Aarons 2012 Annual Report Download - page 59

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Perfect Home is a variable interest entity (―VIE‖) as it does not have sufficient equity at risk; however, the Company
is not the primary beneficiary and lacks the power through voting or similar rights to direct the activities of Perfect
Home that most significantly affect its economic performance. As such, the VIE is not consolidated by the
Company.
Because the Company is not able to exercise significant influence over the operating and financial decisions of
Perfect Home, the equity portion of the investment in Perfect Home, totaling less than a thousand dollars at
December 31, 2012, is accounted for as a cost method investment and is included in prepaid expenses and other
assets in the consolidated balance sheets. The notes purchased from Perfect Home totaling 11.4 million British
pounds ($18.4 million) and 10.2 million British pounds ($15.9 million) at December 31, 2012 and 2011,
respectively, are accounted for as held-to-maturity securities in accordance with ASC 320, Debt and Equity
Securities, and are included in investments in the consolidated balance sheets. The increase in the Company’s
British pound-denominated notes during 2012 relates to accretion of the original discount on the notes with a face
value of 10.0 million British pounds. Utilizing a Black-Scholes model, the options to buy the remaining interest in
Perfect Home and to sell the Company’s interest in Perfect Home were determined to have only nominal values.
The Company’s maximum exposure to any potential losses associated with this VIE is equal to its total recorded
investment which totals $18.4 million at December 31, 2012.
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting of consumer electronics, computers, residential furniture,
appliances, and household accessories, to its customers for lease under certain terms agreed to by the customer.
Two primary lease models are offered to customers: one through the Company’s Sales & Lease Ownership division
(established as a monthly model) and the other through its HomeSmart division (established as a weekly model).
The typical monthly lease model is 12, 18 or 24 months, while the typical weekly lease model is 60, 90 or 120
weeks. The Company does not require deposits upon inception of customer agreements.
In a number of states, the Company utilizes a consumer lease form as an alternative to a typical lease purchase
agreement. The consumer lease differs from our state lease agreement in that it has an initial lease term in excess of
four months. Generally, state laws that govern the rent-to-own industry only apply to lease agreements with an
initial term of four months or less. Following satisfaction of the initial term contained in the consumer or state lease,
as applicable, the customer has the right to acquire title either through a purchase option or through payment of all
required lease payments.
All of the Company’s customer agreements are considered operating leases under the provisions of ASC 840,
Leases. As such, 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 payment obligations are satisfied under sales and
lease ownership agreements, the Company maintains ownership of the lease merchandise. Initial direct costs related
to the Company’s customer agreements are expensed as incurred and have been classified as operating expenses in
the Company’s consolidated statements of earnings.
Retail and Non-Retail Sales
Revenues from the sale of merchandise to franchisees are recognized at the time of receipt of the merchandise by the
franchisee based on the electronic receipt of merchandise by the franchisee within the Company’s fulfillment
system. Additionally, revenues from the sale of merchandise to other customers are recognized at the time of
shipment, at which time title and risk of ownership are transferred to the customer.
Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying
consolidated statements of earnings relate to the sale of lease merchandise to franchisees. The Company classifies
the sale of merchandise to other customers as retail sales in the consolidated statements of earnings. The Company
presents sales net of sales taxes.
Franchise Royalties and Fees
The Company franchises Aaron’s Sales & Lease Ownership stores. Franchisees typically pay a non-refundable
initial franchise fee from $15,000 to $50,000 depending upon market size and an ongoing royalty of either 5% or 6%
of gross revenues. Franchise fees and area development fees are generated from the sale of rights to develop, own