Cash America 2007 Annual Report Download - page 44

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24
merchandise held for disposition, allowance for losses on cash advances, long-lived and intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on historical experience,
empirical data and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or conditions. The development
and selection of the critical accounting policies and the related disclosures below have been reviewed with
the Audit Committee of the Board of Directors.
Management believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its consolidated financial statements.
Finance and service charges revenue recognition. The Company accrues finance and service charges
revenue only on those pawn loans that the Company deems collectible based on historical loan redemption
statistics. Pawn loans written during each calendar month are aggregated and tracked for performance. The
gathering of this empirical data allows the Company to analyze the characteristics of its outstanding pawn
loan portfolio and estimate the probability of collection of finance and service charges. If the future actual
performance of the loan portfolio differs significantly (positively or negatively) from expectations, revenue
for the next reporting period would be likewise affected.
Due to the short-term nature of pawn loans, the Company can quickly identify performance trends.
For 2007, $159.5 million, or 99.1%, of recorded finance and service charges represented cash collected from
customers and the remaining $1.5 million, or 0.9%, represented an increase in the finance and service
charges receivable during the year. At the end of the current year and based on the revenue recognition
method described above, the Company had accrued $27.0 million of finance and service charges receivable.
Assuming the year-end accrual of finance and service charges revenue was overestimated by 10%, finance
and service charges revenue would decrease by $2.7 million in 2008 and net income would decrease by $1.8
million. Some or all of the decrease would potentially be mitigated through the profit on the disposition of
the related forfeited loan collateral.
Merchandise held for disposition. Merchandise held for disposition consists primarily of forfeited
collateral from pawn loans not repaid. The carrying value of the forfeited collateral is stated at the lower of
cost (cash amount loaned) or market. Management provides an allowance for shrinkage and valuation based
on its evaluation of the merchandise. Because pawn loans are made without recourse to the borrower, the
Company does not investigate or rely upon the borrower’s creditworthiness, but instead bases its lending
decision on an evaluation of the pledged personal property. The amount the Company is willing to finance is
typically based on a percentage of the pledged personal property’s estimated disposition value. The
Company uses numerous sources in determining an item’s estimated disposition value, including the
Company’s automated product valuation system as well as catalogs, “blue books,” newspapers, internet
research and previous experience with similar items. The Company performs a physical count of its
merchandise in each location on a cyclical basis and reviews the composition of inventory by category and
age in order to assess the adequacy of the allowance, which was $2.0 million, representing 2.0% of the
balance of merchandise held for disposition at December 31, 2007. Adverse changes in the disposition
value of the Company’s merchandise may require an increase in the valuation allowance.
Allowance for losses on cash advances. The Company maintains an allowance for losses on Company-
owned cash advances (including fees and interest) and accrues losses for third-party lender-owned cash
advances at a level estimated to be adequate to absorb credit losses in the outstanding combined cash
advance portfolio. The cash advance product typically serves a customer base with high risk credit
performance histories. These advances are typically single payment cash advances with a typical term of
seven to 45 days. Cash advances written during each calendar month are aggregated and tracked to develop
a performance history. The Company stratifies the outstanding portfolio by age, delinquency and stage of
collection when assessing the adequacy of the allowance for losses. The Company uses current portfolio
performance, as well as the performance of cash advances made during the same calendar period twelve
months earlier to develop expected loss rates used in determining the allowance. Increased defaults and