Cash America 2011 Annual Report Download - page 119

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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its outstanding pawn loan portfolio and assess the collectability of the principal balance in addition to pawn loan fees
and service charges.
With respect to the Company’s domestic pawn operations, for pawn loans that are not redeemed, the carrying
value of the underlying collateral is stated at the lower of cost or market. Collateral underlying unredeemed pawn
loans is reflected in “Merchandise held for disposition” in the Company’s consolidated balance sheets. Upon sale of
the merchandise, the Company realizes gross profit, which is the difference between the amount loaned, which is cost
of sales, and the amount of proceeds from the sale. The cost of disposed merchandise is computed on the specific
identification basis. Interim customer payments for layaway sales are recorded as customer deposits and subsequently
recognized as revenue during the period in which the final payment is received.
With respect to the Company’s foreign pawn operations, pledged collateral for nonperforming pawn loans is
not owned by the Company and is held in “Prepaid expenses and other assets” until sold. Revenue that is recognized
at the time the collateral is sold is reflected in “Pawn loan fees and service charges” in the Company’s consolidated
statements of income. If the proceeds exceed the outstanding loan balance, the Company recognizes as revenue
accrued pawn loan fees and service charges, which includes other fees and expenses incurred in relation to the non-
payment and sale of the loan collateral on behalf of the customer at the time of the sale. If the proceeds from the
disposition of the collateral are less than the outstanding loan balance, a loss is recorded for the difference at the time
the collateral is sold, which reduces the amount of pawn loan fees and service charges revenue from performing loans
in the current period. In the event the amount of proceeds exceeds the accrued service charges and all fees and
expenses, the excess amount is recognized as revenue. If, within six months of the sale of the merchandise, the
customer makes a claim to receive the excess proceeds, the Company refunds that amount to the customer and reduces
revenue by the same amount.
Consumer Loans
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Upon completion of a transaction with a customer, funds are provided to the customer in
exchange for an obligation to repay the amount advanced plus fees and any applicable interest, which takes the form of
a consumer loan, and can be a loan written by the Company or by a third party. The Company recognizes interest on
consumer loans it writes and participation interests purchased from third parties on an effective yield basis ratably over
the term of the loan. Unpaid and accrued interest and fees are added to the consumer loan balance. Fees generated
through the Company’s CSO programs are deferred and amortized over the term of the consumer loan arranged by the
Company and recorded as revenue. The Company classifies its consumer loan portfolio as either performing or
nonperforming as described in Note 5. Consumer loan fees and interest do not accrue on nonperforming loans, and
once a loan is considered nonperforming, the Company does not resume the accrual of interest on these loans. For
nonperforming loans, all payments received are first applied against accrued but unpaid interest and fees and then
against the principal balance of the loan.
Allowance for Losses on Consumer Loans
See Note 5 for a discussion of the Company’s allowance for losses on consumer loans.
Merchandise Held for Disposition and Cost of Disposed Merchandise
Merchandise held for disposition includes merchandise acquired from unredeemed loans, merchandise
purchased from third parties or directly from customers. Merchandise held for disposition is stated at the lower of cost
(cash amount loaned) or market. Cash received upon the sale of forfeited merchandise is classified as a recovery of
principal on unredeemed loans under investing activities and any related profit or loss on disposed merchandise is
included in operating activities in the period when the merchandise is sold. The Company provides an allowance for
returns and valuation based on management’s evaluation of the characteristics of the merchandise and historical
shrinkage rates. The allowance deducted from the carrying value of merchandise held for disposition amounted to
$0.7 million at December 31, 2011 and 2010. The Company offers customers a 30-day satisfaction guarantee,
whereby the customer can return merchandise and receive a full refund, a replacement item of comparable value or