Aarons 2013 Annual Report Download - page 59

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negative industry or economic trends and significant underperformance relative to historical or projected future operating
results.
The Company has deemed its operating segments to be reporting units due to the fact that operations (stores) included in each
operating segment have similar economic characteristics. As of December 31, 2013, the Company had five operating segments
and reporting units: Sales and Lease Ownership, HomeSmart, RIMCO, Franchise and Manufacturing. As of December 31,
2013, the Company’s Sales and Lease Ownership and HomeSmart reporting units were the only reporting units with assigned
goodwill balances. The following is a summary of the Company’s goodwill by reporting unit at December 31:
(In Thousands) 2013 2012
Sales and Lease Ownership $ 224,523 $ 219,547
HomeSmart 14,658 14,648
Total $ 239,181 $ 234,195
The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of the
reporting unit to its carrying value, including goodwill. The Company uses a combination of valuation techniques to determine
the fair value of its reporting units, including a multiple of gross revenue approach and discounted cash flow models that use
assumptions consistent with those we believe hypothetical marketplace participants would use. The results of the market
multiple and discounted cash flow models are evenly weighted in determining reporting unit fair value.
If the carrying value of the reporting unit exceeds the fair value, a second step is performed in order to determine the amount of
impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment
charge is recognized in an amount equal to that excess.
During the performance of the annual assessment of goodwill for impairment in the 2013, 2012 and 2011 fiscal years, the
Company did not identify any reporting units that were not substantially in excess of their carrying values, other than the
HomeSmart division for which locations were recently acquired. While no impairment was noted in our impairment test as of
September 30, 2013, if profitability is delayed as a result of the significant start-up expenses associated with the HomeSmart
stores, there could be a change in the valuation of the HomeSmart reporting unit that may result in the recognition of an
impairment loss in future periods.
No new indications of impairment existed during the fourth quarter of 2013. As a result, no impairment testing was updated as
of December 31, 2013.
Other Intangibles
Other intangibles represent the value of customer relationships, non-compete agreements and franchise development rights
acquired in connection with business acquisitions and are recorded at fair value as determined by the Company. The customer
relationship intangible asset is amortized on a straight-line basis over a two-year estimated useful life. The non-compete
intangible asset is amortized on a straight-line basis over a three-year useful life. Acquired franchise development rights are
amortized on a straight-line basis over the unexpired life of the franchisee’s ten year area development agreement.
Insurance Reserves
Estimated insurance reserves are accrued primarily for group health, general liability, automobile liability 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.
Asset Retirement Obligations
The Company accrues for asset retirement obligations, which relate to expected costs to remove exterior signage, in the period
in which the obligations are incurred. These costs are accrued at estimated fair value. When the related liability is initially
recorded, the Company capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the Company recognizes a gain or loss for any differences between the settlement amount and the
liability recorded. Asset retirement obligations amounted to approximately $2.4 million and $2.3 million as of December 31,
2013 and 2012, respectively.