Cash America 2009 Annual Report Download - page 64

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of cost (cash amount loaned) or market. Management provides an allowance for returns and valuation based
on its evaluation of the merchandise and historical shrinkage rates. 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 disposing of 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.
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 in
which the Company does not have a participation interest 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 typically 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 internet 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, 2009, the allowance for losses on cash advances was $27.4 million and accrued
losses on third-party lender-owned cash advances were $2.9 million, in aggregate representing 16.2% of the
combined cash advance portfolio.
During fiscal year 2009, the cash advance loss provision for the combined cash advance portfolio,
which increases the allowance for loan losses, was $130.8 million and reflects 5.6% of gross combined cash
advances written by the Company and third-party lenders. If future loss rates increased, or decreased, by 10%,
or 0.6% from 2009 levels, the cash advance loss provision would increase, or decrease, by $13.1 million and
net income attributable to the Company would decrease, or increase, by $8.3 million, net of taxes, for 2009,
assuming the same volume of cash advances written in 2009.
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