Aarons 2014 Annual Report Download - page 42

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Insurance Programs
We maintain insurance contracts to fund workers compensation, vehicle liability, general liability and group health insurance
claims. Using actuarial analyses and projections, we estimate the liabilities associated with open and incurred but not reported
workers compensation, vehicle liability and general liability claims. This analysis is based upon an assessment of the likely
outcome or historical experience, net of any stop loss or other supplementary coverage. We also calculate the projected
outstanding plan liability for our group health insurance program using historical claims runoff data. Our gross estimated
liability for workers compensation insurance claims, vehicle liability, general liability and group health insurance was
$36.8 million and $31.9 million at December 31, 2014 and 2013, respectively. In addition, we have prefunding balances on
deposit with the insurance carriers of $28.3 million and $24.4 million at December 31, 2014 and 2013, respectively.
If we resolve insurance claims for amounts that are in excess of our current estimates and within policy stop loss limits, we will
be required to pay additional amounts beyond those accrued at December 31, 2014.
The assumptions and conditions described above reflect management’s best assumptions and estimates, but these items involve
inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting
for such items could result in different amounts if management used different assumptions or if different conditions occur in
future periods.
Legal and Regulatory Reserves
We are subject to various legal and regulatory proceedings arising in the ordinary course of business. Management regularly
assesses the Company’s insurance deductibles, monitors our litigation and regulatory exposure with the Company’s attorneys
and evaluates its loss experience. The Company establishes an accrued liability for legal and regulatory proceedings when the
Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Legal fees and
expenses associated with the defense of all of our litigation are expensed as such fees and expenses are incurred.
Income Taxes
The calculation of our income tax expense requires significant judgment and the use of estimates. We periodically assess tax
positions based on current tax developments, including enacted statutory, judicial and regulatory guidance. In analyzing our
overall tax position, consideration is given to the amount and timing of recognizing income tax liabilities and benefits. In
applying the tax and accounting guidance to the facts and circumstances, income tax balances are adjusted appropriately
through the income tax provision. Reserves for income tax uncertainties are maintained at levels we believe are adequate to
absorb probable payments. Actual amounts paid, if any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established, when necessary, to reduce deferred tax assets when we expect the amount of tax
benefit to be realized is less than the carrying value of the deferred tax asset.
Fair Value Measurements
For the valuation techniques used to determine the fair value of financial assets and liabilities on a recurring basis, as well as
assets held for sale, which are recorded at fair value on a nonrecurring basis, refer to Note 4 in the consolidated financial
statements.