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Note 2 - Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
2.
SIGNIFICANT ACCOUNTING POLICIES
:
 
Principles of Consolidation
 
The consolidated financial statements presented herein include the accounts of Rush Enterprises, Inc. together with its consolidated subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
 
Estimates in Financial Statements
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
may
differ from those estimates.
 
Cash and Cash Equivalents
 
Cash and cash equivalents generally consist of cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of
ninety
days or less to be cash equivalents.
 
Allowance for Doubtful Receivables and Repossession Losses
 
The Company provides an allowance for doubtful receivables and repossession losses after considering historical loss experience and other factors that might affect the collection of accounts receivable and the ability of customers to meet their obligations on finance contracts sold by the Company.
 
Inventories
 
Inventories are stated at the lower of cost or net realizable value. Cost is determined by specific identification of new and used commercial vehicle inventory and by the
first
-in,
first
-out method for tires, parts and accessories. As the market value of the Company’s inventory typically declines over time, reserves are established based on historical loss experience and market trends. These reserves are charged to cost of sales and reduce the carrying value of the Company’s inventory on hand. An allowance is provided when it is anticipated that cost will exceed net realizable value less a reasonable profit margin.
 
P
roperty and Equipment
 
Property and equipment are stated at cost and depreciated over their estimated useful lives. Leasehold improvements are amortized over the useful life of the improvement, or the term of the lease, whichever is shorter. Provision for depreciation of property and equipment is calculated primarily on a straight-line basis. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest, when incurred, is added to the cost of underlying assets and is amortized over the estimated useful life of such assets. The Company capitalized interest of approximately
$357,600
related to major capital projects during
2018.
The cost, accumulated depreciation and amortization and estimated useful lives of certain of the Company’s assets are summarized as follows (in thousands):
 
   
 
2018
   
 
2017
   
Estimated Life (Years)
 
Land
  $
134,873
    $
129,805
     
 
 
 
Buildings and improvements
   
434,049
     
404,679
     
10
39
 
Leasehold improvements
   
27,165
     
26,765
     
2
39
 
Machinery and shop equipment
   
73,578
     
65,694
     
5
20
 
Furniture, fixtures and computers
   
67,330
     
63,475
     
3
15
 
Transportation equipment
   
92,385
     
81,158
     
2
15
 
Lease and rental vehicles
   
914,708
     
894,905
     
2
8
 
Construction in progress
   
16,310
     
8,043
     
 
 
 
 
Accumulated depreciation and amortization
   
(576,345
)    
(514,929
)    
 
 
 
 
                             
Total
  $
1,184,053
    $
1,159,595
     
 
 
 
 
 
The Company recorded depreciation expense of
$149.1
million and amortization expense of
$36.0
million for the year ended
December 31, 2018,
depreciation expense of
$140.3
million and amortization expense of
$17.6
million for the year ended
December 31, 2017
and depreciation expense of
$140.6
million and amortization expense of
$17.0
million for the year ended
December 31, 2016.
 
As of
December 31, 2018,
the Company had
$66.4
million in lease and rental vehicles under various capital leases included in property and equipment, net of accumulated amortization of
$44.6
million. The Company recorded depreciation and amortization expense of
$114.6
million related to lease and rental vehicles in lease and rental cost of products sold for the year ended
December 31, 2018,
$107.9
million for the year ended
December 31, 2017
and
$106.3
million for the year ended
December 31, 2016.
 
Goodwill
 
 
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the purchase method. The Company tests goodwill for impairment annually during the
fourth
quarter, or when indications of potential impairment exist. These indicators would include a significant change in operating performance, or a planned sale or disposition of a significant portion of the business, among other factors. The Company tests for goodwill impairment utilizing a fair value approach at the reporting unit level. The Company has deemed its reporting unit to be the Truck Segment, as all components of the Truck Segment are similar.
 
