Aarons 2002 Annual Report Download - page 25

23
NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
As of December 31, 2002 and 2001, and for the Years
Ended December 31, 2002, 2001 and 2000.
Basis of Presentation —
The consolidated financial statements
include the accounts of Aaron Rents, Inc. and its wholly-owned
subsidiaries (the Company). All significant intercompany accounts
and transactions have been eliminated. The preparation of the
Company’s consolidated financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in these financial statements and accompanying notes. Actual
results could differ from those estimates.
Line of Business — The Company is engaged in the business
of renting and selling residential and office furniture, consumer
electronics, appliances, and other merchandise throughout the
U.S. and Puerto Rico. The Company manufactures furniture for
its sales and lease ownership and rent-to-rent operations.
Rental Merchandise consists primarily of residential and office
furniture, consumer electronics, appliances, and other merchandise
and is recorded at cost. The sales and lease ownership division
depreciates merchandise over the agreement period, generally 12
to 24 months, when on rent, and 36 months, when not on rent, to
a 0% salvage value. The rent-to-rent division depreciates merchan-
dise over its estimated useful life which ranges from six months to
60 months, net of its salvage value which ranges from 0% to 60%.
Our policies require weekly rental merchandise counts by store
managers, which includes a write-off for unsalable, damaged, or
missing merchandise inventories. Full physical inventories are
generally taken at our distribution and manufacturing facilities on
a quarterly basis, and appropriate provisions are made for missing,
damaged and unsalable merchandise. In addition, we monitor
rental merchandise levels and mix by division, store, and distribu-
tion center, as well as the average age of merchandise on hand.
If unsalable rental merchandise cannot be returned to vendors,
it is adjusted to its net realizable value or written off.
All rental merchandise is available for rental and sale. On a
monthly basis, we write off damaged, lost or unsalable mer-
chandise as identified. These write-offs, recorded as a component
of operating expenses, totaled approximately $10.1 million, $10
million and $8.9 million during the years ended December 31,
2002, 2001, and 2000, respectively. See Note B.
Property, Plant, and Equipment are recorded at cost.
Depreciation and amortization are computed on a straight-line
basis over the estimated useful lives of the respective assets, which
are from 8 to 40 years for buildings and improvements and from 1
to 5 years for other depreciable property and equipment. Gains
and losses related to dispositions and retirements are expensed as
incurred. Maintenance and repairs are also expensed as incurred;
renewals and betterments are capitalized.
Deferred Income Taxes are provided for temporary differ-
ences between the amounts of assets and liabilities for financial
and tax reporting purposes. Such temporary differences arise
principally from the use of accelerated depreciation methods on
rental merchandise for tax purposes.
Cost of Sales includes the net book value of merchandise sold,
primarily using specific identification in the sales and lease owner-
ship division and first-in, first-out in the rent-to-rent division. It is
not practicable to allocate operating expenses between selling and
rental operations.
Shipping and Handling Costs — Shipping and handling costs
are classified as operating expenses in the accompanying consolidated
statements of earnings and totaled approximately $20,554,000 in
2002, $18,965,000 in 2001, and $17,397,000 in 2000.
Advertising — The Company expenses advertising costs as
incurred. Such costs aggregated $15,406,000 in 2002, $14,204,000
in 2001, and $11,937,000 in 2000.
Stock Based Compensation — The Company has elected to
follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations in accounting
for its employee stock options and adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock Based Compensation (SFAS
No. 123). The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair
value of the shares at the date of grant and, accordingly, recognizes
no compensation expense for the stock option grants. Income tax
benefits resulting from stock option exercises credited to additional
paid-in capital totaled approximately $341,000, $288,000, and
$540,000, in 2002, 2001, and 2000, respectively.
Goodwill — Goodwill primarily represents the excess of the
purchase price paid over the fair value of the net assets acquired
in connection with business acquisitions. Effective January 1,
2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS No.
142). SFAS No. 142 requires that entities assess the fair value of
the net assets underlying all acquisition-related goodwill on a
reporting unit basis effective beginning in 2002. When the fair
value is less than the related carrying value, entities are required
to reduce the amount of goodwill (see Note B). The approach to
evaluating the recoverability of goodwill as outlined in SFAS No.
142 requires the use of valuation techniques utilizing estimates
and assumptions about projected future operating results and
other variables. The impairment only approach required by SFAS
No. 142 may have the effect of increasing the volatility of the
Company’s earnings if goodwill impairment occurs at a future date.
Long-Lived Assets Other Than Goodwill — The Company
assesses its long-lived assets other than goodwill for impairment
whenever facts and circumstances indicate that the carrying
amount may not be fully recoverable. To analyze recoverability,
the Company projects undiscounted net future cash flows over the
remaining life of such assets. If these projected cash flows are less
than the carrying amount, an impairment would be recognized,
resulting in a write-down of assets with a corresponding charge
to earnings. Impairment losses, if any, are measured based upon
the difference between the carrying amount and the fair value
of the assets.
Fair Value of Financial Instruments — The carrying amounts
reflected in the consolidated balance sheets for cash, accounts
receivable, bank, and other debt approximate their respective fair
values. The fair value of the liability for interest rate swap agree-
ments, included in accounts payable and accrued expenses in the
consolidated balance sheet, was approximately $3,321,000 and
$3,145,000 at December 31, 2002 and 2001, respectively, based
upon quotes from financial institutions. At December 31, 2002 and
2001, the carrying amount for variable rate debt approximates fair
market value since the interest rates on these instruments are reset
periodically to current market rates.
At December 31, 2002, the fair market value of fixed rate
long-term debt was approximately $51,074,000, based primarily
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS