Aarons 2010 Annual Report Download - page 20

Critical Accounting Policies
REVENUE RECOGNITION. Lease revenues are recognized in the
month they are due on the accrual basis of accounting. For internal
management reporting purposes, lease revenues from the sales and
lease ownership division are recognized as revenue in the month the
cash is collected. On a monthly basis, we record an accrual for lease
revenues due but not yet received, net of allowances, and a deferral
of revenue for lease payments received prior to the month due. Our
revenue recognition accounting policy matches the lease revenue
with the corresponding costs, mainly depreciation, associated with
the lease merchandise. At December 31, 2010 and 2009, we had a
revenue deferral representing cash collected in advance of being due
or otherwise earned totaling $39.5 million and $37.4 million, respec-
tively, and accrued revenue receivable, net of allowance for doubtful
accounts, based on historical collection rates of $4.9 million and
$5.3 million, respectively. Revenues from the sale of merchandise to
franchisees are recognized at the time of receipt of the merchandise
by the franchisee and revenues from such sales to other customers are
recognized at the time of shipment.
LEASE MERCHANDISE. Our sales and lease ownership division
depreciates merchandise over the applicable agreement period, gener-
ally 12 to 24 months when leased, and 36 months when not leased,
to 0% salvage value. Our office furniture stores depreciate merchan-
dise over its estimated useful life, which ranges from 24 months to
48 months, net of salvage value, which ranges from 0% to 30%.
Sales and lease ownership merchandise is generally depreciated at a
faster rate than our office furniture merchandise. Our policies require
weekly lease merchandise counts by store managers and write-offs for
unsalable, damaged, or missing merchandise inventories. Full physi-
cal inventories are generally taken at our fulfillment and manufactur-
ing facilities two to four times a year with appropriate provisions
made for missing, damaged and unsalable merchandise. In addition,
we monitor lease merchandise levels and mix by division, store and
fulfillment center, as well as the average age of merchandise on hand.
If unsalable lease merchandise cannot be returned to vendors, its car-
rying value is adjusted to net realizable value or written off. All lease
merchandise is available for lease and sale, excluding merchandise
determined to be missing, damaged or unsalable.
We record lease merchandise carrying value adjustments on
the allowance method, which estimates the merchandise losses
incurred but not yet identified by management as of the end of
the accounting period. Lease merchandise adjustments totaled
$46.5 million, $38.3 million, and $34.5 million for the years ended
December 31, 2010, 2009, and 2008, respectively. The current year
includes a write-down of $4.7 million related to the closure of the
Aaron’s Office Furniture division.
LEASES AND CLOSED STORE RESERVES. The majority of
our Company-operated stores are operated from leased facilities
under operating lease agreements. The majority of these leases are
for periods that do not exceed five years. Leasehold improvements
related to these leases are generally amortized over periods that do
not exceed the lesser of the lease term or five years. While a majority
of our leases do not require escalating payments, for the leases which
do contain such provisions we record the related lease expense on a
straight-line basis over the lease term. We do not generally obtain
significant amounts of lease incentives or allowances from landlords.
From time to time, we close or consolidate stores. Our primary
cost associated with closing or consolidating stores is the future
lease payments and related commitments. We record an estimate
of the future obligation related to closed or consolidated stores
based upon the present value of the future lease payments and
related commitments, net of estimated sublease income which we
base upon historical experience. For the years ended December 31,
2010 and 2009, our reserve for closed or consolidated stores was
$6.4 million and $2.3 million, respectively, and the increase was
primarily the result of the closure of the Aaron’s Office Furniture
stores. If our estimates related to sublease income are not correct,
our actual liability may be more or less than the liability recorded
at December 31, 2010.
INSURANCE PROGRAMS. Aaron’s maintains insurance contracts
to fund workers compensation, vehicle liability, general liability and
group health insurance claims. Using actuarial analysis and projec-
tions, we estimate the liabilities associated with open and incurred,
but not reported workers compensation, vehicle liability and general
liability claims. This analysis is based upon an assessment of the
likely outcome or historical experience, net of any stop loss or other
supplementary coverage. We also calculate the projected outstanding
plan liability for our group health insurance program using historical
claims runoff data. Our gross liability for workers compensation
insurance claims, vehicle liability, general liability and group health
insurance was $27.6 million and $22.5 million at December 31,
2010 and 2009, respectively. In addition, we have prefunding bal-
ances on deposit with the insurance carriers of $23.8 million and
$19.8 million at December 31, 2010 and 2009, respectively.
If we resolve insurance claims for amounts that are in excess of
our current estimates and within policy stop loss limits, we will
be required to pay additional amounts beyond those accrued at
December 31, 2010. The assumptions and conditions described
above reflect management’s best assumptions and estimates, but
these items involve inherent uncertainties as described above,
which may or may not be controllable by management. As a result,
the accounting for such items could result in different amounts if
management used different assumptions or if different conditions
occur in future periods.
INCOME TAXES. The calculation of our income tax expense
requires significant judgment and the use of estimates. We periodi-
cally assess tax positions based on current tax developments, includ-
ing enacted statutory, judicial and regulatory guidance. In analyzing
our overall tax position, consideration is given to the amount and
timing of recognizing income tax liabilities and benefits. In applying
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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