Aarons 2007 Annual Report Download - page 34

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Notes to Consolidated Financial Statements
NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
As of December 31, 2007 and 2006, and for the
Years Ended December 31, 2007, 2006 and 2005.
BASIS OF PRESENTATION — The consolidated financial
statements include the accounts of Aaron Rents, Inc. and its
wholly owned subsidiaries (the “Company”). All significant
intercompany accounts and transactions have been eliminated.
The preparation of the Company’s consolidated financial
statements in conformity with United States generally accepted
accounting principles requires management to make esti-
mates 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.
In May 2006, the Company completed an underwritten
public offering of 3.45 million newly-issued shares of com-
mon stock for net proceeds, after the underwriting discount
and expenses, of approximately $84.0 million. The Company
used the proceeds to repay borrowings under the revolving
credit facility. The Company’s Chairman, Chief Executive
Officer and controlling shareholder sold an additional
1,150,000 shares in the offering.
Certain reclassifications have been made to the prior
periods to conform to the current period presentation. In
2006 and 2005 cash flow presentations, $3.2 million and
$996,000, respectively, of construction in progress has been
reclassified to additions of property, plant and equipment
from proceeds from sale of property, plant and equipment.
LINE OF BUSINESS — The Company is engaged in the busi-
ness of renting and selling residential and office furniture,
consumer electronics, appliances, computers, and other
merchandise throughout the U.S. and Canada. The Company
manufactures furniture principally for its sales and lease
ownership and corporate furnishings operations.
RENTAL MERCHANDISE — The Company’s rental merchan-
dise consists primarily of residential and office furniture,
consumer electronics, appliances, computers, and other mer-
chandise and is recorded at cost, which includes overhead
from production facilities, shipping costs and warehousing
costs. 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 corporate furnishings
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. The Company’s policies require weekly rental merchan-
dise counts by store managers, which include write-offs for
unsalable, damaged, or missing merchandise inventories. Full
physical inventories are generally taken at the fulfillment and
manufacturing facilities on a quarterly basis, and appropriate
provisions are made for missing, damaged and unsalable
merchandise. In addition, the Company monitors rental
merchandise levels and mix by division, store, and fulfillment
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 or sale. On
a monthly basis, all damaged, lost or unsalable merchandise
identified is written off. The Company records rental
merchandise adjustments on the allowance method. The
2005 rental merchandise adjustments include write-offs of
merchandise in the third quarter that resulted from losses
associated with Hurricanes Katrina and Rita. These hurricane-
related write-offs were $2.8 million, net of insurance pro-
ceeds. Rental merchandise write-offs totaled $30.0 million,
$20.8 million, and $21.8 million during the years ended
December 31, 2007, 2006, and 2005, respectively, and
are included in operating expenses in the accompanying
consolidated statements of earnings.
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
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 recognized as incurred. Maintenance
and repairs are also expensed as incurred; renewals and
betterments are capitalized. Depreciation expense, included
in operating expenses in the accompanying consolidated
statements of earnings, for property, plant and equipment
was $35.1 million, $29.1 million, and $25.6 million during
the years ended December 31, 2007, 2006, and 2005,
respectively.
GOODWILL AND OTHER INTANGIBLES — Goodwill
represents the excess of the purchase price paid over the
fair value of the net tangible and identifiable intangible
assets acquired in connection with business acquisitions.
The Company has elected to perform its annual impairment
evaluation as of September 30. Based on the evaluation,
there was no impairment. More frequent evaluations are
completed if indicators of impairment become evident. Other
intangibles represent the value of customer relationships
acquired in connection with business acquisitions as well as
acquired franchise development rights, recorded at fair value
as determined by the Company. As of December 31, 2007
and 2006, the net intangibles other than goodwill were
$4.8 million and $3.4 million, respectively. The customer
relationship intangible is amortized on a straight-line basis
over a two-year useful life while acquired franchise develop-
ment rights are amortized over the unexpired life of the