Aarons 2014 Annual Report Download - page 41

31
revenue growth rates, operating margins, capital requirements, and a weighted-average cost of capital and/or discount rate.
Under the market approach, we estimate fair value after considering the multiples of gross revenue for benchmark companies.
We believe the benchmark companies evaluated for each reporting unit serve as an appropriate input for calculating fair value
as those benchmark companies have similar risks, participate in similar markets, provide similar products and services for their
customers and compete with us directly. The values separately derived from each of the income and market approach valuation
techniques were used to develop an overall estimate of each reporting unit's fair value. The selection and weighting of the
various fair value techniques, which requires the use of management judgment to determine what is most representative of fair
value, may result in a higher or lower fair value.
Intangible assets acquired in recent transactions are naturally more susceptible to impairment, primarily due to the fact that they
are recorded at fair value based on recent operating plans and macroeconomic conditions present at the time of acquisition.
Consequently, if operating results and/or macroeconomic conditions deteriorate shortly after an acquisition, it could result in
the impairment of the acquired assets. A deterioration of macroeconomic conditions may not only negatively impact the
estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our
analyses, including but not limited to, the estimated cost of capital and/or discount rates. Additionally, as discussed above, in
accordance with accounting principles generally accepted in the United States, we are required to ensure that assumptions used
to determine fair value in our analyses are consistent with the assumptions a hypothetical marketplace participant would use. As
a result, the cost of capital and/or discount rates used in our analyses may increase or decrease based on market conditions and
trends, regardless of whether our actual cost of capital has changed. Therefore, if the cost of capital and/or discount rates
change, we may recognize an impairment of an intangible asset in spite of realizing actual cash flows that are approximately
equal to, or greater than, our previously forecasted amounts.
During the performance of the 2014 annual assessment of goodwill for impairment, the Company did not identify any reporting
units that were not substantially in excess of their carrying values, other than the HomeSmart reporting unit for which the
estimated fair value exceeded the carrying value of the reporting unit by approximately 9%. While no impairment was noted in
our impairment testing, if HomeSmart does not achieve its near-term financial projections or if macroeconomic conditions
change causing the cost of capital to increase without an offsetting increase in operating results, it is likely that we would be
required to recognize an impairment charge related to goodwill.
The Company completed its indefinite-lived intangible asset impairment test as of October 1, 2014 and determined that no
impairment had occurred. No new indications of impairment existed during the fourth quarter of 2014. As a result, no
impairment testing was updated as of December 31, 2014. We will continue to monitor the fair value of goodwill and other
intangible assets in future periods.
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, 2014 and 2013, our reserve for closed stores was $5.6 million and $2.1 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 $7.8 million and $2.9 million as of December 31, 2014 and 2013, respectively.