Aarons 2007 Annual Report Download - page 43

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NOTE K: SEGMENTS
Description of Products and Services of
Reportable Segments
Aaron Rents, Inc. has four reportable segments: sales and
lease ownership, corporate furnishings (formerly known
as rent-to-rent), franchise, and manufacturing. The sales
and lease ownership division offers electronics, residential
furniture, appliances, and computers to consumers primarily
on a monthly payment basis with no credit requirements.
The corporate furnishings division rents and sells residential
and office furniture to businesses and consumers who meet
certain minimum credit requirements. The Company’s fran-
chise operation sells and supports franchisees of its sales
and lease ownership concept. The manufacturing division
manufactures upholstered furniture, office furniture, and
bedding predominantly for use by the other divisions.
Earnings before income taxes for each reportable segment
are generally determined in accordance with accounting
principles generally accepted in the United States with the
following adjustments:
• Sales and lease ownership revenues are reported on the
cash basis for management reporting purposes.
• A predetermined amount of each reportable segment’s
revenues is charged to the reportable segment as an
allocation of corporate overhead. This allocation was
approximately 2.3% in 2007, 2006, and 2005.
• Accruals related to store closures are not recorded on the
reportable segments’ financial statements, but are rather
maintained and controlled by corporate headquarters.
• The capitalization and amortization of manufacturing
variances are recorded on the consolidated financial state-
ments as part of Cash to Accrual and Other Adjustments
and are not allocated to the segment that holds the related
rental merchandise.
• Advertising expense in the sales and lease ownership
division is estimated at the beginning of each year and
then allocated to the division ratably over time for manage-
ment reporting purposes. For financial reporting purposes,
advertising expense is recognized when the related adver-
tising activities occur. The difference between these two
methods is reflected as part of the Cash to Accrual and
Other Adjustments line below.
• Sales and lease ownership rental merchandise write-offs are
recorded using the direct write-off method for management
reporting purposes and using the allowance method for
financial reporting purposes. The difference between these
two methods is reflected as part of the Cash to Accrual and
Other Adjustments line below.
• Interest on borrowings is estimated at the beginning of
each year. Interest is then allocated to operating segments
based on relative total assets.
Revenues in the “Other” category are primarily from
leasing space to unrelated third parties in the corporate
headquarters building and revenues from several minor
unrelated activities. The pre-tax losses in the “Other”
category are the net result of the activity mentioned above,
net of the portion of corporate overhead not allocated to
the reportable segments for management purposes, and
the $565,000 gain recognized on the sale of marketable
securities in 2005. Additionally, included in the “Other”
category is a $4.9 million gain from the sale of a parking
deck at the Company’s corporate headquarters in the first
quarter of 2007.
Measurement of Segment Profit or Loss
and Segment Assets
The Company evaluates performance and allocates resources
based on revenue growth and pre-tax profit or loss from
operations. The accounting policies of the reportable seg-
ments are the same as those described in the summary of
significant accounting policies except that the sales and lease
ownership division revenues and certain other items are
presented on a cash basis. Intersegment sales are completed
at internally negotiated amounts ensuring competitiveness
with outside vendors. Since the intersegment profit and loss
affect inventory valuation, depreciation and cost of goods
sold are adjusted when intersegment profit is eliminated in
consolidation.
Factors Used by Management to Identify
the Reportable Segments
The Company’s reportable segments are business units that
service different customer profiles using distinct payment
arrangements. The reportable segments are each managed
separately because of differences in both customer base
and infrastructure.