Cash America 2008 Annual Report Download - page 52

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29
During 2008, the Company modified its methodology for assessing the reasonableness of this
allowance by taking a more comprehensive view of factors impacting the valuation of merchandise held for
disposition. Beginning in 2008, a greater emphasis was placed on shrinkage rates as a measure of adequacy
of the allowance, while maintaining the other measures of merchandise quality used in prior periods.
Management believes that this approach more accurately reflects the near-term vulnerability of merchandise
valuation impairment based on historical perspectives. As a result, the allowance was reduced from $2.0
million as of December 31, 2007 to $0.7 million as of December 31, 2008, representing 0.6% of the balance
of merchandise held for disposition at December 31, 2008. As described above, the Company conducts
multiple physical count assessments of merchandise in all of its locations and immediately records the
results of those activities directly to the income statement. For the trailing six months ended December 31,
2008, the merchandise shortages charged to income was $0.4 million, approximately 0.2% of merchandise
sales for the same period.
Allowance for losses on cash advances. 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.
At December 31, 2008, the allowance for losses on cash advances was $21.5 million and accrued
losses on third-party lender-owned cash advances were $2.1 million, in aggregate representing 16.8% of the
combined cash advance portfolio.
During fiscal year 2008, the cash advance loss provision for the combined cash advance portfolio,
which increases the allowance for loan losses, was $140.7 million and reflects 6.8% of gross combined cash
advances written by the Company and third-party lenders. If future loss rates increased, or decreased, by
10%, or 0.7%, from 2008 levels, the cash advance loss provision would increase, or decrease, by $14.1
million and net income would decrease, or increase, by $9.2 million, for the twelve month period assuming
the same volume of cash advances written in 2008.
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