Aarons 2014 Annual Report Download - page 39

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Retail Cost of Sales. Retail cost of sales represents the original or depreciated cost of merchandise sold through our Company-
operated stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, selling costs, occupancy costs and delivery, among other
expenses.
Other Operating Expense (Income), Net. Other operating expense (income), net consists of gains or losses on sales of
Company-operated stores and delivery vehicles, impairment charges on assets held for sale and gains or losses on other
dispositions of property, plant and equipment.
Critical Accounting Policies
Revenue Recognition
Lease revenues are recognized in the month they are due on the accrual basis of accounting. For internal management reporting
purposes, lease revenues from sales and lease ownership agreements are recognized by the reportable segments as revenue in
the month the cash is collected. On a monthly basis, we record an accrual for lease revenues due but not yet received, net of
allowances, and a deferral of revenue for lease payments received prior to the month due. Our revenue recognition accounting
policy matches the lease revenue with the corresponding costs, mainly depreciation, associated with the lease merchandise. At
December 31, 2014 and 2013, we had a revenue deferral representing cash collected in advance of being due or otherwise
earned totaling $60.5 million and $45.1 million, respectively, and an accrued revenue receivable, net of allowance for doubtful
accounts, based on historical collection rates of $30.2 million and $7.9 million, respectively. 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.
Lease Merchandise
Our Aaron’s Sales & Lease Ownership and HomeSmart divisions depreciate merchandise over the applicable agreement
period, generally 12 to 24 months (monthly agreements) or 60 to 120 weeks (weekly agreements) when leased, and 36 months
when not leased, to a 0% salvage value. The Company's Progressive division depreciates merchandise over the lease agreement
period, which is typically over 12 months, while on lease.
Our policies generally require weekly lease merchandise counts at our store-based operations, which include write-offs for
unsalable, damaged, or missing merchandise inventories. Full physical inventories are generally taken at our fulfillment and
manufacturing facilities two to four times a year with appropriate provisions made for missing, damaged and unsalable
merchandise. In addition, we monitor lease merchandise levels and mix by division, store and fulfillment center, as well as the
average age of merchandise on hand. If unsalable lease 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 based on historical write off experience.
As of December 31, 2014 and 2013, the allowance for lease merchandise write offs was $27.6 million and $8.3 million,
respectively. Lease merchandise write-offs totaled $99.9 million, $58.0 million and $54.9 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
Acquisition Accounting
We account for acquisitions under FASB Accounting Standards Codification 805, Business Combinations, which requires
companies to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. We estimate
the fair value of identifiable intangible assets using discounted cash flow analyses or estimates of replacement cost based on
market participant assumptions. The excess of the purchase price paid over the estimated fair values of the identifiable net
tangible and intangible assets acquired in connection with business acquisitions is recorded as goodwill. We consider
accounting for business combinations critical because management's judgment is used to determine the estimated fair values
assigned to assets acquired and liabilities assumed, as well as the useful life of and amortization method for intangible assets,
which can materially affect the results of our operations. Although management believes that the judgments and estimates
discussed herein are reasonable, actual results could differ, and we may be exposed to an impairment charge if we are unable to
recover the value of the recorded net assets.