Aarons 2015 Annual Report Download - page 33

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 65 to 104 weeks (weekly agreements) when leased, and generally 36 months when not leased, to a 0% salvage value. The Company's
Progressive division depreciates merchandise over the lease agreement period, which is typically over 12 months, while on lease.
Our policies generally require weekly lease merchandise counts at our store-based operations, which include write-offs for unsalable, damaged, or missing
merchandise inventories. Full physical inventories are generally taken at our fulfillment and manufacturing facilities one to two 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 amount 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. We record lease merchandise
carrying amount 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 based on historical write off experience. As of December 31, 2015 and 2014, the allowance for lease merchandise write-offs was
$33.4 million and $27.6 million, respectively. Lease merchandise adjustments totaled $136.4 million, $99.9 million and $58.0 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
Acquisition Accounting for Businesses
We account for acquisitions of businesses by recognizing the assets acquired and liabilities assumed at their respective fair values on the date of acquisition.
We estimate the fair value of identifiable intangible assets using discounted cash flow analyses or estimates of replacement cost based on market participant
assumptions. The excess of the purchase price paid over the estimated fair values of the identifiable net tangible and intangible assets acquired in connection
with business acquisitions is recorded as goodwill. We consider accounting for business combinations critical because management's judgment is used to
determine the estimated fair values assigned to assets acquired and liabilities assumed, as well as the useful life of and amortization method for intangible
assets, which can materially affect the results of our operations. Although management believes that the judgments and estimates discussed herein are
reasonable, actual results could differ, and we may be exposed to an impairment charge if we are unable to recover the value of the recorded net assets.
Loans acquired in a business acquisition are recorded at their fair value at the acquisition date. The projected net cash flows from expected payments of
principal, interest, fees and servicing costs and anticipated charge-offs are included in the determination of fair value; therefore, an allowance for loan losses
and an amount for unamortized fees is not recognized for the acquired loans. The difference, or discount, between the expected cash flows to be received and
the fair value of the acquired loans is accreted to revenue based on the effective interest method. At each period end, the Company evaluates the
appropriateness of the accretable discount on the acquired loans based on actual and revised projected future cash receipts.
Goodwill and Other Intangible Assets
Intangible assets are classified into one of three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with
indefinite lives not subject to amortization and (3) goodwill. For intangible assets with definite lives, tests for impairment must be performed if conditions
exist that indicate the carrying amount may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must be
performed at least annually, and sooner if events or circumstances indicate that an impairment may have occurred. Factors which could necessitate an interim
impairment assessment include a sustained decline in the Company’s stock price, prolonged negative industry or economic trends and significant
underperformance relative to historical or projected future operating results. As an alternative to this annual impairment testing for intangible assets with
indefinite lives and goodwill, the Company may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying
amount of a reporting unit's net assets exceeds the reporting unit's fair value.
Indefinite-lived intangible assets represent the value of trade names and trademarks acquired as part of the Progressive acquisition. At the date of acquisition,
the Company determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful life of the trade name and trademark
intangible asset and, therefore, the useful life is considered indefinite. The Company reassesses this conclusion quarterly and continues to believe the useful
life of this asset is indefinite.
We estimate the fair value of indefinite-lived trade name and trademark intangible assets based on projected discounted future cash flows under a relief from
royalty method. The Company completed its indefinite-lived intangible asset impairment test as of October 1, 2015 and determined that no impairment had
occurred.
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