Aarons 2014 Annual Report Download - page 63

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Perfect Home is a variable interest entity (“VIE”) as it does not have sufficient equity at risk; however, the Company is not the
primary beneficiary and lacks the power through voting or similar rights to direct the activities of Perfect Home that most
significantly affect its economic performance. As such, the VIE is not consolidated by the Company.
The notes purchased from Perfect Home totaling £13.7 million ($21.3 million) and £12.5 million ($20.7 million) at
December 31, 2014 and 2013, respectively, are accounted for as held-to-maturity securities in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Debt and Equity Securities, and are
included in investments in the consolidated balance sheets. The increase in the Company’s British pound-denominated notes
during the year ended December 31, 2014 relates to accretion of the original discount on the notes with a face value of £10.0
million.
The Company’s maximum exposure to any potential losses associated with this VIE is equal to its total recorded investment
which was $21.3 million at December 31, 2014.
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting of furniture, consumer electronics, computers, appliances and household
accessories, to its customers for lease under certain terms agreed to by the customer. Two primary store-based lease models are
offered to customers: one through the Company’s Sales & Lease Ownership division (established as a monthly model) and the
other through its HomeSmart division (established as a weekly model). The typical monthly store-based lease model is 12, 18
or 24 months, while the typical weekly store-based lease model is 60, 90 or 120 weeks. The Company’s Progressive division
offers virtual lease-purchase solutions, typically over 12 months, to the customers of traditional retailers. The Company does
not require deposits upon inception of customer agreements.
In a number of states, the Company utilizes a consumer lease form as an alternative to a typical lease purchase agreement. The
consumer lease differs from the Company’s state lease agreement in that it has an initial lease term in excess of four months.
Generally, state laws that govern the rent-to-own industry only apply to lease agreements with an initial term of four months or
less. Following satisfaction of the initial term contained in the consumer or state lease, as applicable, the customer has the right
to acquire title either through a purchase option or through payment of all required lease payments.
All of the Company’s customer agreements are considered operating leases under the provisions of ASC 840, Leases. As such,
lease revenues are recognized as revenue in the month they are due. Lease payments received prior to the month due are
recorded as deferred lease revenue, which is included in customer deposits and advance payments in the accompanying
consolidated balance sheets. Until all payment obligations are satisfied under sales and lease ownership agreements, the
Company maintains ownership of the lease merchandise. Initial direct costs related to the Company’s customer agreements are
expensed as incurred and have been classified as operating expenses in the Company’s consolidated statements of earnings.
Retail and Non-Retail Sales
Revenues from the sale of merchandise to franchisees are recognized at the time of receipt of the merchandise by the franchisee
based on the electronic receipt of merchandise by the franchisee within the Company’s fulfillment system. Additionally,
revenues from the sale of merchandise to other customers are recognized at the time of shipment, at which time title and risk of
ownership are transferred to the customer.
Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying consolidated
statements of earnings relate to the sale of lease merchandise to franchisees. The Company classifies the sale of merchandise to
other customers as retail sales in the consolidated statements of earnings.
Franchise Royalties and Fees
The Company franchises its Aaron’s Sales & Lease Ownership and HomeSmart stores in markets where the Company has no
immediate plans to enter. Franchisees typically pay a non-refundable initial franchise fee from $15,000 to $50,000 depending
upon market size and an ongoing royalty of either 5% or 6% of gross revenues. Franchise fees and area development fees are
generated from the sale of rights to develop, own and operate sales and 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 are
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.