Aarons 2015 Annual Report Download - page 36

Legal and Regulatory Reserves
We are subject to various legal and regulatory proceedings arising in the ordinary course of business. Management regularly assesses the Company’s
insurance deductibles, monitors our litigation and regulatory exposure with the Company’s attorneys and evaluates its loss experience. An accrued liability
for legal and regulatory proceedings is established when the Company determines that a loss is both probable and the amount of the loss can be reasonably
estimated. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expenses are incurred.
Income Taxes
The calculation of our income tax expense requires judgment and the use of estimates. We periodically assess tax positions based on current tax
developments, including enacted statutory, judicial and regulatory guidance. In analyzing our overall tax position, consideration is given to the amount and
timing of recognizing income tax liabilities and benefits. In applying the tax and accounting guidance to the facts and circumstances, income tax balances
are adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are maintained at levels we believe are adequate to absorb
probable payments. Actual amounts paid, if any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets when we expect the amount of tax
benefit to be realized is less than the carrying amount of the deferred tax asset.
Fair Value Measurements
For the valuation techniques used to determine the fair value of financial assets and liabilities on a recurring basis, as well as assets held for sale, which are
recorded at fair value on a nonrecurring basis, refer to Note 4 in the consolidated financial statements.
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As of December 31, 2015, the Company had six operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, DAMI, Franchise
and Manufacturing. The results of DAMI and Progressive have been included in the Company’s consolidated results and presented as reportable segments
from their October 15, 2015 and April 14, 2014 acquisition dates, respectively. In January 2014, the Company sold the 27 Company-operated RIMCO stores
and the rights to five franchised RIMCO stores. In all periods presented, RIMCO has been reclassified from the RIMCO segment to Other.
The Company’s Sales and Lease Ownership, Progressive, HomeSmart and Franchise segments accounted for substantially all of the operations of the
Company and, therefore, unless otherwise noted, only material changes within these four segments are discussed. The production of our Manufacturing
segment, consisting of the Woodhaven Furniture Industries division, is primarily leased or sold through the Company-operated and franchised stores, and
consequently, substantially all of that segment’s revenues and earnings before income taxes are eliminated through the elimination of intersegment revenues
and intersegment profit or loss.
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