Cash America 2013 Annual Report Download - page 140

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
115
In determining the allowance or liability for estimated losses on consumer loans, the Company applies a
documented systematic methodology. In calculating the allowance or liability for loan losses, outstanding loans are
divided into discrete groups of short-term loans, line of credit accounts and installment loans and are analyzed as
current or delinquent. Increases in either the allowance or the liability, net of charge-offs and recoveries, are recorded
as a “Consumer loan loss provision” in the consolidated statements of income.
The allowance or liability for short-term loans classified as current is based on historical loss rates adjusted for
recent default trends for current loans. For delinquent short-term loans, the allowance or liability is based on a six-
month rolling average of loss rates by stage of collection. For line of credit accounts and installment loan portfolios,
the Company generally uses a migration analysis to estimate losses inherent in the portfolio. The allowance or liability
calculation under the migration analysis is based on historical charge-off experience and the loss emergence period,
which represents the average amount of time between the first occurrence of a loss event to the charge-off of a loan.
The factors the Company considers to assess the adequacy of the allowance or liability include past due performance,
historical behavior of monthly vintages, underwriting changes and recent trends in delinquency in the migration
analysis.
The Company fully reserves and generally charges off consumer loans once the loan or a portion of the loan
has been classified as delinquent for 60 consecutive days. If a loan is deemed uncollectible before it is fully reserved, it
is charged off at that point. Consumer loans classified as delinquent generally have an age of one to 59 days from the
date any portion of the loan became delinquent, as defined above. Recoveries on loans previously charged to the
allowance are credited to the allowance when collected.
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Merchandise Held for Disposition, Proceeds from Disposition of Merchandise and Cost of Disposed Merchandise
Proceeds From and Cost of Disposed Merchandise
Upon the sale of merchandise, the Company realizes gross profit, which is the difference between the
Company’s cost basis in the loan or the amount paid for purchased merchandise, both of which are recorded as 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.
Merchandise Held for Disposition
Merchandise held for disposition consists primarily of forfeited collateral from pawn loans not repaid and
merchandise that is purchased directly from customers or from third parties. The carrying value of the forfeited
collateral and other merchandise held for disposition is stated at the lower of cost (which is the cost basis in the loan or
the amount paid for purchased merchandise) or fair value. With respect to the Company’s foreign pawn operations,
collateral underlying forfeited pawn loans is not owned by the Company; however, the Company assumes the risk of
loss on such collateral and is solely responsible for its care and disposition. Accordingly, the Company classifies these
domestic and foreign assets as “Merchandise held for disposition, net” in the consolidated balance sheets. The
Company provides an allowance for returns and an allowance for valuation based on management’s evaluation of the
characteristics of the merchandise and historical shrinkage rates. Because the Company's pawn loans are made without
recourse to the borrower, the Company does not investigate or rely upon the borrower’s creditworthiness with outside
third parties, but instead bases its lending decision on an evaluation of the pledged personal property and the
borrower’s transaction history with the Company. The amount financed is typically based on a percentage of the
pledged personal property’s estimated disposition value. The Company uses numerous sources in determining an
item’s estimated disposition value, including the Company’s proprietary automated product valuation system as well
as catalogs, “blue books,” newspapers, internet research and previous disposition experience. The Company performs
physical counts of its merchandise in each location during the year and reviews the composition of inventory by
category and age in order to assess the adequacy of the allowance.