Aarons 2012 Annual Report Download - page 60

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and operate Aaron’s Sales & Lease Ownership stores. These fees are recognized as income when substantially all of
the Company’s obligations per location are satisfied, generally at the date of the store opening. Franchise fees and
area development fees are received before the substantial completion of the Company’s obligations and deferred.
The Company guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on
the outstanding debt obligations of such franchisees. The Company recognizes finance fee revenue as the guarantee
obligation is satisfied. Refer to Note 8 for additional discussion of the Company’s franchise-related guarantee
obligation.
Franchise agreement fee revenue was $2.4 million, $2.6 million and $3.0 million; royalty revenue was $56.5
million, $52.0 million and $47.9 million; and finance fee revenue was $4.9 million, $5.9 million and $5.7 million for
the years ended December 31, 2012, 2011 and 2010, respectively. Deferred franchise and area development
agreement fees, included in accounts payable and accrued expenses in the accompanying consolidated balance
sheets, were $3.8 million and $4.7 million at December 31, 2012 and 2011, respectively.
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 $74.9 million, $68.1 million and $60.6 million in 2012, 2011 and
2010, respectively.
Advertising
The Company expenses advertising costs as incurred when an advertisement appears for the first time. Such
advertising costs amounted to $36.5 million, $38.9 million and $31.7 million in 2012, 2011 and 2010, respectively.
These advertising expenses are shown net of cooperative advertising considerations received from vendors,
substantially all of which represents reimbursement of specific, identifiable and incremental costs incurred in selling
those vendors’ products. The amount of cooperative advertising consideration netted against advertising expense
was $31.1 million, $25.4 million and $27.2 million in 2012, 2011 and 2010, respectively. The prepaid advertising
asset was $3.2 million and $1.6 million at December 31, 2012 and 2011, respectively.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are more fully described in Note 10. 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.
Deferred Income Taxes
Deferred income taxes represent primarily 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.
Earnings per Share
Earnings per share is computed by dividing net earnings by the weighted average number of shares of common
stock outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive