Aarons 2008 Annual Report Download - page 30

Notes to Consolidated Financial Statements
Note A: Summary of Significant
Accounting Policies
As of December 31, 2008 and 2007, and for the Years Ended
December 31, 2008, 2007 and 2006.
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 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 signifi-
cantly in the future absent unsurfaced or unforeseen events.
During the fourth quarter of 2008 the Company sold sub-
stantially all of the assets of its Aaron’s Corporate Furnishings
division, which rented residential furniture, office furniture
and related accessories through 47 company-operated stores
in 16 states was sold to CORT Business Services Corporation.
As a result of the sale, our financial statements have been
prepared reflecting the Aaron’s Corporate Furnishings division
as discontinued operations. All historical financial statements
have been restated to conform to this presentation. See Note N
for a discussion of the sale of the Aaron’s Corporate Furnishings
division.
In May 2006, the Company completed an underwritten public
offering of 3.45 million newly-issued shares of common 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 and controlling shareholder sold an
additional 1,150,000 shares in the offering.
LINE OF BUSINESS — The Company is engaged in the business
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 stores.
RENTAL MERCHANDISE — The Company’s rental merchandise
consists primarily of residential and office furniture, consumer
electronics, appliances, computers, and other merchandise 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
Company’s policies require weekly rental merchandise 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 divi-
sion, 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 merchan-
dise adjustments on the allowance method. Rental merchandise
write-offs totaled $34.5 million, $29.0 million, and $20.1
million during the years ended December 31, 2008, 2007, and
2006, respectively, and are included in operating expenses in
the accompanying consolidated statements of earnings.
ACCOUNTS RECEIVABLE — The Company maintains an allowance
for doubtful accounts and a reserve for returns. The reserve for
returns is calculated based on the historical collection experience
associated with rental receivables and the related return of rental
merchandise. The Company’s policy is to write off rental receiv-
ables that are 60 days or more past due.
The following is a summary of the Company’s allowance for
doubtful accounts as of December 31:
(In Thousands) 2008 2007 2006
Beginning Balance $ 3,702 $ 2,773 $ 2,374
Accounts written off (18,876) (18,509) (13,823)
Provision for returns 18,962 19,438 14,222
Ending Balance $ 3,788 $ 3,702 $ 2,773
PROPERTY, PLANT AND EQUIPMENT — The Company records prop-
erty, 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 state-
ments of earnings, for property, plant and equipment was $38.4
million, $34.8 million, and $27.9 million during the years ended
December 31, 2008, 2007, and 2006, 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 as of September 30,
2008. 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.
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