Cash America 2007 Annual Report Download - page 45

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25
credit losses, which could occur during a national or regional economic downturn or for other reasons, could
require an increase in the allowance. Since cash advances are unsecured, unlike pawn loans, the portfolio’s
performance depends on the Company’s ability to collect on defaulted loans. The Company believes it
effectively manages the risks inherent in this product by utilizing a variety of underwriting criteria to
evaluate prospective borrowers, maintaining a customer database to track individual borrowers’
performance and by closely monitoring the performance of the portfolio. Any remaining unpaid balance of
a cash advance is charged off once it has been in default for 60 days or sooner if deemed uncollectible. At
December 31, 2007, allowance for losses on cash advances was $25.7 million and accrued losses on third-
party lender-owned cash advances were $1.8 million, in aggregate representing 18.5% of the combined cash
advance portfolio.
During fiscal year 2007, the cash advance loss provision for the combined cash advance portfolio,
which increases the allowance for loan losses, was $155.2 million and reflects 7.7% of gross combined cash
advances written by the Company and third-party lenders. If future loss rates increased, or decreased, by
10% (0.77%) from 2007 levels, the cash advance loss provision would increase, or decrease, by $15.5
million and net income would decrease, or increase, by $10.1 million, assuming the same volume of cash
advances written in 2007.
Valuation of long-lived and intangible assets. The Company assesses the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Intangible assets having an indefinite useful life are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the assets might be impaired. Factors that could trigger an
impairment review include significant underperformance relative to expected historical or projected future
cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall
business, and significant negative industry trends. When management determines that the carrying value of
long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the
assets’ carrying value over the estimated fair value.
Income taxes. As part of the process of preparing its consolidated financial statements, the Company is
required to estimate income taxes in each of the jurisdictions in which it operates. This process involves
estimating the actual current tax exposure together with assessing temporary differences in recognition of
income for tax and accounting purposes. These differences result in deferred tax assets and liabilities and are
included within the Company’s consolidated balance sheets. Management must then assess the likelihood
that the deferred tax assets will be recovered from future taxable income and, to the extent it believes that
recovery is not likely, it must establish a valuation allowance. An expense, or benefit, is included within the
tax provision in the statement of operations for any increase, or decrease, in the valuation allowance for a
given period.
Effective January 1, 2007, the Company began accounting for uncertainty in income taxes
recognized in the financial statements in accordance with Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 requires that a
more-likely-than-not threshold be met before the benefit of a tax position may be recognized in the financial
statements and prescribes how such benefit should be measured. Management must evaluate tax positions
taken on the Company’s tax returns for all periods that are open to examination by taxing authorities and
make a judgment as to whether and to what extent such positions are more likely than not to be sustained
based on merit.
Management judgment is required in determining the provision for income taxes, the deferred tax
assets and liabilities and any valuation allowance recorded against deferred tax assets. Management
judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for
recognition under FIN 48.