Aarons 2002 Annual Report Download - page 21

19
Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. We
adopted SFAS 144 as of January 1, 2002, and the statement had
no material effect on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Rental revenues are recognized in the month they are due on
the accrual basis of accounting. For internal management reporting
purposes, rental revenues from the sales and lease ownership divi-
sion are recognized as revenue in the month the cash is collected.
On a monthly basis, we record an accrual for rental revenues due
but not yet received, net of allowances, and a deferral of revenue
for rental payments received prior to the month due. Our revenue
recognition accounting policy matches the rental revenue with the
corresponding costs — mainly depreciation —associated with the
rental merchandise. At the years ended December 31, 2002 and
2001, Aaron Rents had a net revenue deferral representing cash
collected in advance of being due or otherwise earned totaling
approximately $7.5 million and $5.7 million, respectively.
Revenues from the sale of residential and office furniture and
other merchandise are recognized at the time of shipment.
RENTAL MERCHANDISE DEPRECIATION
Our sales and lease ownership division depreciates merchandise
over the agreement period, generally 12 to 24 months when rented,
and 36 months when not rented, to 0% salvage value. Prior to
2002, we depreciated sales and lease ownership merchandise as
soon as it was delivered to our stores from our distribution centers.
In the first quarter of 2002, we began depreciating this merchan-
dise upon the earlier to occur of its initial lease to a customer or
12 months after it is acquired from the vendor. See Note B to the
Consolidated Financial Statements. Nevertheless, sales and lease
ownership merchandise is generally depreciated at a faster rate
than our rent-to-rent merchandise. As sales and lease ownership
revenues continue to comprise an increasing percentage of total
revenues, we expect rental merchandise depreciation to increase at
a correspondingly faster rate. Our rent-to-rent division depreciates
merchandise over its estimated useful life which ranges from six
months to 60 months, net of its salvage value which ranges from
0% to 60%.
Our policies require weekly rental merchandise counts by store
managers, which includes a write-off for unsalable, damaged, or
missing merchandise inventories. Full physical inventories are
generally taken at our distribution and manufacturing facilities on
a quarterly basis, and appropriate provisions are made for missing,
damaged and unsalable merchandise. In addition, we monitor
rental merchandise levels and mix by division, store and distri-
bution center, as well as the average age of merchandise on hand.
If unsalable rental merchandise cannot be returned to vendors,
it’s adjusted to its net realizable value or written off.
All rental merchandise is available for rental and sale. On
a monthly basis, we write off damaged, lost or unsalable mer-
chandise as identified. These write-offs totaled approximately
$10.1 million, $10 million and $8.9 million during the years
ended December 31, 2002, 2001, and 2000, respectively.
CLOSED STORE RESERVES
From time to time, Aaron Rents closes or consolidates retail
stores. 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 which we base upon historical experience. At the years
ended December 31, 2002 and 2001, our reserve for closed stores
was $1.5 million and $3.4 million, respectively. If our estimates
related to sublease income are not correct, our actual liability may
be more or less than the liability recorded at December 31, 2002.
INSURANCE PROGRAMS
Aaron Rents maintains insurance contracts for paying of
workers’ compensation and group health insurance claims. Using
actuarial analysis and projections, we estimate the liabilities asso-
ciated with open and incurred but not reported workers compen-
sation claims. This analysis is based upon an assessment of the
likely outcome or historical experience, net of any stop loss or
other supplementary coverages. We also calculate the projected
outstanding plan liability for our group health insurance program.
Our liability for workers compensation insurance claims
and group health insurance was approximately $3.1 million and
$3.3 million, respectively, at the years ended December 31, 2002
and 2001.
If we resolve existing workers compensation claims for amounts
which 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, 2002. Additionally, if the actual
group health insurance liability exceeds our projection, we will
be required to pay additional amounts beyond those accrued at
December 31, 2002.
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.
FORWARD LOOKING STATEMENTS
Certain written and oral statements made by our Company
may constitute “forward-looking statements” as defined under
the Private Securities Litigation Reform Act of 1995, including
statements made in this report and other filings with the Securities
and Exchange Commission. All statements which address oper-
ating performance, events, or developments that we expect or
anticipate will occur in the future — including growth in store
openings and franchises awarded, market share, and statements
expressing general optimism about future operating results —
are forward-looking statements. Forward-looking statements are
subject to certain risks and uncertainties that could cause actual
results to differ materially. The Company undertakes no obligation
to publicly update or revise any forward-looking statements. For
a discussion of such risks and uncertainties see “Certain Factors
Affecting Forward-Looking Statements” in the Company’s Annual
Report on Form 10-K for fiscal 2002, filed with the Securities and
Exchange Commission, which discussion is incorporated herein
by this reference.