Aarons 2015 Annual Report Download - page 58

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Reclassifications
Certain reclassifications have been made to the prior periods to conform to the current period presentation.
The Company presents sales net of related taxes for its traditional lease-to-own store-based ("core") business. Prior to 2015, Progressive presented lease
revenues on a gross basis with sales taxes included. Effective January 1, 2015, Progressive conformed its presentation of sales tax to that of the core business.
For the year ended December 31, 2014, a reclassification adjustment of $30.2 million has been made to present sales net of related taxes on a consolidated
basis. This adjustment reduces lease revenues and fees and operating expenses.
Principles of Consolidation and Variable Interest Entities
The consolidated financial statements include the accounts of Aaron’s, Inc. and its subsidiaries, each of which is wholly owned. Intercompany balances and
transactions between consolidated entities have been eliminated.
The Company holds notes issued by Perfect Home Holdings Limited ("Perfect Home"), a privately-held lease-to-own company that is primarily financed by
share capital and subordinated debt. Perfect Home is based in the U.K. and operates 70 retail stores as of December 31, 2015.
Perfect Home is a variable interest entity ("VIE") because it does not have sufficient equity at risk. However, the Company is not the primary beneficiary and
does not consolidate Perfect Home since the Company lacks the power through voting or similar rights to direct the activities that most significantly affect
Perfect Home's economic performance. The Company’s maximum exposure to any potential losses associated with this VIE is equal to its total recorded
investment which is $22.2 million at December 31, 2015.
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting of furniture, consumer electronics, computers, appliances and household accessories, to its customers for
lease under certain terms agreed to by the customer. Two primary store-based lease models are offered to customers: one through the Company’s Sales &
Lease Ownership division (established as a monthly model) and the other through its HomeSmart division (established as a weekly model). The typical
monthly store-based lease model is 12, 18 or 24 months, while the typical weekly store-based lease model is 65 to 104 weeks. The Company’s Progressive
division offers virtual lease-purchase solutions, typically over 12 months, to the customers of traditional retailers. The Company does not require deposits
upon inception of customer agreements. The customer has the right to acquire title either through a purchase option or through payment of all required lease
payments.
All of the Company’s customer agreements are considered operating leases. Lease revenues are recognized as revenue in the month they are due. Lease
payments received prior to the month due are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in
the accompanying consolidated balance sheets. The Company maintains ownership of the lease merchandise until all payment obligations are satisfied under
sales and lease ownership agreements. Initial direct costs related to the Company’s customer agreements are expensed as incurred and have been classified as
operating expenses in the Company’s consolidated statements of earnings.
Retail and Non-Retail Sales
Revenues from the sale of merchandise to franchisees are recognized when title and risk of ownership transfer to the franchisee upon its receipt of the
merchandise, which is tracked electronically by the Company’s fulfillment system. Additionally, revenues from the sale of merchandise to other customers
are recognized at the time of shipment, at which time title and risk of ownership are transferred to the customer.
Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying consolidated statements of earnings relate to the
sale of lease merchandise to franchisees. The Company classifies the sale of merchandise to other customers as retail sales in the consolidated statements of
earnings.
Franchise Royalties and Fees
The Company franchises its Aaron’s Sales & Lease Ownership and HomeSmart stores in markets where the Company has no immediate plans to enter.
Franchisees pay an ongoing royalty of either 5% or 6% of gross revenues, which are recorded when due.
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