The impairment test for goodwill involves comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a
second
step is required to measure the goodwill impairment loss. The
second
step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination and comparing the hypothetical implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the hypothetical implied fair value of the goodwill, the Company would recognize an impairment loss in an amount equal to the excess,
not
to exceed the carrying amount. The Company determines the fair values calculated in an impairment test using the discounted cash flow method, which requires assumptions and estimates regarding future revenue, expenses and cash flow projections. The analysis is based upon available information regarding expected future cash flows of its reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit.
 
No
impairment write down was required in the
fourth
quarter of
2018.
However, the Company cannot predict the occurrence of certain events that might adversely affect the reported value of goodwill in the future.
 
The following table sets forth the change in the carrying amount of goodwill for the Company for the years ended
December 31, 2018
and
2017
(in thousands):
 
Balance January 1, 2017
  $
290,191
 
Acquisition
   
1,200
 
Balance December 31, 2017 and 2018
  $
291,391
 
 
Other Assets
 
 
ERP Platform
 
The total capitalized costs of the Company’s SAP enterprise resource planning software platform (“ERP Platform”) of
$10.8
million are recorded on the Consolidated Balance Sheet in Other Assets. Amortization expense relating to the ERP Platform, which is recognized in depreciation and amortization expense in the Consolidated Statements of Income and Comprehensive Income, was
$21.7
million for the year ended
December 31, 2018
and
$3.4
million for the year ended
December 31, 2017.
The Company estimates that amortization expense relating to the ERP Platform will be approximately
$1.9
million for each of the next
five
years.
 
In the
first
quarter of
2018,
as part of an assessment that involved a technical feasibility study of the then current ERP Platform, the Company determined that a majority of the components of this ERP Platform would require replacement earlier than originally anticipated; in prior disclosures, the Company had referred to the ERP Platform separately as the SAP enterprise software and SAP dealership management system. In accordance with Accounting Standards Codification (“ASC”) Topic
350
-
40,
in the
first
quarter of
2018,
the Company adjusted the useful life of these components that were replaced so that the respective net book values of the components were fully amortized upon replacement in
May 2018.
The Company amortized the remaining net book value of the components that were replaced on a straight-line basis in
February 2018
through
May 2018.
The Company recognized
$19.9
million of amortization expense in
2018
related to the components of the ERP Platform that were replaced. The ERP Platform asset and related amortization are reflected in the Truck Segment.
 
Franchise Rights
 
The Company’s only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers. The fair value of the franchise right is determined at the acquisition date by discounting the projected cash flows specific to each acquisition. The carrying value of the Company’s manufacturer franchise rights was
$7.0
million at
December 31, 2018
and
December 31, 2017,
and is included in Other Assets on the accompanying consolidated balance sheets. The Company has determined that manufacturer franchise rights have an indefinite life, as there are
no
economic or other factors that limit their useful lives and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers’ brand names. Furthermore, to the extent that any agreements evidencing manufacturer franchise rights have expiration dates, the Company expects that it will be able to renew those agreements in the ordinary course of business. Accordingly, the Company does
not
amortize manufacturer franchise rights.
 
Due to the fact that manufacturer franchise rights are specific to geographic region, the Company has determined that evaluating and including all locations acquired in the geographic region is the appropriate level for purposes of testing franchise rights for impairment. Management reviews indefinite-lived manufacturer franchise rights for impairment annually during the
fourth
quarter, or more often if events or circumstances indicate that an impairment
may
have occurred. The Company is subject to financial statement risk to the extent that manufacturer franchise rights become impaired due to decreases in the fair market value of its individual franchises.
 
The significant estimates and assumptions used by management in assessing the recoverability of manufacturer franchise rights include estimated future cash flows, present value discount rate and other factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluations of manufacturer franchise rights can vary within a range of outcomes.
 
No
impairment write down was required in the
fourth
quarter of
2018.
The Company cannot predict the occurrence of certain events that might adversely affect the reported value of manufacturer franchise rights in the future.
 
Income Taxes
 
Significant management judgment is required to determine the provisions for income taxes and to determine whether deferred tax assets will be realized in full or in part. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely than
not
that all or some portion of specific deferred income tax assets will
not
be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined
not
to be realizable. Accordingly, the facts and financial circumstances impacting deferred income tax assets are reviewed quarterly and management’s judgment is applied to determine the amount of valuation allowance required, if any, in any given period.
 
