Aarons 2012 Annual Report Download - page 63

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Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net tangible and
intangible assets acquired in connection with business acquisitions. Impairment occurs when the carrying value of
goodwill is not recoverable from future cash flows. The Company performs an assessment of goodwill for
impairment at the reporting unit level annually as of September 30, and when events or circumstances indicate that
impairment may have occurred. Factors which could necessitate an interim impairment assessment include a
sustained decline in the Company’s stock price, prolonged negative industry or economic trends and significant
underperformance relative to historical or projected future operating results.
The Company has deemed its operating segments to be reporting units due to the fact that operations (stores)
included in each operating segment have similar economic characteristics. As of December 31, 2012, the Company
has five operating segments and reporting units: Sales and Lease Ownership, RIMCO, HomeSmart, Franchise and
Manufacturing. The Company’s RIMCO stores lease automobile wheels, tires and rims to customers under sales and
lease ownership agreements. Although the products offered are different, these stores are managed, monitored and
operated similarly to our other sales and lease ownership stores.
As of December 31, 2012, the Company’s Sales and Lease Ownership and HomeSmart reporting units are the only
reporting units with assigned goodwill balances. The following is a summary of the Company’s goodwill by
reporting unit at December 31:
(In Thousands)
2012
2011
Sales and Lease Ownership
$ 219,547
$ 205,509
HomeSmart
14,648
13,833
Total
$ 234,195
$ 219,342
The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value
of the reporting unit to its carrying value, including goodwill. The Company uses a multiple of gross revenue to
determine the fair value of its reporting units. If the carrying value of the reporting unit exceeds the fair value, a
second step is performed in order to determine the amount of impairment loss, if any. The second step compares the
implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount
of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount
equal to that excess.
During the performance of the annual assessment of goodwill for impairment in the 2012, 2011 and 2010 fiscal
years, the Company did not identify any reporting units that were not substantially in excess of their carrying values,
other than the HomeSmart division for which locations were recently acquired. While no impairment was noted in
our impairment test as of September 30, 2012, if profitability is delayed as a result of the significant start-up
expenses associated with the HomeSmart stores, there could be a change in the valuation of the HomeSmart
reporting unit that may result in the recognition of an impairment loss in future periods.
No new indications of impairment existed during the fourth quarter of 2012, thus no impairment testing was updated
as of December 31, 2012.
Other Intangibles
Other intangibles represent the value of customer relationships, non-compete agreements and franchise development
rights acquired in connection with business acquisitions and are recorded at fair value as determined by the
Company. The customer relationship intangible asset is amortized on a straight-line basis over a two-year estimated
useful life. The non-compete intangible asset is amortized on a straight-line basis over a three-year useful life.
Acquired franchise development rights are amortized on a straight-line basis over the unexpired life of the
franchisee’s ten year area development agreement.
Insurance Reserves
Estimated insurance reserves are accrued primarily for group health, general liability, automobile liability and
workers compensation benefits provided to the Company’s employees. 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.