Aarons 2011 Annual Report Download - page 32

Company recorded an impairment charge of $1.3 million in 2009
within operating expenses related primarily to the impairment of
leasehold improvements in the Aaron’s Office Furniture stores.
The Aaron’s Office Furniture long-lived assets are Level 2 assets.
In addition, the Company recorded an $865,000 write-down to
certain office furniture lease merchandise in 2009 within operating
expenses. The impairment charge and inventory write-down are
included in the Other segment.
Derivative Financial Instruments — The Company utilizes deriva-
tive financial instruments to mitigate its exposure to certain market
risks associated with its ongoing operations for a portion of the year.
The primary risk it seeks to manage through the use of derivative
financial instruments is commodity price risk, including the risk of
increases in the market price of diesel fuel used in the Company’s
delivery vehicles. All derivative financial instruments are recorded
at fair value on the consolidated balance sheets. The Company does
not use derivative financial instruments for trading or speculative
purposes. The Company is exposed to counterparty credit risk on all
its derivative financial instruments. The counterparties to these con-
tracts are high credit quality commercial banks, which the Company
believes largely minimize the risk of counterparty default. The fair
values of the Company’s fuel hedges as of December 31, 2010 and
the changes in their fair values in 2011 and 2010 were immaterial.
The Company did not hold any derivative financial instruments as of
December 31, 2011.
Fair Value of Financial Instruments — The fair values of the
Company’s cash and cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to their
short-term nature.
At December 31, 2011 and 2010, the fair value of fixed rate
long-term debt approximated its carrying value. The fair value of
debt is estimated using valuation techniques that consider risk-free
borrowing rates and credit risk.
Deferred Income Taxes — Deferred income taxes represent primar-
ily temporary differences between the amounts of assets and liabilities
for financial and tax reporting purposes. The Company’s largest
temporary differences arise principally from the use of accelerated
depreciation methods on lease merchandise for tax purposes.
Revenue Recognition — Lease revenues are recognized as revenue
in the month they are due. Lease payments received prior to the
month due are recorded as deferred lease revenue. Until all pay-
ments are received under sales and lease ownership agreements, the
Company maintains ownership of the lease merchandise. Revenues
from the sale of merchandise to franchisees are recognized at the
time of receipt of the merchandise by the franchisee, and revenues
from such sales to other customers are recognized at the time of
shipment, at which time title and risk of ownership are transferred to
the customer. Refer to Note I for discussion of recognition of other
franchise-related revenues. The Company presents sales net of
sales taxes.
Retail and Non-Retail Cost of Sales — Included in cost of sales
is the net book value of merchandise sold, primarily using specific
identification. It is not practicable to allocate operating expenses
between selling and lease operations.
Shipping and Handling Costs — The Company classifies shipping
and handling costs as operating expenses in the accompanying
consolidated statements of earnings, and these costs totaled $68.1
million in 2011, $60.6 million in 2010 and $55.0 million in 2009.
Advertising — The Company expenses advertising costs as incurred.
Advertising costs are recorded as expenses the first time an adver-
tisement appears. Such costs aggregated to $38.9 million in 2011,
$31.7 million in 2010 and $31.0 million in 2009. These advertising
expenses are shown net of cooperative advertising considerations
received from vendors, substantially all of which represents reim-
bursement of specific, identifiable and incremental costs incurred in
selling those vendors’ products. The amount of cooperative adver-
tising consideration netted against advertising expense was $25.4
million in 2011, $27.2 million in 2010 and $23.4 million in 2009.
The prepaid advertising asset was $1.6 million and $3.2 million at
December 31, 2011 and 2010, respectively.
Stock-Based Compensation — The Company has stock-based
employee compensation plans, which are more fully described in
Note H below. The Company estimates the fair value for the options
granted on the grant date using a Black-Scholes option-pricing
model and accounts for stock-based compensation under the fair
value recognition provisions codified in FASB ASC Topic 718,
Stock Compensation. The fair value of each share of restricted stock
awarded was equal to the market value of a share of the Company’s
Common Stock on the grant date.
Insurance Reserves — Estimated insurance reserves are accrued
primarily for group health, general liability, automobile liability and
workers compensation benefits provided to the Company’s employ-
ees. Estimates for these insurance reserves are made based on actual
reported but unpaid claims and actuarial analyses of the projected
claims run off for both reported and incurred but not reported
claims.
Comprehensive Income — For the years ended December 31, 2011,
2010 and 2009, comprehensive income totaled $113.2 million,
$119.3 million and $113.9 million, respectively.
Foreign Currency Translation — Assets and liabilities denomi-
nated in a foreign currency are translated into U.S. dollars at the
current rate of exchange on the last day of the reporting period.
Revenues and expenses are generally translated at a daily exchange
rate and equity transactions are translated using the actual rate on
the day of the transaction.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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