONIC AUTOMOTIVE INCSAH
SONIC AUTOMOTIVE INC New Standards Disclosure
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 as well as several subsequent amendments to amend the accounting guidance on revenue recognition. The amendments to the revenue recognition accounting guidance are included in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” and are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments to this guidance must be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the amendments in each prior reporting period with the option to elect certain practical expedients; or (2) a modified retrospective approach with the cumulative effect of initially applying the amendments recognized at the date of adoption (which requires additional footnote disclosures). These amendments were effective for reporting periods beginning after December 15, 2017. On January 1, 2018, we adopted ASC 606 (the “new revenue standard”) using the modified retrospective transition approach applied to contracts not completed as of the date of adoption. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for that period. We do not expect the effect of the adoption of the new revenue standard to have a material impact on our net income on an ongoing basis.
Under the new revenue standard, revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The principles apply a five-step model that includes: (1) identifying the contract(s) with the customer; (2) identifying the performance obligation(s) in the contract(s); (3) determining the transaction price; (4) allocating the transaction price to the performance obligation(s) in the contract(s); and (5) recognizing revenue as the performance obligation(s) are satisfied. The new revenue standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We do not include the cost of obtaining contracts within the related revenue streams. We have elected the practical expedient to expense the costs to obtain a contract when incurred.
During the implementation process, management evaluated its established business processes, revenue transaction streams and accounting policies, and generally expects similar performance obligations to result under the new revenue standard as compared with prior U.S. generally accepted accounting principles (“U.S. GAAP”). Management identified its material revenue streams to be (1) the sale of new vehicles; (2) the sale of used vehicles to retail customers; (3) the sale of wholesale used vehicles at third-party auctions; (4) the arrangement of vehicle financing and the sale of service and other insurance contracts; and (5) the performance of vehicle maintenance and repair services and the sale of related parts and accessories. As a result of this evaluation during the implementation process, management expects the amounts and timing of revenue recognition to generally remain the same, with the exception of the timing of revenue recognition related to: (1) service and collision repair orders that are incomplete as of a reporting date (“work in process”) and (2) certain retrospective finance and insurance revenue earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenues”), both of which are subject to accelerated recognition under the new revenue standard. Work in process revenues are
recognized over time based on the completed work to date and F&I retro revenues are recognized when the product contract has been executed with the end customer and are estimated each reporting period based on the expected value method using historical and projected data. F&I retro revenues, which represent variable consideration, subject to constraint, are to be included in the transaction price and recognized when or as the performance obligation is satisfied. F&I retro revenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, we utilize this historical and projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Generally, performance conditions are satisfied when the associated vehicle is either delivered or returned to a customer and customer acceptance has occurred or over time as the maintenance and repair services are performed. We do not have any revenue streams with significant financing components as payments are typically received within a short period of time following completion of the performance obligation(s).
During the year ended December 31, 2018, we implemented new financial reporting controls during the process of adopting the new revenue standard. Those efforts did not result in any material changes to our internal control process.
The cumulative effect of the adjustments to our December 31, 2018 consolidated statements of income and January 1, 2018 consolidated balance sheet for the adoption of ASC 606 was as follows:
| Income Statement | Pre-ASC 606 Results Year Ended December 31, 2018 | Effects of Adoption of ASC 606 | As Reported Year Ended December 31, 2018 | ||||||||||||||
| (In thousands) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Parts, service and collision repair | $ | 1,380,506 | $ | 381 | $ | 1,380,887 | |||||||||||
| Finance, insurance and other, net | $ | 396,905 | $ | 8,618 | $ | 405,523 | |||||||||||
| Cost of Sales: | |||||||||||||||||
| Parts, service and collision repair | $ | (713,259) | $ | (267) | $ | (713,526) | |||||||||||
| Selling, general and administrative expenses: | $ | (1,145,294) | $ | (31) | $ | (1,145,325) | |||||||||||
| Operating income (loss): | $ | 168,962 | $ | 8,701 | $ | 177,663 | |||||||||||
| Balance Sheet | December 31, 2017 | Effects of Adoption of ASC 606 | January 1, 2018 | ||||||||||||||
| (In thousands) | |||||||||||||||||
| Assets: | |||||||||||||||||
| Receivables, net | $ | 482,126 | $ | 4,590 | $ | 486,716 | |||||||||||
| Contract assets (1) | $ | — | $ | 2,082 | $ | 2,082 | |||||||||||
| Liabilities: | |||||||||||||||||
| Other accrued liabilities | $ | 237,963 | $ | 1,286 | $ | 239,249 | |||||||||||
| Deferred income taxes | $ | 51,619 | $ | 1,468 | $ | 53,087 | |||||||||||
| Stockholders' Equity: | |||||||||||||||||
| Retained earnings | $ | 625,356 | $ | 3,918 | $ | 629,274 | |||||||||||
(1) Receivables, net in the accompanying consolidated balance sheets at December 31, 2018 includes approximately $4.7 million related to work in process and a contract asset of approximately $5.4 million related to F&I retro revenues. Changes in contract assets from January 1, 2018 to December 31, 2018 were primarily due to ordinary business activity.
