Cash America 2011 Annual Report Download - page 76

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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 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.
As of June 30, 2011, the annual assessment date, the Company’s reporting units had combined fair values that
exceeded carrying value by 105.1%. The retail services segment and the e-commerce segment had fair values that
exceeded carrying value by 69.8% and 637.3%, 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 $232.2 million, and the combined fair value would exceed
carrying value by 78.0%. There were no events or circumstances between June 30, 2011 and December 31, 2011 that
would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Company also evaluated its indefinite-lived intangible assets for impairment as of June 30, 2011 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 asset and Other Intangible Assets. The Company amortizes intangible assets subject to
amortization 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 intangible assets subject to amortization is performed whenever the facts and circumstances indicate that
the carrying value may be impaired. An impairment loss is recognized if the future undiscounted cash flows associated
with the asset and the estimated fair value of the asset are less than the asset’s corresponding carrying value. The
amount of the impairment loss, if any, is the excess of the asset’s carrying value over its estimated fair value.