Aarons 2013 Annual Report Download - page 36

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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
$58.0 million, $54.9 million and $46.2 million for the years ended December 31, 2013, 2012, and 2011, respectively.
Leases and Closed Store Reserves. The majority of our Company-operated stores are operated from leased facilities under
operating lease agreements. The majority of the leases are for periods that do not exceed five years, although lease terms range
in length up to approximately 15 years. Leasehold improvements related to these leases are generally amortized over periods
that do not exceed the lesser of the lease term or useful life. While some 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. Any incentive or allowance
amounts we receive are recognized ratably over the lease term.
From time to time, we close or consolidate stores. Our primary costs associated with closing stores are the future lease
payments and related commitments. We record an estimate of the future obligation related to closed stores based upon the
present value of the future lease payments and related commitments, net of estimated sublease income based upon historical
experience. As of December 31, 2013 and 2012, our reserve for closed stores was $2.1 million and $2.8 million, respectively.
Due to changes in market conditions, our estimates related to sublease income may change and, as a result, our actual liability
may be more or less than the recorded amount. Excluding estimated sublease income, our future obligations related to closed
stores on an undiscounted basis were $2.9 million and $4.1 million as of December 31, 2013 and 2012, respectively.
Insurance Programs. We maintain insurance contracts to fund workers compensation, vehicle liability, general liability and
group health insurance claims. Using actuarial analyses and projections, 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 estimated liability for workers compensation insurance claims, vehicle liability, general liability and group health
insurance was $31.9 million and $29.8 million at December 31, 2013 and 2012, respectively. In addition, we have prefunding
balances on deposit with the insurance carriers of $24.4 million and $25.6 million at December 31, 2013 and 2012,
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, 2013.
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.
Legal and Regulatory Reserves. We are subject to various legal and regulatory proceedings arising in the ordinary course of
business. Management regularly assesses the Company’s insurance deductibles, monitors our litigation and regulatory exposure
with the Company’s attorneys and evaluates its loss experience. The Company establishes an accrued liability for legal and
regulatory proceedings when the Company determines that a loss is both probable and the amount of the loss can be reasonably
estimated. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expenses
are incurred.
Income Taxes. The calculation of our income tax expense requires significant judgment and the use of estimates. We
periodically assess tax positions based on current tax developments, including 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 the tax and accounting guidance to the facts and circumstances, income tax balances are
adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are maintained at levels we
believe are adequate to absorb probable payments. Actual amounts paid, if any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established, when necessary, to reduce deferred tax assets when we expect the amount of tax
benefit to be realized is less than the carrying value of the deferred tax asset.
Fair Value. For the valuation techniques used to determine the fair value of financial assets and liabilities on a recurring basis,
as well as Assets Held for Sale, which are recorded at fair value on a nonrecurring basis, refer to Note 4 in the Consolidated
Financial Statements.