In February 2016, the FASB established ASC 842, “Leases,” by issuing ASU 2016-02 (and subsequent amendments via ASU 2018-01, ASU 2018-10 and ASU 2018-11) in order to increase transparency and comparability among organizations by recognizing operating lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The lease standard is effective for us on January 1, 2019. Prior to adoption of the lease standard, only leases classified as capital leases under ASC 840 were recorded in the consolidated balance sheets. Under ASC 842, an entity will
classify leases as either finance leases (formerly capital leases) or operating leases, and a right-of-use asset (“ROU asset”) and lease liability are required to be recognized in the consolidated balance sheets for both finance and operating leases with a term longer than 12 months. The lease standard requires a modified retrospective transition approach and provides an optional transition method to either (1) record current existing leases as of the effective date; or (2) record leases existing as of the earliest comparative period presented in the financial statements by recasting comparative period financial statements. We adopted the lease standard as of January 1, 2019 using the effective date as our date of application. As such, financial statement information and disclosures required under the new lease standard will not be provided for dates and periods prior to January 1, 2019. The lease standard provides for a number of optional practical expedients in transition, which include: (1) not requiring an entity to reassess prior conclusions about lease identification, lease classification or initial direct costs; (2) allowing an entity to use a portfolio approach for similar lease assets; (3) allowing an entity to elect an accounting policy to choose not to separate non-lease components of an agreement from lease components (by asset class); (4) allowing the use of hindsight in estimating lease term or assessing impairment of ROU assets; and (5) not requiring an entity to reassess prior conclusions about land easements. We expect to elect all of the practical expedients permitted under the transition guidance within the new standard. The new lease standard also provides practical expedients for ongoing accounting. We expect to elect the short-term lease recognition exemption for our real estate and equipment leases, which means that for those leases that qualify, we will not recognize ROU assets or lease liabilities.
As part of the lease standard implementation process, we assessed our existing real estate and equipment lease agreements, identified certain lease components embedded within existing service contracts, evaluated transition guidance and practical expedient elections, implemented lease accounting software and designed internal controls over lease accounting under the new standard. We are still evaluating the possible effects of impairment of certain ROU assets as of the effective date. We estimate that adoption of the new lease standard will result in recording additional operating lease liabilities and corresponding ROU assets ranging from $350.0 million to $400.0 million as of January 1, 2019. We do not expect the adoption of the new lease standard to have a material effect on future results of operations or cash flows.
In August 2017, the FASB issued ASU 2017-12 which amends the hedge accounting recognition and presentation requirements in ASC Topic 815, Derivatives and Hedging. This ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, which allows the reclassification of stranded tax effects, as a result of the Tax Cuts and Jobs Acts of 2017, from accumulated other comprehensive income to retained earnings. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financial statements.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2018 | Feb 21, 2019 | Showing above |
| 2017 | Feb 28, 2018 | |
| 2016 | Feb 27, 2017 | |
| 2015 | Feb 26, 2016 | |
About New Standards Disclosures
New accounting standards disclosures describe recently adopted pronouncements and those not yet effective, along with management's assessment of their expected impact. This section provides an early warning system for upcoming changes to how a company reports its financial results, often years before the new rules take effect.
Key signals: when management describes a not-yet-adopted standard's impact as "material" or "still being evaluated," it signals potential significant changes to reported metrics upon adoption. Watch for standards that affect a company's core operations — for example, revenue recognition changes for software companies or lease accounting changes for retailers with large store footprints. The transition method chosen (full retrospective versus modified retrospective) affects comparability with prior periods. Companies that delay adoption to the latest permitted date may be struggling with implementation complexity. Compare the disclosed impact assessments against peers in the same industry to gauge whether management's expectations are reasonable.