Aarons 2003 Annual Report Download - page 28

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Notes to Consolidated Financial Statements
Note A: Summary of
Significant Accounting
Policies
As of December 31, 2003 and 2002, and for the
Years Ended December 31, 2003, 2002 and 2001.
Basis of Presentation — The consolidated financial state-
ments include the accounts of Aaron Rents, Inc. and its
wholly-owned subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminat-
ed. The preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported
in these financial statements and accompanying notes. Actual
results could differ from those estimates. Generally, actual
experience has been consistent with management’s prior
estimates and assumptions. Management does not believe
these estimates or assumptions will change significantly in
the future absent unsurfaced or unforeseen events.
On July 21, 2003, the Company announced a 3-for-2
stock split effected in the form of a 50% stock dividend on
both Common Stock and Class A Common Stock. New
shares were distributed on August 15, 2003 to shareholders
of record as of the close of business on August 1, 2003. All
share and per share information has been restated for all
periods presented to reflect this stock dividend.
Certain amounts presented for prior years have been
reclassified to conform to the current year presentation.
Line of Business — The Company is engaged in the
business of renting and selling residential and office furniture,
consumer electronics, appliances and other merchandise
throughout the U.S., Puerto Rico, and Canada. The
Company manufactures furniture principally for its
rent-to-rent and sales and lease ownership operations.
Rental Merchandise — Rental merchandise consists
primarily of consumer electronics, residential and office
furniture, appliances, computers and other merchandise and
is recorded at cost. The sales and lease ownership division
depreciates merchandise over the rental agreement period,
generally 12 to 24 months when on rent and 36 months
when not on rent, to a 0% salvage value. The 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% of historical
cost. Our policies require weekly rental merchandise counts
by store managers, which include 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 distribution center, as
well as the average age of merchandise on hand. If unsalable
rental merchandise cannot be returned to vendors, it is
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
merchandise as identified. These write-offs, recorded as a
component of operating expenses, totaled approximately
$11.9 million, $10.1 million, and $10 million during
the years ended December 31, 2003, 2002, and 2001,
respectively.
Property, Plant and Equipment — Property, plant and
equipment are recorded at cost. Depreciation and amortiza-
tion are computed on a straight-line basis over the estimated
useful lives of the respective assets, which are from eight to
40 years for buildings and improvements and from one to five
years for other depreciable property and equipment. Gains
and losses related to dispositions and retirements are recog-
nized as incurred. Maintenance and repairs are also expensed
as incurred; renewals and betterments are capitalized.
Goodwill and Other Intangibles — Goodwill represents the
excess of the purchase price paid over the fair value of the
net assets acquired in connection with business acquisitions.
Effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142). SFAS No. 142
requires that entities assess the fair value of the net assets
underlying all acquisition-related goodwill on a reporting
unit basis effective beginning in 2002. When the fair value is
less than the related carrying value, entities are required to
reduce the amount of goodwill (see Note B). The approach
to evaluating the recoverability of goodwill as outlined in
SFAS No. 142 requires the use of valuation techniques using
estimates and assumptions about projected future operating
results and other variables. The Company has elected to per-
form this annual evaluation on September 30. More frequent
evaluations will be completed if indicators of impairment
become evident. The impairment-only approach required by
SFAS No. 142 may have the effect of increasing the volatility
of the Company’s earnings if goodwill impairment occurs
at a future date. Other Intangibles represent the value of
customer relationships acquired in connection with business
acquisitions, recorded at fair value as determined by the
Company. These intangibles are amortized on a straight-line
basis over a two-year useful life.
Impairment — The Company assesses its long-lived
assets other than goodwill for impairment whenever facts
and circumstances indicate that the carrying amount may
not be fully recoverable. To analyze recoverability, the
Company projects undiscounted net future cash flows
over the remaining life of such assets. If these projected cash
flows were less than the carrying amount, an impairment
would be recognized, resulting in a write-down of assets
with a corresponding charge to earnings. Impairment losses,
if any, are measured based upon the difference between the
carrying amount and the fair value of the assets.
Investments in Marketable Securities — The Company
holds certain marketable equity securities and has designated
these securities as available-for-sale. The fair value of these
securities was approximately $3,606,000 and $1,560,000 as
of December 31, 2003 and 2002, respectively. These amounts
are included in prepaid expenses and other assets in the
accompanying consolidated balance sheets. Unrealized gains
on these securities, net of tax, included in accumulated