Aarons 2012 Annual Report Download - page 38

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merchandise cannot be returned to vendors, its carrying value is adjusted to net realizable value or written off. All lease
merchandise is available for lease and sale, excluding merchandise determined to be missing, damaged or unsalable.
We record lease merchandise carrying value adjustments on the allowance method, which estimates the merchandise
losses incurred but not yet identified by management as of the end of the accounting period. Lease merchandise
adjustments totaled $54.9 million, $46.2 million, and $46.5 million for the years ended December 31, 2012, 2011, and
2010, respectively. The fiscal year ended December 31, 2010 includes a write-down of $4.7 million related to the
closure of the Aaron’s Office Furniture stores.
Leases and Closed Store Reserves. The majority of our Company-operated stores are operated from leased facilities
under operating lease agreements. The majority of the leases are for periods that do not exceed five years, although
lease terms range in length up to approximately 15 years. Leasehold improvements related to these leases are generally
amortized over periods that do not exceed the lesser of the lease term or useful life. While some of our leases do not
require escalating payments, for the leases which do contain such provisions we record the related lease expense on a
straight-line basis over the lease term. We do not generally obtain significant amounts of lease incentives or allowances
from landlords. Any incentive or allowance amounts we receive are recognized ratably over the lease term.
From time to time, we close or consolidate stores. Our primary costs associated with closing stores are the future lease
payments and related commitments. We record an estimate of the future obligation related to closed stores based upon
the present value of the future lease payments and related commitments, net of estimated sublease income based upon
historical experience. As of December 31, 2012 and 2011, our reserve for closed stores was $2.8 million and $3.8
million, respectively. Due to changes in market conditions, our estimates related to sublease income may change and,
as a result, our actual liability may be more or less than the recorded amount. Excluding estimated sublease income, our
future obligations related to closed stores on an undiscounted basis were $4.1 million and $6.1 million as of December
31, 2012 and 2011, respectively.
Insurance Programs. We maintain insurance contracts to fund workers compensation, vehicle liability, general liability
and group health insurance claims. Using actuarial analysis and projections, we estimate the liabilities associated with
open and incurred but not reported workers compensation, vehicle liability and general liability claims. This analysis is
based upon an assessment of the likely outcome or historical experience, net of any stop loss or other supplementary
coverage. We also calculate the projected outstanding plan liability for our group health insurance program using
historical claims runoff data. Our gross estimated liability for workers compensation insurance claims, vehicle liability,
general liability and group health insurance was $29.8 million and $28.5 million at December 31, 2012 and 2011,
respectively. In addition, we have prefunding balances on deposit with the insurance carriers of $25.6 million and $23.1
million at December 31, 2012 and 2011, respectively.
If we resolve insurance claims for amounts that are in excess of our current estimates and within policy stop loss limits,
we will be required to pay additional amounts beyond those accrued at December 31, 2012.
The assumptions and conditions described above reflect management’s best assumptions and estimates, but these items
involve inherent uncertainties as described above, which may or may not be controllable by management. As a result,
the accounting for such items could result in different amounts if management used different assumptions or if different
conditions occur in future periods.
Legal Reserves. We are subject to various legal claims arising in the ordinary course of business. Management
regularly assesses the Company’s insurance deductibles, analyzes litigation information with the Company’s attorneys
and evaluates its loss experience. We accrue for litigation loss contingencies that are both probable and reasonably
estimable. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and
expenses are incurred.
Income Taxes. The calculation of our income tax expense requires significant judgment and the use of estimates. We
periodically assess tax positions based on current tax developments, including enacted statutory, judicial and regulatory
guidance. In analyzing our overall tax position, consideration is given to the amount and timing of recognizing income
tax liabilities and benefits. In applying the tax and accounting guidance to the facts and circumstances, income tax
balances are adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are
maintained at levels we believe are adequate to absorb probable payments. Actual amounts paid, if any, could differ
significantly from these estimates.