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Summary of Significant Accounting Policies
 12 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Summary of Significant Accounting Policies
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Formed in 1989, we have grown into a leading provider of pawn loans in the United States and Latin America. Pawn loans are non-recourse loans collateralized by tangible property. We also sell merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers, and operate a small number of financial services stores in Canada. We are dedicated to satisfying the short-term cash needs of consumers who are cash or credit constrained, focusing on delivering an industry-leading customer experience.
As of September 30, 2019, we operated a total of 1,014 locations, consisting of:
•
512 United States pawn stores (operating primarily as EZPAWN or Value Pawn & Jewelry);
•
357 Mexico pawn stores (operating primarily as Empeño Fácil);
•
123 pawn stores in Guatemala, El Salvador, Honduras and Peru (operating as GuatePrenda and MaxiEfectivo); and
•
22 financial services stores in Canada (operating as CASHMAX).
We also own 34.75% of Cash Converters International Limited (“Cash Converters International”), a publicly traded company (ASX:CCV) headquartered in Perth, Western Australia. Cash Converters International and its controlled companies comprise a diverse group generating revenues from franchising, store operations, personal finance and vehicle finance, with operations in Australia and the United Kingdom, a 25% equity interest in Cash Converters New Zealand and a franchise presence in 15 other countries around the world.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of EZCORP, Inc. and its consolidated subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Management has the responsibility to evaluate whether there is substantial doubt about our ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued) or to provide related footnote disclosures. We do not believe there is substantial doubt about our ability to continue as a going concern.
To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity; otherwise, the entity is evaluated under the voting interest model. Where we hold current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in that VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally.
In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.
In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to a VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design including the entity’s capital structure, contractual rights to earnings or losses, subordination of our interests relative to those of other investors, as well as any other contractual arrangements that might exist that could have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.
Corrections and Reclassifications to Prior Period Financial Statements
In the second quarter of fiscal 2019, we identified errors in our previously reported financial statements during the ordinary course of account reviews and subsequent investigation of related accounts. None of the identified errors was material to any previously reported period. These have now been corrected in all periods presented. The errors related to the overstatement of historical balances of pawn service charges receivable resulting from errors in the configuration of information technology reports, as well as other minor items identified in our reconciliation process. These errors resulted in an overstatement of October 1, 2016 beginning retained earnings of $3.4 million. The impact of these corrections on the consolidated financial statements, exclusive of quarterly impacts presented in previous fiscal 2019 filings, is as provided below (in thousands except per share amounts).
Consolidated Balance Sheets
 
December 31, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Pawn service charges receivable, net
$
38,959

 
$
(7,401
)
 
$
31,558

Prepaid expenses and other current assets
31,223

 
260

 
31,483

Goodwill
294,881

 
1,757

 
296,638

Deferred tax asset, net
(334
)
 
821

 
487

Accounts payable, accrued expenses and other current liabilities
57,628

 
(248
)
 
57,380

Retained earnings
387,936

 
(4,680
)
 
383,256

Accumulated other comprehensive loss
(49,104
)
 
365

 
(48,739
)
 
December 31, 2017
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Cash and cash equivalents
$
113,584

 
$
(627
)
 
$
112,957

Pawn service charges receivable, net
34,054

 
(5,950
)
 
28,104

Prepaid expenses and other current assets
26,156

 
238

 
26,394

Goodwill
288,773

 
1,442

 
290,215

Deferred tax asset, net
10,997

 
1,245

 
12,242

Accounts payable, accrued expenses and other current liabilities
60,207

 
(73
)
 
60,134

Retained earnings
364,414

 
(3,890
)
 
360,524

Accumulated other comprehensive loss
(44,902
)
 
311

 
(44,591
)
Consolidated Statements of Operations
 
Fiscal Year Ended September 30, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Pawn service charges
$
305,936

 
$
(1,359
)
 
$
304,577

Operations expense
334,649

 
192

 
334,841

Administrative expense
53,653

 
(14
)
 
53,639

Income from continuing operations before income taxes
57,076

 
(1,537
)
 
55,539

Income tax expense
18,149

 
240

 
18,389

Income from continuing operations, net of tax
38,927

 
(1,777
)
 
37,150

Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.73

 
$
(0.03
)
 
$
0.70

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.69

 
$
(0.03
)
 
$
0.66

 
Fiscal Year Ended September 30, 2017
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Pawn service charges
$
273,080

 
$
(3
)
 
$
273,077

Operations expense
304,636

 
320

 
304,956

Administrative expense
53,254

 
238

 
53,492

Income from continuing operations before income taxes
43,239

 
(561
)
 
42,678

Income tax expense
11,206

 
(113
)
 
11,093

Income from continuing operations, net of tax
32,033

 
(448
)
 
31,585

Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.62

 
$
(0.01
)
 
$
0.61

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.62

 
$
(0.01
)
 
$
0.61

 
Three Months Ended December 31, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Pawn service charges
$
83,674

 
$
(155
)
 
$
83,519

Operations expense
89,546

 
(783
)
 
88,763

Administrative expense
15,479

 
(224
)
 
