Aarons 2003 Annual Report Download - page 30

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that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred as
opposed to the date of an entity’s commitment to an exit
plan. SFAS No. 146 also establishes fair value as the objec-
tive for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after
December 31, 2002. Adoption of SFAS No. 146 did not have
a material effect on the Company’s financial statements.
In November 2002, the FASB issued Interpretation No.
45, Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others (FIN 45). FIN 45 requires an entity to disclose in
its interim and annual financial statements information with
respect to its obligations under certain guarantees that it has
issued. It also requires an entity to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure require-
ments of FIN 45 are effective for interim and annual periods
ending after December 15, 2002. These disclosures are pre-
sented in Note G. The initial recognition and measurement
requirements of FIN 45 are effective prospectively for guar-
antees issued or modified after December 31, 2002. The
adoption of the recognition provisions of FIN 45 had no
significant effect on the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51 (FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for
all new variable interest entities created or acquired after
January 31, 2003. The Company has not entered into
transactions with, created, or acquired significant potential
variable interest entities subsequent to that date. For interests
in variable interest entities arising prior to February 1, 2003,
the Company must apply the provisions of FIN 46 as of
December 31, 2003. The Company has concluded that cer-
tain independent franchisees, as discussed in Note J, are not
subject to the interpretation, and are therefore not included
in the Company’s consolidated financial statements. In addi-
tion, as discussed in Note E, the Company has certain capital
leases with partnerships controlled by related parties of
the Company. The Company has concluded that these
partnerships are not variable interest entities. The Company
has concluded that the accounting and reporting of its
construction and lease facility (see Note G) are not subject
to the provisions of FIN 46 since the lessor is not a variable
interest entity, as defined by FIN 46.
In January 2003, the Emerging Issues Task Force (EITF)
of the FASB issued EITF Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration
Received from a Vendor (EITF 02-16). EITF 02-16 addresses
accounting and reporting issues related to how a reseller
should account for cash consideration received from vendors.
Generally, cash consideration received from vendors is
presumed to be a reduction of the prices of the vendor’s
products or services and should, therefore, be characterized
as a reduction of cost of sales when recognized in the
customer’s income statement. However, under certain
circumstances this presumption may be overcome and
recognition as revenue or as a reduction of other costs in
the income statement may be appropriate. The Company
does receive cash consideration from vendors subject to the
provisions of EITF 02-16. EITF 02-16 is effective for fiscal
periods beginning after December 15, 2002. The Company
adopted EITF 02-16 as of January 1, 2003. Such adoption
did not have a material effect on the Company’s financial
statements since substantially all cooperative advertising
consideration received from vendors represents a reimburse-
ment of specific identifiable and incremental costs incurred
in selling those vendors’ products.
Note B: Accounting Changes
Effective January 1, 2002, the Company prospectively
changed its method of depreciation for sales and lease
ownership rental merchandise. Previously, all sales and
lease ownership rental merchandise began being depreciated
when received at the store over a period of the shorter of
36 months or the length of the rental periods, to a salvage
value of zero. Due to changes in business, the Company
changed the depreciation method such that sales and lease
ownership rental merchandise received into a store begins
being depreciated at the earlier of the expiration of 12
months from the date of acquisition or upon being subject
to a sales and lease ownership agreement. Under the previous
and the new depreciation method, rental merchandise in
distribution centers does not begin being depreciated until
12 months from the date of acquisition. The Company
believes the new depreciation method results in a better
matching of the costs of rental merchandise with the
corresponding revenue. The change in method of deprecia-
tion had the effect of increasing net income by approximately
$3,038,000, or approximately $.09 diluted earnings per
share, for the year ended December 31, 2002.
Effective January 1, 2002, the Company adopted SFAS
No. 141 and SFAS No. 142. The Company concluded that
the enterprise fair values of the Company’s reporting units
were greater than the carrying values, and accordingly no
further impairment analysis was considered necessary.
Prior to the adoption of SFAS No. 142, the Company
amortized goodwill over estimated useful lives up to a
maximum of 20 years. Had the Company accounted for
goodwill consistent with the provisions of SFAS No. 142
in the year ended December 31, 2001, the Company’s
income would have been affected as follows:
(In Thousands, Except Per Share)
Net Earnings, As Reported $12,336
Add Back: Goodwill Amortization, Net of Tax 688
Net Earnings, As Adjusted $13,024
Basic Earnings Per Common Share:
As Reported $ .41
Add Back: Goodwill Amortization .02
As Adjusted $ .43
Diluted Earnings Per Common Share:
As Reported $ .41
Add Back: Goodwill Amortization .02
As Adjusted $ .43