Aarons 2011 Annual Report Download - page 41

The following is a summary of the HomeSmart stores’ intangible
assets by category at December 31:
(In Thousands) 2011
Customer Relationship Intangible, Gross $1,402
Accumulated Amortization on Customer
Relationship Intangible (194)
Reacquired Franchise Intangible, Gross —
Accumulated Amortization on
Re-acquired Franchise Rights —
Non-Compete Intangible, Gross 957
Accumulated Amortization on Non-Compete Intangible (117)
The Company did not sell any of its HomeSmart stores in 2011.
NOTE K:
SEGMENTS
Description of Products and Services of
Reportable Segments
Aaron’s, Inc. has four reportable segments: Sales and Lease
Ownership, Franchise, HomeSmart and Manufacturing. In all peri-
ods presented, HomeSmart was reclassified from the Other Segment
to the HomeSmart segment. During 2008, the Company sold its
corporate furnishings division. The Aaron’s Sales & Lease Ownership
division offers electronics, residential furniture, appliances and
computers to consumers primarily on a monthly payment basis with
no credit requirements. The HomeSmart division offers electron-
ics, residential furniture, appliances and computers to consumers
primarily on a weekly payment basis with no credit requirements.
The Company’s franchise operation sells and supports franchisees of
its sales and lease ownership concept. The Manufacturing segment
manufactures upholstered furniture and bedding predominantly
for use by Company-operated and franchised stores. Therefore the
Manufacturing Segment revenues and earnings before income taxes
are solely the result of intercompany transactions and are eliminated
through the Elimination of Intersegment Revenues. The Company
has elected to aggregate certain operating segments.
Earnings before income taxes for each reportable segment are
generally determined in accordance with accounting principles gen-
erally 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% in 2011, 2010
and 2009.
• Accruals related to store closures are not recorded on the report-
able 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 statements as part of Cash
to Accrual and Other Adjustments and are not allocated to the
segment that holds the related lease merchandise.
• Advertising expense in the Sales and Lease Ownership and
HomeSmart segments 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, advertis-
ing expense is recognized when the related advertising 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 lease 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 revenues of the
Aaron’s Office Furniture division, 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.
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 segments 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. 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 based on the operations
of the Company that the chief operating decision maker regularly
reviews to analyze performance and allocate resources among busi-
ness units of the Company.
Included in the Earnings Before Income Taxes results above for
the Sales and Lease Ownership segment is a $36.5 million charge
for the lawsuit expense described in Note F. As discussed in Note
N, the Company sold substantially all of the assets of the Aaron’s
Corporate Furnishings division during the fourth quarter of 2008.
For financial reporting purposes, this division has been classified
as a discontinued operation and is not included in our segment
information as shown below.
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