Cash America 2008 Annual Report Download - page 51

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the
Company’s consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities, at the dates of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting periods. On an on-going basis,
management evaluates its estimates and judgments, including those related to revenue recognition,
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 2008, $180.8 million, or 97.7%, of recorded finance and service charges represented cash collected from
customers and the remaining $4.2 million, or 2.3%, 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 $33.1 million of finance and service charges receivable.
Assuming the year-end accrual of finance and service charges revenue was overestimated or underestimated
by 10%, finance and service charges revenue would decrease or increase by $3.3 million in 2009 and net
income would decrease or increase by $2.1 million. Some or all of the decrease would potentially be
mitigated through the profit on the disposition of the related forfeited loan collateral. Any increase would
be realized as additional service charge revenue.
Merchandise held for disposition. Merchandise held for disposition consists primarily of forfeited
collateral from pawn loans not repaid; however, the Company also liquidates merchandise that is purchased
directly from customers. The carrying value of the forfeited collateral and other merchandise held for
disposition is stated at the lower of cost (the cash amount loaned in the case of forfeited collateral) 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 multiple occasions on a cyclical basis and reviews the composition of inventory by category and age in
order to assess the adequacy of the allowance.