Aarons 2015 Annual Report Download - page 62

DAMI extends or declines credit to an applicant through its bank partner based upon the customer's credit rating. Qualifying customers receive a credit card
to finance their initial purchase and to use in subsequent purchases at the merchant or other subsequent merchants for an initial 24 month privilege period,
which DAMI will renew if the cardholder remains in good standing. DAMI’s bank partner originates the loan by providing financing to the merchant at the
point of sale and acquiring the receivable at a discount from the face value. The discount represents a pre-negotiated, nonrefundable fee between DAMI and
the merchant that generally ranges from 3.5% to 25% (the merchant fee), depending on the product type and any promotional interest periods offered (e.g.,
six, 12 or 18 months of deferred or reduced interest). The fee is designed primarily to cover DAMI’s incremental direct origination costs and the risk of loss
related to the portfolio of cardholder charges received from the merchant. Within a 72 hour period, DAMI acquires the receivable from the bank at the
discounted amount. DAMI offsets the origination costs against the merchant fee, and the net amount is deferred. It is generally amortized into revenue over
the 24 month initial privilege period.
The customer is required to make periodic minimum payments that are generally 3.5% of the outstanding loan balance, which includes outstanding interest.
Fixed and variable interest rates, typically 17.90% to 29.99%, compound daily. Annual fees may also be charged to the customer at the commencement of the
loan and on each subsequent anniversary date. Under the provisions of the credit card agreements, the Company may assess fees for missed or late payments.
Interest and fees are due in the billing period in which they are assessed.
The Company acquired outstanding credit card loans in the October 15, 2015 DAMI acquisition (the "Acquired Loans"). 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 are 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. The estimated weighted average life of the Acquired Loans was
approximately one year at the acquisition date. 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.
Property, Plant and Equipment
The Company records property, plant and equipment at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful
lives of the respective assets, which range from five to 40 years for buildings and improvements and from one to 15 years for other depreciable property and
equipment.
Costs incurred to develop software for internal use are capitalized and amortized over the estimated useful life of the software, which ranges from five to 10
years. The Company primarily develops software for use in its store-based operations. The Company uses an agile development methodology in which
feature-by-feature updates are made to its software. Costs are capitalized when management, with the relevant authority, authorizes and commits to funding a
feature update and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization of costs
ceases when the feature update is substantially complete and ready for its intended use. Generally, the life cycle for each feature update is one month.
Gains and losses related to dispositions and retirements are recognized as incurred. Maintenance and repairs are also expensed as incurred; renewals and
improvements are capitalized. Depreciation expense for property, plant and equipment is included in operating expenses in the accompanying consolidated
statements of earnings and was $52.0 million, $53.7 million and $53.3 million during the years ended December 31, 2015, 2014 and 2013, respectively.
Amortization of previously capitalized internal use software development costs, which is a component of depreciation expense for property, plant and
equipment, was $7.4 million, $5.4 million and $3.3 million during the years ended December 31, 2015, 2014 and 2013, respectively.
The Company assesses its long-lived assets other than goodwill and other indefinite-lived intangible assets for impairment whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable. If it is determined that the carrying amount of an asset is not recoverable, the Company
compares the carrying amount of the asset to its fair value as estimated using discounted expected future cash flows, market values or replacement values for
similar assets. The amount by which the carrying amount exceeds the fair value of the asset, if any, is recognized as an impairment loss.
Assets Held for Sale
Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of December 31, 2015 and 2014.
After adjustment to fair value, the $7.0 million and $6.4 million carrying amount of these properties has been classified as assets held for sale in the
consolidated balance sheets as of December 31, 2015 and 2014, respectively. The Company estimated the fair values of real estate properties using the
market values for similar properties. These properties are considered Level 2 assets as defined below.
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