Cash America 2009 Annual Report Download - page 65

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period.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial
statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 740-10-25, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10-25”). ASC
740-10-25 requires that a more-likely-than-not threshold be met before the benefit of a tax position may be
recognized in the consolidated 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’s 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’s
judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for
recognition under ASC 740-10-25.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired in each business combination. In accordance with ASC 350-20-35,
Goodwill – Subsequent Measurement (“ASC 350-20-35”), the Company tests goodwill for potential
impairment annually as of June 30 and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying amount. As defined in
ASC 350-20, the Company has three reporting units: pawn lending operations, cash advance operations and
check cashing operations. These reporting units offer products with similar economic characteristics and have
discrete financial information which is regularly reviewed by executive management. See “Item 8. Financial
Statements and Supplementary Data—Note 2” for further discussion.
The Company’s impairment evaluation of goodwill is based on comparing the fair value of the
Company’s reporting units to their carrying value. The fair value of the reporting units is determined based
on the income approach and then compared to the results of the market approach for reasonableness. The
income approach establishes fair value based on estimated future cash flows of each reporting unit,
discounted by an estimated weighted-average cost of capital developed using the capital asset pricing model,
which reflects the overall level of inherent risk of a reporting unit. The income approach uses the Company’s
projections of financial performance for a five-year period and includes assumptions about future revenue
growth rates, operating margin and terminal values which vary among reporting units. The market approach
establishes fair value by applying cash flow multiples to the reporting unit’s operating performance. The
multiples are derived from other publicly traded companies that are similar but not identical from an
operational and economic standpoint.
The Company performed its 2009 annual impairment test of goodwill as of June 30, 2009. The
results of the annual impairment test indicated that the Company’s reporting units had fair values that
exceeded carrying value by 79%. Based on the results of this test, no impairment of goodwill was observed.
The Company also performed a sensitivity analysis on the Company’s estimated fair value using the income
approach. A key assumption in the Company’s fair value estimate is the weighted average cost of capital
utilized for discounting the Company’s cash flow estimates in the Company’s income approach. Holding all
other assumptions constant at the annual assessment date, a 100 basis point increase in the discount rates
would reduce the fair value of the Company’s reporting units by $71.0 million, which exceeds carrying value
by 69%.
The Company considered the need to update its most recent annual impairment test as of December
31, 2009 and concluded that there were no impairment indicators that would require such an update. The
Company believes the assumptions used during the June 30, 2009 annual assessment remain appropriate.
The process of evaluating goodwill for impairment involves the determination of the fair value of the