Aarons 2013 Annual Report Download - page 55

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Because the Company is not able to exercise significant influence over the operating and financial decisions of Perfect Home,
the equity portion of the investment in Perfect Home, totaling less than a thousand dollars at December 31, 2013 and 2012,
respectively, is accounted for as a cost method investment and is included in prepaid expenses and other assets in the
consolidated balance sheets. The notes purchased from Perfect Home totaling £12.5 million ($20.7 million) and £11.4 million
($18.4 million) at December 31, 2013 and 2012, respectively, are accounted for as held-to-maturity securities in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Debt and Equity
Securities, and are included in investments in the consolidated balance sheets. The increase in the Company’s British pound-
denominated notes during the year ended December 31, 2013 relates to accretion of the original discount on the notes with a
face value of £10.0 million. Utilizing a Black-Scholes model, the options to buy the remaining interest in Perfect Home and to
sell the Company’s interest in Perfect Home were determined to have only nominal values.
The Company’s maximum exposure to any potential losses associated with this VIE is equal to its total recorded investment
which was $20.7 million at December 31, 2013.
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting of consumer electronics, computers, furniture, appliances, and household
accessories, to its customers for lease under certain terms agreed to by the customer. Two primary lease models are offered to
customers: one through the Company’s Sales & Lease Ownership division (established as a monthly model) and the other
through its HomeSmart division (established as a weekly model). The typical monthly lease model is 12, 18 or 24 months,
while the typical weekly lease model is 60, 90 or 120 weeks. The Company does not require deposits upon inception of
customer agreements.
In a number of states, the Company utilizes a consumer lease form as an alternative to a typical lease purchase agreement. The
consumer lease differs from our state lease agreement in that it has an initial lease term in excess of four months. Generally,
state laws that govern the rent-to-own industry only apply to lease agreements with an initial term of four months or less.
Following satisfaction of the initial term contained in the consumer or state lease, as applicable, the customer has the right to
acquire title either through a purchase option or through payment of all required lease payments.
All of the Company’s customer agreements are considered operating leases under the provisions of ASC 840, Leases. As such,
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, which is included in customer deposits and advance payments in the accompanying
consolidated balance sheets. Until all payment obligations are satisfied under sales and lease ownership agreements, the
Company maintains ownership of the lease merchandise. Initial direct costs related to the Company’s customer agreements are
expensed as incurred and have been classified as operating expenses in the Company’s consolidated statements of earnings.
Retail and Non-Retail Sales
Revenues from the sale of merchandise to franchisees are recognized at the time of receipt of the merchandise by the franchisee
based on the electronic receipt of merchandise by the franchisee within the Company’s fulfillment system. Additionally,
revenues from the sale of merchandise to other customers are recognized at the time of shipment, at which time title and risk of
ownership are transferred to the customer.
Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying consolidated
statements of earnings relate to the sale of lease merchandise to franchisees. The Company classifies the sale of merchandise to
other customers as retail sales in the consolidated statements of earnings. The Company presents sales net of sales taxes.
Franchise Royalties and Fees
The Company franchises its Aaron's Sales & Lease Ownership and HomeSmart stores in markets where the Company has no
immediate plans to enter. Franchisees typically pay a non-refundable initial franchise fee from $15,000 to $50,000 depending
upon market size and an ongoing royalty of either 5% or 6% of gross revenues. Franchise fees and area development fees are
generated from the sale of rights to develop, own and operate sales and lease ownership stores. These fees are recognized as
income when substantially all of the Company’s obligations per location are satisfied, generally at the date of the store opening.
Franchise fees and area development fees are received before the substantial completion of the Company’s obligations and are
deferred. The Company guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the
outstanding debt obligations of such franchisees. The Company recognizes finance fee revenue as the guarantee obligation is
satisfied. Refer to Note 8 for additional discussion of the Company’s franchise-related guarantee obligation.