In determining its provision for income taxes, the Company uses an annual effective income tax rate based on annual income, permanent differences between book and tax income, and statutory income tax rates. The effective income tax rate also reflects its assessment of the ultimate outcome of tax audits. The Company adjusts its annual effective income tax rate as additional information on outcomes or events becomes available. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur.
 
The Company’s income tax returns are periodically audited by U.S. federal, state and local tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions. At any time, multiple tax years are subject to audit by the various tax authorities. In evaluating the tax benefits associated with the Company’s various tax filing positions, the Company records a tax benefit for uncertain tax positions. A number of years
may
elapse before a particular matter for which the Company has established a liability is audited and effectively settled. The Company adjusts its liability for unrecognized tax benefits in the period in which it determines the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. The Company includes its liability for unrecognized tax benefits, including accrued interest, in accrued liabilities on the Company’s Consolidated Balance Sheet and in income tax expense in the Company’s Consolidated Statements of Income. Unfavorable settlement of any particular issue would require use of the Company’s cash and a charge to income tax expense. Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution.
 
Additionally, despite the Company’s belief that its tax return positions are consistent with applicable tax law, management expects that certain positions
may
be challenged by taxing authorities. Settlement of any challenge can result in
no
change, a complete disallowance, or some partial adjustment reached through negotiations. The Company records interest and penalties, if any, related to federal and state unrecognized tax benefits in income tax expense.
 
Revenue Recognition Policies
 
Effective
January 1, 2018,
the Company adopted ASU
2014
-
09,
Revenue from Contracts with Customers
(
Topic
606
)
,” using the modified retrospective transition method.  This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.  Under Topic
606,
the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that the Company determines are within the scope of Topic
606,
the Company performs the following
five
steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.  The Company only applies the
five
-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.  At contract inception, once the contract is determined to be within the scope of Topic
606,
the Company assesses the goods or services promised within each contract and determines those that are performance obligations. The Company then assess whether each promised good or service is distinct and recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.  For a complete discussion of accounting for revenue, see Note
20
– Revenue of the Notes to Consolidated Financial Statements.
 
Lease and rental revenue is recognized over the period of the related lease or rental agreement. Contingent rental revenue is recognized when it is earned.
 
Cost of Sales
 
For the Company’s new and used commercial vehicle operations, cost of sales consists primarily of the Company’s actual purchase price plus make-ready expenses, less any applicable manufacturers’ incentives. For the Company’s parts operations, cost of sales consists primarily of the Company’s actual purchase price, less any applicable manufacturers’ incentives. For the Company’s service and collision center operations, technician labor cost is the primary component of cost of sales. For the Company’s rental and leasing operations, cost of sales consists primarily of depreciation and amortization, rent, maintenance costs, license costs and interest expense on the lease and rental fleet owned and leased by the Company. There are
no
costs of sales associated with the Company’s finance and insurance revenue or other revenue.
 
Taxes Assessed by a Governmental Authority
 
The Company accounts for sales taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction on a net (excluded from revenues) basis.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of incentive based compensation for sales, finance and general management personnel, salaries for administrative personnel and expenses for rent, marketing, insurance, utilities, research and development and other general operating purposes.
 
Stock Based Compensation
 
The Company applies the provisions of ASC topic
718
-
10,
“Compensation – Stock Compensation,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including grants of employee stock options, restricted stock units, restricted stock awards and employee stock purchases under the Employee Stock Purchase Plan, based on estimated fair values.
 
The Company uses the Black-Scholes option-pricing model to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.
 
Compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is recognized based on awards expected to vest. Accordingly, stock based compensation expense has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards and actual and projected stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have
no
vesting or hedging restrictions and are fully transferable. Because the Company’s stock options have characteristics that are significantly different from traded options and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models
may
not
provide an accurate measure of the fair value that value
may
not
be indicative of the fair value observed in a market transaction between a willing buyer and a willing seller.
 
