Cash America 2010 Annual Report Download - page 63

34
Allowance for losses on consumer loans. The Company maintains either an allowance or accrual for losses on
consumer loans (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 consumer loans offsets the outstanding consumer loan amounts
in the consolidated balance sheets. Active third-party lender-originated consumer loans 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 consumer loans 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 consumer loans written during each calendar month to develop a
performance history. The Company stratifies the outstanding combined consumer loan portfolio by age, delinquency
and stage of collection when assessing the adequacy of the allowance or accrual 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 recorded as a consumer loan loss provision
expense in the consolidated statements of income. Generally, the Company charges off all consumer loans once they
have been in default for 60 consecutive 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 lending channel periodically sells selected consumer loans 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, 2010, the allowance for losses on consumer loans was $38.9 million and accrued losses on
third-party lender-owned consumer loans were $2.8 million, in aggregate representing 18.4% of the combined
consumer loan portfolio.
For the year ended December 31, 2010, the consumer loan loss provision for the combined consumer loan
portfolio was $182.4 million and reflects 6.3% of gross combined consumer loans written by the Company and third-
party lenders. If future loss rates increased, or decreased, by 10%, or 0.6% from 2010 levels, the consumer loan loss
provision would increase, or decrease, by $18.2 million and net income attributable to the Company would decrease,
or increase, by $11.4 million, net of taxes, for 2010, assuming the same volume of consumer loans written in 2010.
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 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 and other indefinite lived intangible assets. Goodwill represents the excess of the purchase price over the