Aarons 2015 Annual Report Download - page 35

Intangible assets acquired in recent transactions may be more susceptible to impairment, primarily due to the fact that they are recorded at fair value based on
recent operating plans and macroeconomic conditions present at the time of acquisition. Consequently, if operating results and/or macroeconomic conditions
deteriorate shortly after an acquisition, it could result in the impairment of the acquired assets. A deterioration of macroeconomic conditions may not only
negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analyses,
including but not limited to, the estimated cost of capital and/or discount rates. Additionally, as discussed above, in accordance with accounting principles
generally accepted in the United States, we are required to ensure that assumptions used to determine fair value in our analyses are consistent with the
assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount rates used in our analyses may increase or
decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed. Therefore, if the cost of capital and/or discount
rates change, we may recognize an impairment of an intangible asset in spite of realizing actual cash flows that are approximately equal to, or greater than,
our previously forecasted amounts.
The Company determined that there were no events that occurred or circumstances that changed in the fourth quarter of 2015 that would more likely than not
reduce the fair value of a reporting unit below its carrying amount or that would indicate an impairment of the other intangible assets. As a result, the
Company did not perform interim impairment testing for any reporting unit or other intangible asset as of December 31, 2015. We will continue to monitor
the fair value of goodwill and other intangible assets in future periods.
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. For leases which contain escalating payments we record the
related lease expense on a straight-line basis over the lease term. We generally do not obtain significant amounts of lease incentives or allowances from
landlords. Any incentive or allowance amounts we receive are recognized on a straight-line basis 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, 2015 and 2014, our reserve for closed stores was $5.7 million and
$5.6 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
$8.1 million and $7.8 million as of December 31, 2015 and 2014, 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 $38.6 million and
$36.8 million at December 31, 2015 and 2014, respectively. In addition, we have prefunding balances on deposit with the insurance carriers of $31.8 million
and $28.3 million at December 31, 2015 and 2014, 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, 2015.
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.
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