Cash America 2010 Annual Report Download - page 64

35
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, the Company tests goodwill and intangible assets with an
indefinite life 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.
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 was 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 margins and terminal growth
rates 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.
During the second quarter of 2010, the Company realigned its operating segments into two reportable
segments, as further described in the “General” section above. As defined in ASC 280, Segment Reporting, the
Company has two reporting units: retail services and e-commerce. These reporting units have discrete financial
information which is regularly reviewed by executive management and represent the manner in which the Company’s
operations are managed. See “Item 8. Notes to Consolidated Financial Statements— Note 2” for further discussion.
The Company completed its annual review of goodwill impairment both before and after the realignment of its
reportable segments. As of June 30, 2010, the annual assessment date, the Company’s reporting units had combined
fair values that exceeded carrying value by 44.8%. The retail services segment and the e-commerce segment had fair
values that exceeded carrying value by 28.1% and 627.9%, respectively. 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 enterprise value for the Company’s reporting units by $161.3 million, which exceeds
carrying value by 24.5%.
The Company also evaluated its indefinite lived intangible assets for impairment both before and after the
realignment of its reportable segments and noted no impairment.
The termination of the iAdvance program by MetaBank, which is discussed in the “Revenue Recognition”
section above, was considered a triggering event for purposes of goodwill impairment testing. In accordance with
ASC 350-20-35-30, Intangibles─Goodwill and Other, the Company tested goodwill at the e-commerce reporting unit
for impairment following this announcement and noted no impairment.
The process of evaluating goodwill and other indefinite lived intangible assets for impairment involves the
determination of the fair value of the Company’s reporting units. Inherent in such fair value determination are certain
judgments and estimates relating to future cash flows, including the Company’s interpretation of current economic
indicators and market valuations, and assumptions about the Company’s strategic plans with regard to the Company’s
operations. To the extent additional information arises, market conditions change or the Company’s strategies change,
it is possible that the Company’s conclusions regarding whether existing goodwill is impaired could change and result
in a material effect on the Company’s consolidated financial position or results of operations.
Long-lived assets and other intangibles. The Company amortizes intangible assets with an estimable life on the basis
of their expected periods of benefit, generally three to ten years. The costs of start-up activities and organization costs
are charged to expense as incurred. An evaluation of the recoverability of property and equipment and amortized
intangible assets is performed whenever the facts and circumstances indicate that the carrying value may be impaired.