The following table reflects the weighted-average fair value of stock options granted during each period using the Black-Scholes option valuation model with the following weighted-average assumptions used:
 
   
2018
   
2017
   
2016
 
Expected stock volatility
   
31.68
%    
33.54
%    
35.63
%
Weighted-average stock volatility
   
31.68
%    
33.54
%    
35.63
%
Expected dividend yield
   
0.00
%    
0.00
%    
0.00
%
Risk-free interest rate
   
2.69
%    
2.17
%    
1.64
%
Expected life (years)
   
6.0
     
6.0
     
6.0
 
Weighted-average fair value of stock options granted
  $
15.46
    $
12.33
    $
6.54
 
 
The Company computes its historical stock price volatility in accordance with ASC topic
718
-
10.
The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of stock options represents the weighted-average period the stock options are expected to remain outstanding.
 
Advertising Costs
 
Advertising costs are expensed as incurred. Advertising and marketing expense was
$10.4
million for
2018,
$9.5
million for
2017
and
$6.8
million for
2016.
Advertising and marketing expense is included in selling, general and administrative expense.
 
Accounting for Internal Use Software
 
The Company’s accounting policy with respect to accounting for computer software developed or obtained for internal use is consistent with ASC topic
350
-
40,
which provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics of internal-use software.  The Company has capitalized software costs, including capitalized interest, of approximately
$10.8
million at
December 31, 2018,
net of accumulated amortization of
$8.3
million, and had
$31.9
million, net of accumulated amortization of
$20.0
million at
December 31, 2017. 
 
Insurance
 
The Company is partially self-insured for a portion of the claims related to its property and casualty insurance programs. Accordingly, the Company is required to estimate expected losses to be incurred. The Company engages a
third
-party administrator to assess any open claims and the Company adjusts its accrual accordingly on an annual basis. The Company is also partially self-insured for a portion of the claims related to its worker’s compensation and medical insurance programs. The Company uses actuarial information provided from
third
-party administrators to calculate an accrual for claims incurred, but
not
reported, and for the remaining portion of claims that have been reported.
 
Fair Value Measurements
 
The Company has various financial instruments that it must measure at fair value on a recurring basis. See Note
9
– Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements, for further information. The Company also applies the provisions of fair value measurement to various nonrecurring measurements for its financial and nonfinancial assets and liabilities.
 
Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company measures its assets and liabilities using inputs from the following
three
levels of the fair value hierarchy:
 
Level
1
inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
 
Level
2
inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are
not
active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
 
Level
3
includes unobservable inputs that reflect the Company’s assumptions about what factors market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
 
Acquisitions
 
The Company uses the acquisition method of accounting for the recognition of assets acquired and liabilities assumed through acquisitions at their estimated fair values as of the date of acquisition. Any excess consideration transferred over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. While the Company uses its best estimates and assumptions to measure the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which is
not
to exceed
one
year from the date of acquisition, any changes in the estimated fair values of the net assets recorded for the acquisitions will result in an adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Consolidated Statements of Income.
 
 
New Accounting Pronouncements
 
In
February 2016,
the FASB issued ASU
No.
2016
-
02,
Leases (
Topic
842
),
” which is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than
twelve
months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
 
The Company adopted Topic
842
on
January 1, 2019.
The Company will apply a modified retrospective transition approach for all leases existing at, or entered into after,
January 1, 2019.
Upon adoption, the Company is applying the practical expedients permitted within Topic
842,
which among other things, allows it to retain its existing assessment of whether an arrangement is, or contains, a lease and is classified as an operating or finance lease. The Company made an accounting policy election that keeps leases with an initial term of
twelve
months or less off of the balance sheet and results in recognizing those lease payments in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term. The Company estimates that the adoption of Topic
842
will result in the recognition of right-of-use assets and lease liabilities for operating leases of approximately
$51.9
million on its Consolidated Balance Sheets, with
no
material impact to its Consolidated Statements of Income and Comprehensive Income.