Aarons 2002 Annual Report Download - page 26

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on quoted prices for these or similar instruments. The fair value
of fixed rate long-term debt was estimated by calculating the
present value of anticipated cash flows. The discount rate used
was an estimated borrowing rate for similar debt instruments
with like maturities.
Revenue Recognition — Rental revenues are recognized as
revenue in the month they are due. Rental payments received prior
to the month due are recorded as deferred rental revenue. The
Company maintains ownership of the rental merchandise until all
payments are received under sales and lease ownership agree-
ments. Revenues from the sale of residential and office furniture
and other merchandise are recognized at the time of shipment
which is when title and risk of ownership are transferred to
the customer.
Franchisees pay a non-refundable initial franchise fee of
$35,000 for each store opened and an ongoing royalty of 5% of
cash receipts. Franchise fees and area development franchise fees
are generated from the sale of rights to develop, own, and operate
Aaron’s Sales & Lease Ownership stores. These fees are recog-
nized when substantially all of the Company’s obligations per
location are satisfied (generally at the date of the store opening).
Prior to opening, the franchisees are provided support in creating a
business plan, site selection services, marketing analysis, and train-
ing, and are provided necessary computer software and assistance
in advertising and publicity to reach the market area of each store.
Franchise fees and area development fees received prior to the
substantial completion of the Company’s obligations are deferred.
The ongoing royalties are recognized in the period earned. In addi-
tion, on a monthly basis, the Company recognizes servicing and
guarantee fees as earned associated with the Company-sponsored
franchise loan program. The Company includes this income in
Other Revenues in the Consolidated Statements of Earnings.
Allowance for Uncollectible Accounts Receivable — The
Company had an allowance for uncollectible accounts receivable
of $1,300,000 as of December 31, 2002.
Closed Store Reserves — From time to time the Company
closes under-performing stores. The charges related to the closing
of these stores primarily consist of reserving the net present value
of future minimum payments under the store’s real estate leases.
Insurance Reserves — Estimated insurance reserves are
accrued primarily for group health and workers compensation
benefits provided to the Company’s employees. Estimates for these
insurance reserves are made based on actual reported but unpaid
claims and actuarial analysis of the projected claims run off for
both reported and unreported but incurred claims.
Derivative Instruments and Hedging Activities — From
time to time, the Company uses interest rate swap agreements to
synthetically manage the interest rate characteristics of a portion of
its outstanding debt and to limit the Company’s exposure to rising
interest rates. The Company designates at inception that interest
rate swap agreements hedge risks associated with future variable
interest payments and monitors each swap agreement to determine
if it remains an effective hedge. The effectiveness of the derivative
as a hedge is based on a high correlation between changes in the
value of the underlying hedged item. The ineffectiveness related
to the Company’s derivative transactions is not material. The
Company records amounts to be received or paid as a result of
interest rate swap agreements as an adjustment to interest expense,
or in the case of variable payment lease obligations, as an adjust-
ment to net expenses. At December 31, 2002, the notional amount
of approximately $28,000,000 of the Company’s interest rate swaps
were designated as effective cash flow hedges, and approximately
$32,000,000 were not being utilized as a hedge of variable obliga-
tions. In the event of early termination or redesignation of interest
rate swap agreements, any resulting gain or loss would be deferred
and amortized as an adjustment to interest expense of the related
debt instrument over the remaining term of the original contract
life of the agreement. In the event of early extinguishment of a
designated debt obligation, any realized or unrealized gain or loss
from the associated swap would be recognized in income at the
time of extinguishment. The Company does not enter into deriva-
tives for speculative or trading purposes.
Comprehensive Income — Comprehensive income totaled
$27,526,000, $10,382,000, and $27,261,000, for the years ended
December 31, 2002, 2001, and 2000, respectively.
New Accounting Pronouncements — Effective January 1,
2002, the Company adopted SFAS No. 141, Business Combinations
(SFAS No. 141), and SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations ini-
tiated after June 30, 2001. SFAS No. 142 requires that entities
assess the fair value of the net assets underlying all acquisition-
related goodwill on a reporting unit basis. See Note B.
In June 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146) which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). SFAS No. 146 requires that a liability
for costs associated with an exit or disposal activity be recognized
when the liability is incurred as opposed to the date of an entity’s
commitment to an exit plan. SFAS No. 146 also establishes fair
value as the objective for initial measurement of the liability.
SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not
expect SFAS No. 146 to have a significant impact on the
Company’s financial statements.
In December, 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation—Transition and Disclosure (SFAS No.
148). SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition to SFAS No. 123’s fair value method of
accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and
Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity’s accounting policy
with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial
statements. The disclosure provisions of SFAS No. 148 are appli-
cable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using
the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. SFAS No. 148’s amendment of
the transition and annual disclosure requirements of SFAS No.
123 are effective for fiscal years ending after December 15, 2002.
The additional disclosures required under SFAS No. 148 have
been included in Note I.
In November, 2002, the FASB issued Interpretation Number
45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN