Cash America 2007 Annual Report Download - page 83

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
63
Check Cashing Fees, Royalties and Other ƔThe Company records check cashing fees derived from both
check cashing locations it owns and many of its lending locations in the period in which the check cashing
service is provided. It records royalties derived from franchise locations on an accrual basis. Revenues
derived from other financial services such as money order commissions, prepaid debit card fees, etc. are
recognized when earned.
Allowance for Losses on Cash Advances x In order to manage the portfolio of cash advances effectively,
the Company utilizes a variety of underwriting criteria, monitors the performance of the portfolio, and
maintains either an allowance or accrual for losses.
The Company maintains either an allowance or accrual for losses on cash advances (including fees
and interest) at a level estimated to be adequate to absorb credit losses inherent in the outstanding combined
Company and third-party lender portfolio (the portion owned by independent third-party lenders). The
allowance for losses on Company-owned cash advances offsets the outstanding cash advance amounts in the
consolidated balance sheets. Active third-party lender-originated cash advances are not included in the
consolidated balance sheets. An accrual for contingent losses on third-party lender-owned cash advances
that are guaranteed by the Company is maintained and included in “Accounts payable and accrued
expenses” in the consolidated balance sheets.
The Company aggregates and tracks cash advances written during each calendar month to develop a
performance history. The Company stratifies the outstanding combined portfolio by age, delinquency, and
stage of collection when assessing the adequacy of the allowance for losses. It uses historical collection
performance adjusted for recent portfolio performance trends to develop the expected loss rates used to
establish either the allowance or accrual. Increases in either the allowance or accrual are created by
recording a cash advance loss provision in the consolidated statements of income. The Company charges
off all cash advances once they have been in default for 60 days or sooner if deemed uncollectible.
Recoveries on losses previously charged to the allowance are credited to the allowance when collected.
The Company’s online distribution channel periodically sells selected cash advances that have been
previously written off. Proceeds from these sales are recorded as recoveries on losses previously charged to
the allowance for losses.
The allowance deducted from the carrying value of cash advances was $25.7 million and $19.5
million at December 31, 2007 and 2006, respectively. The accrual for losses on third-party lender-owned
cash advances was $1.8 million and $1.2 million at December 31, 2007 and 2006, respectively. See Note 4.
Merchandise Held for Disposition and Cost of Disposed Merchandise x Merchandise held for disposition
includes merchandise acquired from unredeemed loans, merchandise purchased directly from the public and
merchandise purchased from vendors. Merchandise held for disposition is stated at the lower of cost
(specific identification) or market. The cost of merchandise, computed on the specific identification basis,
is removed from merchandise held for disposition and recorded as a cost of revenue at the time of sale.
Cash received upon the sale of forfeited merchandise is classified as a recovery of principal on unredeemed
loans under investing activities and any related profit or loss on disposed merchandise is included in
operating activities in the period when the merchandise is sold. The Company provides an allowance for
valuation and shrinkage based on management’s evaluation of the characteristics of the merchandise. The
allowance deducted from the carrying value of merchandise held for disposition amounted to $2.0 million
and $1.9 million at December 31, 2007 and 2006, respectively.