Aarons 2002 Annual Report Download - page 27

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45 requires an entity to disclose in its interim and annual financial
statements information with respect to its obligations under certain
guarantees that it has issued. It also requires an entity to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN 45 are effective for interim and annual
periods ending after December 15, 2002. These disclosures are
presented in Note G. The initial recognition and measurement
requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. The Company is
currently assessing the initial measurement requirements of FIN
45. However, management does not believe that the recognition
requirements will have a material impact on the Company’s
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51. FIN 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subor-
dinated financial support from other parties. FIN 46 is effective for
all new variable interest entities created or acquired after January
31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15, 2003. The
adoption is not expected to have a material effect on the Company’s
financial statements.
In January 2003, the Emerging Issues Task Force (EITF) of
the FASB issued EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor
(EITF 02-16). EITF 02-16 addresses accounting and reporting
issues related to how a reseller should account for cash considera-
tion received from vendors. Generally, cash consideration received
from vendors is presumed to be a reduction of the prices of the
vendor’s products or services and should, therefore, be character-
ized as a reduction of cost of sales when recognized in the cus-
tomer’s income statement. However, under certain circumstances
this presumption may be overcome and recognition as revenue or
as a reduction of other costs in the income statement may be
appropriate. While the Company does receive cash consideration
from vendors subject to the provisions of EITF 02-16, the
Company has not yet completed its evaluation of the potential
impact on its financial statements. EITF 02-16 is effective for
fiscal periods beginning after December 15, 2002.
NOTE B: ACCOUNTING CHANGES
Effective January 1, 2002, the Company prospectively changed
its method of depreciation for sales and lease ownership rental
merchandise. Previously, all sales and lease ownership rental
merchandise began being depreciated when received at the store
over a period of the shorter of 36 months or the length of the
rental period(s), to a salvage value of zero. Due to changes in
business, the Company changed the depreciation method such that
sales and lease ownership rental merchandise received into a store
begins being depreciated at the earlier of the expiration of 12
months from the date of acquisition, or upon being subject to a
sales and lease ownership agreement. Under the previous and
the new depreciation method, rental merchandise in distribution
centers does not begin being depreciated until 12 months from
the date of acquisition. The Company believes the new deprecia-
tion method results in a better matching of the costs of rental
merchandise with the corresponding revenue. The change in
method of depreciation had the effect of increasing net income
by approximately $3,038,000, or approximately $.14 diluted
earnings per share, for the year ended December 31, 2002.
Effective January 1, 2002, the Company adopted SFAS No.
141 and 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 effective beginning in
2002. When fair value is less than the related carrying value,
entities are required to reduce the amount of goodwill. The
Company performed Step 1 of the required transitional impair-
ment test under SFAS No. 142 using a combination of the market
value and comparable transaction approaches to business enter-
prise valuation. The Company concluded that the enterprise
fair value of the Company’s reporting units was greater than the
carrying value and, accordingly, no further impairment analysis
was considered necessary.
Prior to the adoption of SFAS No. 142, the Company amor-
tized goodwill over estimated useful lives up to a maximum of 20
years. Had the Company accounted for goodwill consistent with
the provisions of SFAS No. 142 in prior years, the Company’s
earnings would have been affected as follows:
Year Ended Year Ended Year Ended
(In Thousands, December 31, December 31, December 31,
Except Per Share) 2002 2001 2000
Net earnings, as reported $27,440 $12,336 $27,261
Add back: Goodwill
amortization, net of tax 688 431
Net earnings, as adjusted $27,440 $13,024 $27,692
Basic earnings per
common share:
As reported $ 1.31 $ .62 $ 1.38
Add back: Goodwill
amortization .03 .02
As adjusted $ 1.31 $ .65 $ 1.40
Diluted earnings per
common share:
As reported $ 1.29 $ .61 $ 1.37
Add back: Goodwill
amortization .03 .02
As adjusted $ 1.29 $ .64 $ 1.39
NOTE C: EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during
the year, which were 20,909,000 shares in 2002, 19,928,000 shares
in 2001, and 19,825,000 shares in 2000. The computation of
earnings per share assuming dilution includes the dilutive effect
of stock options and awards. Such stock options and awards had
the effect of increasing the weighted average shares outstanding
assuming dilution by 324,000 in 2002, 214,000 in 2001, and
142,000 in 2000, respectively.