Aarons 2010 Annual Report Download - page 34

amount by which the carrying value exceeds the fair value of the
asset is recognized as an impairment loss.
The Company also recorded an impairment charge of $879,000
and $3.0 million within operating expenses in 2010 and 2009,
respectively, both of which related primarily to the impairment
of various land outparcels and buildings included in our sales and
lease ownership segment that the Company decided not to utilize
for future expansion. The assets held for sale are Level 2 assets and
the charges were recorded within operating expenses on the consoli-
dated statement of earnings and are included in the Other segment
category. In 2008, the Company recorded an impairment charge of
$838,000 within operating expenses which related primarily to the
impairment of leasehold improvements in several RIMCO stores
included in our sales and lease ownership segment. The RIMCO
leasehold improvements are Level 2 assets.
The Company performed an impairment analysis on the
Aaron’s Office Furniture long-lived assets in the third quarter of
2009 due to continuing negative performance. As a result, the
Company recorded an impairment charge of $1.3 million in 2009
within operating expenses related primarily to the impairment of
leasehold improvements in the Aaron’s Office Furniture stores.
The Aaron’s Office Furniture long-lived assets are Level 2 assets. In
addition, the Company recorded an $865,000 write-down to certain
office furniture lease merchandise in 2009 within operating expenses.
The impairment charge and inventory write-down are included in
the other segment and are Level 2 assets.
DERIVATIVE FINANCIAL INSTRUMENTS — The Company
utilizes derivative financial instruments to mitigate its exposure to
certain market risks associated with its ongoing operations. The pri-
mary risk it seeks to manage through the use of derivative financial
instruments is commodity price risk, including the risk of increases
in the market price of diesel fuel used in the Company’s delivery
vehicles. All derivative financial instruments are recorded at fair
value on the consolidated balance sheets. The Company does not use
derivative financial instruments for trading or speculative purposes.
The Company is exposed to counterparty credit risk on all its deriva-
tive financial instruments. The counterparties to these contracts are
high-credit quality commercial banks, which the Company believes
largely minimize the risk of counterparty default. The fair values of
the Company’s fuel hedges as of December 31, 2010 and 2009 and
the changes in their fair values in 2010 and 2009 were immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS — The fair values
of the Company’s cash and cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to their
short-term nature.
DEFERRED INCOME TAXES — Deferred income taxes represent
primarily temporary differences between the amounts of assets and
liabilities for financial and tax reporting purposes. Such temporary
differences arise principally from the use of accelerated depreciation
methods on lease merchandise for tax purposes.
REVENUE RECOGNITION — Lease revenues are recognized as
revenue in the month they are due. Lease payments received prior to
the month due are recorded as deferred lease revenue. Until all pay-
ments are received under sales and lease ownership agreements, the
Company maintains ownership of the lease merchandise. 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, at which time title and risk of ownership are transferred to
the customer. Refer to Note I for discussion of recognition of other
franchise-related revenues. The Company presents sales net of sales
taxes.
COST OF SALES — Included in cost of sales is the net book value
of merchandise sold, primarily using specific identification. It is not
practicable to allocate operating expenses between selling and lease
operations.
SHIPPING AND HANDLING COSTS — The Company classifies
shipping and handling costs as operating expenses in the accompany-
ing consolidated statements of earnings, and these costs totaled $60.6
million in 2010, $55.0 million in 2009 and $55.1 million in 2008.
ADVERTISING — The Company expenses advertising costs as
incurred. Advertising costs are recorded as expenses the first time
an advertisement appears. Such costs aggregated to $31.7 million
in 2010, $31.0 million in 2009 and $28.5 million in 2008. These
advertising expenses are shown net of cooperative advertising
considerations received from vendors, substantially all of which rep-
resents reimbursement of specific, identifiable and incremental costs
incurred in selling those vendors’ products. The amount of coopera-
tive advertising consideration netted against advertising expense was
$27.2 million in 2010, $23.4 million in 2009 and $24.7 million in
2008. The prepaid advertising asset was $3.2 million and $2.6 mil-
lion at December 31, 2010 and 2009, respectively.
STOCK-BASED COMPENSATION — The Company has stock-
based employee compensation plans, which are more fully described
in Note H below. The Company estimates the fair value for the
options granted on the grant date using a Black-Scholes option-
pricing model and accounts for stock-based compensation under the
fair value recognition provisions codified in FASB ASC Topic 718,
“Compensation — Stock Compensation” (“ASC 718”).
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 analyses of the projected claims run off for both
reported and incurred but not reported claims.
COMPREHENSIVE INCOME — For the years ended December 31,
2010, 2009 and 2008, comprehensive income totaled $119.3 mil-
lion, $113.9 million and $88.8 million, respectively.
FOREIGN CURRENCY TRANSLATION — Assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at
the current rate of exchange on the last day of the reporting period.
Revenues and expenses are generally translated at a daily exchange
Notes to Consolidated Financial Statements
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