Aarons 2015 Annual Report Download - page 32


Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplace. We believe the Progressive acquisition is
strategically transformational for the Company in this respect and will strengthen our business. We also believe the lease-to-own industry has suffered in
recent periods due to economic challenges faced by our core customers. In response to these changing market conditions, we are executing a strategic plan for
the core business that focuses on the following items and that we believe positions us for success over the long-term:
• Profitably grow our stores
• Accelerate our omni-channel platform
• Promote communication, coordination and integration
• Champion compliance

In this management’s discussion and analysis section, we review our consolidated results. For the years ended December 31, 2015, 2014 and 2013, some of
the key revenue and cost and expense items that affected earnings were as follows:
Revenues. We separate our total revenues into six components: lease revenues and fees, retail sales, non-retail sales, franchise royalties and fees, interest and
fees on loans receivable and other. Lease revenues and fees include all revenues derived from lease agreements at Company-operated stores and retail
locations serviced by Progressive. Retail sales represent sales of both new and returned lease merchandise from our Company-operated 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. Interest and fees on loans receivable
primarily represents the accretion of the discount on loans acquired in the DAMI acquisition, as well as finance charges and annual and other fees earned on
loans originated since the acquisition. Other revenues primarily relate to revenues from leasing real estate properties to unrelated third parties, as well as other
miscellaneous revenues.
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 and Progressive.
Retail Cost of Sales. Retail cost of sales represents the 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, occupancy costs, lease merchandise write-offs, bad debt expense, and advertising, among
other expenses.
Other Operating Expense (Income), Net. Other operating expense (income), net consists of gains or losses on sales of Company-operated stores and delivery
vehicles, fair value adjustments on assets held for sale and gains or losses on other transactions involving property, plant and equipment.

We discuss the most critical accounting policies below. For a discussion of the Company's significant accounting policies, see Note 1 to the consolidated
financial statements.
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, 2015 and 2014, we had a revenue deferral representing cash collected in advance of being due or otherwise earned totaling $68.6 million
and $60.5 million, respectively, and an accrued revenue receivable, net of allowance for doubtful accounts, based on historical collection rates of
$34.5 million and $30.2 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.
31