Aarons 2004 Annual Report Download - page 22

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In November 2002 the FASB issued Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others (FIN 45). FIN 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 require-
ments of FIN 45 are effective for interim and annual periods
ending after December 15, 2002. These disclosures are pre-
sented in Note F to the Consolidated Financial Statements.
The initial recognition and measurement requirements of
FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The adoption of the
recognition provisions of FIN 45 had no significant effect
on the consolidated financial statements.
In January 2003 the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51 (FIN 46). 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 subordinated financial support
from other parties. FIN 46 is effective immediately for all
new variable interest entities created or acquired after
January 31, 2003. The Company has not entered into
transactions with, created, or acquired significant potential
variable interest entities subsequent to that date. For interests
in variable interest entities arising prior to February 1, 2003,
the Company must apply the provisions of FIN 46 as of
December 31, 2003. The Company has concluded that
certain independent franchisees, as discussed in Note I to
the Consolidated Financial Statements, are not subject to
the interpretation and are therefore not included in the
Company’s consolidated financial statements. In addition,
as discussed in Note D to the Consolidated Financial
Statements, the Company has certain capital leases with
partnerships controlled by related parties of the Company.
The Company has concluded that these partnerships are not
variable interest entities. The Company has concluded that
the accounting and reporting of its construction and lease
facility (see Note F to the Consolidated Financial Statements)
are not subject to the provisions of FIN 46 since the lessor is
not a variable interest entity as defined by FIN 46.
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 consideration 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 characterized
as a reduction of cost of sales when recognized in the
customer’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. The Company
does receive cash consideration from vendors subject to the
provisions of EITF 02-16. EITF 02-16 is effective for fiscal
periods beginning after December 15, 2002. The Company
adopted EITF 02-16 as of January 1, 2003. Such adoption
did not have a material effect on the Company’s consolidated
financial statements since substantially all cooperative
advertising consideration received from vendors represents
a reimbursement of specific, identifiable, and incremental
costs incurred in selling those vendors’ products.
In November 2004 the FASB issued Statement of Financial
Accounting Standards No. 151, Inventory Costs — An
Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS
151 amends ARB 43, Chapter 4, to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-
period charges. In addition, this Statement requires that
allocation of fixed production overheads to the costs of con-
version be based on the normal capacity of the production
facilities. SFAS 151 is effective for the Company beginning
January 1, 2006, though early application is permitted.
Management is currently assessing the impact of SFAS 151,
but does not expect the impact to be material.
In December 2004 the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-based
Payment (SFAS 123R). SFAS 123R amends SFAS 123 to
require adoption of the fair-value method of accounting
for employee stock options effective June 30, 2005. The
transition guidance in SFAS 123R specifies that compen-
sation expense for options granted prior to the effective date
be recognized over the remaining vesting period of those
options, and that compensation expense for options granted
subsequent to the effective date be recognized over the
vesting period of those options. We anticipate recognizing
compensation expense of $1.7 million, $2.6 million, and
$1.0 million for the years ended December 31, 2005, 2006,
and 2007, respectively, in connection with stock option
grants made prior to December 31, 2004.
Forward-Looking Statements
Certain written and oral statements made by our
Company may constitute “forward-looking statements” as
defined under the Private Securities Litigation Reform Act
of 1995, including statements made in this report and other
filings with the Securities and Exchange Commission. All
statements which address operating performance, events,
or developments that we expect or anticipate will occur in
the future — including growth in store openings, franchises
awarded, and market share, and statements expressing
general optimism about future operating results’ — are
forward-looking statements. Forward-looking statements
are subject to certain risks and uncertainties that could cause
actual results to differ materially. The Company undertakes
no obligation to publicly update or revise any forward-
looking statements. For a discussion of such risks and
uncertainties, see “Certain Factors Affecting Forward-
Looking Statements” in Item I of the Company’s Annual
Report on Form 10-K filed with the SEC.