Aarons 2013 Annual Report Download - page 35

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Same Store Revenues. We believe the changes in same store revenues are a key performance indicator. This indicator is
calculated by comparing revenues for the year to revenues for the prior year for all stores open for the entire 24-month period,
excluding stores that received lease agreements from other acquired, closed or merged stores.
Key Components of Net Earnings
In this management’s discussion and analysis section, we review our consolidated results. For the years ended December 31,
2013, 2012 and 2011, some of the key revenue and cost and expense items that affected earnings were as follows:
Revenues. We separate our total revenues into five components: lease revenues and fees, retail sales, non-retail sales, franchise
royalties and fees, and other. Lease revenues and fees include all revenues derived from lease agreements at Company-operated
stores, including agreements that result in our customers acquiring ownership at the end of the terms. Retail sales represent
sales of both new and returned lease merchandise from our stores. Non-retail sales mainly represent new merchandise sales to
our Aaron’s Sales & Lease Ownership franchisees. Franchise royalties and fees represent fees from the sale of franchise rights
and royalty payments from franchisees, as well as other related income from our franchised stores. Other revenues primarily
relate to revenues from leasing real estate properties to unrelated third parties, as well as other miscellaneous revenues.
Retail Cost of Sales. Retail cost of sales represents the original or depreciated cost of merchandise sold through our Company-
operated stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, selling costs, occupancy costs and delivery, among other
expenses.
Legal and Regulatory Expense/(Income). Legal and regulatory expense relates to significant accruals for loss contingencies for
pending legal and regulatory proceedings. Legal and regulatory income results from significant reductions in previously
accrued reserves.
Retirement and Vacation Charges. Retirement and vacation charges represent costs primarily associated with the retirement of
the Company's Chief Operating Officer and a change in the Company's vacation policies in 2013, as well as costs associated
with the retirement of the Company's founder and former Chairman of the Board in 2012.
Depreciation of Lease Merchandise. Depreciation of lease merchandise reflects the expense associated with depreciating
merchandise held for lease and leased to customers by our Company-operated stores.
Other Operating Expense (Income), Net. Other operating expense (income), net consists of gains or losses on sales of
Company-operated stores and delivery vehicles, impairment charges on assets held for sale and gains or losses on other
dispositions of property, plant and equipment.
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 sales and lease ownership agreements are recognized by the reportable
segments 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, 2013 and 2012, we had a revenue deferral representing cash collected in advance of being
due or otherwise earned totaling $45.1 million and $45.3 million, respectively, and an accrued revenue receivable, net of
allowance for doubtful accounts, based on historical collection rates of $7.9 million and $7.4 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 Aaron’s Sales & Lease Ownership and HomeSmart divisions depreciate merchandise over the
applicable agreement period, generally 12 to 24 months (monthly agreements) or 60 to 120 weeks (weekly agreements) when
leased, and 36 months when not leased, to 0% salvage value. Our policies generally require weekly lease merchandise counts at
the stores and write-offs for unsalable, damaged, or missing merchandise inventories. Full physical inventories are generally
taken at our fulfillment and manufacturing 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 carrying 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.