15,255

Loss from continuing operations before income taxes
(5,570
)
 
852

 
(4,718
)
Income tax benefit
(1,032
)
 
(26
)
 
(1,058
)
Loss from continuing operations, net of tax
(4,538
)
 
878

 
(3,660
)
Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
(0.07
)
 
$
0.01

 
$
(0.06
)
Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
(0.07
)
 
$
0.01

 
$
(0.06
)
 
Three Months Ended December 31, 2017
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Pawn service charges
$
76,360

 
$
(338
)
 
$
76,022

Operations expense
83,610

 
(18
)
 
83,592

Administrative expense
13,318

 
(237
)
 
13,081

Income from continuing operations before income taxes
19,792

 
(83
)
 
19,709

Income tax expense
7,437

 
(26
)
 
7,411

Income from continuing operations, net of tax
12,355

 
(109
)
 
12,246

Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.24

 
$
—

 
$
0.24

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.23

 
$
—

 
$
0.23

Consolidated Statements of Cash Flows
 
Fiscal Year Ended September 30, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Net income
$
38,071

 
$
(1,777
)
 
$
36,294

Deferred income taxes
7,978

 
(62
)
 
7,916

Service charges and fees receivable
(3,153
)
 
1,365

 
(1,788
)
Accounts payable, accrued expenses and other liabilities
(3,902
)
 
631

 
(3,271
)
Income taxes, net of excess tax benefit from stock compensation
(3,622
)
 
(163
)
 
(3,785
)
Net cash provided by operating activities*
88,987

 
(6
)
 
88,981

Effect of exchange rate changes on cash and cash equivalents and restricted cash
(484
)
 
(170
)
 
(654
)
 
Fiscal Year Ended September 30, 2017
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Net income
$
30,208

 
$
(448
)
 
$
29,760

Deferred income taxes
6,046

 
50

 
6,096

Service charges and fees receivable
(224
)
 
(61
)
 
(285
)
Accounts payable, accrued expenses and other liabilities
(31,041
)
 
147

 
(30,894
)
Income taxes, net of excess tax benefit from stock compensation
3,027

 
83

 
3,110

Net cash provided by operating activities*
50,895

 
(229
)
 
50,666

 
Three Months Ended December 31, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Net loss
$
(4,721
)
 
$
878

 
$
(3,843
)
Service charges and fees receivable
(877
)
 
151

 
(726
)
Accounts payable, accrued expenses and other liabilities
(461
)
 
(375
)
 
(836
)
Income taxes, net of excess tax benefit from stock compensation
(3,412
)
 
(33
)
 
(3,445
)
Net cash provided by operating activities*
22,760

 
621

 
23,381

Effect of exchange rate changes on cash and cash equivalents and restricted cash
(865
)
 
83

 
(782
)
 
Three Months Ended December 31, 2017
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Net income
$
12,133

 
$
(109
)
 
$
12,024

Service charges and fees receivable
(50
)
 
357

 
307

Accounts payable, accrued expenses and other liabilities
(5,283
)
 
(132
)
 
(5,415
)
Net cash provided by operating activities*
19,252

 
116

 
19,368

Effect of exchange rate changes on cash and cash equivalents and restricted cash
(1,165
)
 
(218
)
 
(1,383
)
*
As previously reported amount includes the impact of adoption of accounting policies described below.
Pawn Loans and Revenue Recognition
The carrying value of our pawn loans is based on the initial amounts lent to customers and are fully collateralized. We record pawn service charges using the effective interest method over the life of the loan for all pawn loans we believe to be collectible. We base our estimate of collectible loans on several inputs, including recent redemption rates, historical trends in redemption rates and the amount of loans due in the following months. Unexpected variations in any of these factors could change our estimate of collectible loans, affecting our earnings and financial condition. If a pawn loan is not repaid, we value the forfeited collateral (inventory) at the lower of cost (pawn loan principal) or net realizable value of the item. Of our consolidated pawn loans outstanding as of September 30, 2019, $92.8 million is attributable to Texas and Florida stores.
Merchandise Sales Revenue Recognition
Our performance obligations for merchandise sales primarily relate to point in time retail sales in our stores. We recognize the satisfaction of the performance obligation and record merchandise sales revenue and the related cost when merchandise inventory is sold and delivered to the customer or, in the case of a layaway sale, when we receive the final payment. Customers have a limited period of time to return merchandise for a refund or exchange, and actual returns for refunds are insignificant. Sales tax collected on the sale of inventory is excluded from the amount recognized as sales and instead recorded as a liability in “Accounts payable, accrued expenses and other current liabilities” in our consolidated balance sheets until remitted to the appropriate governmental authorities.
We recognize the satisfaction of the performance obligation and record scrapping (precious metals and stones) sales revenue and the related cost when scrap inventory is legally transferred to the refiner and the refiner obtains control of the inventory. The receivables outstanding at the end of a given reporting period are not material. Payment of the receivable from the customer is generally received within a short period of time after the legal transfer of the scrap materials to the refiner.
Our transaction prices are explicitly stated within the contracts with our customers.
Inventory and Cost of Goods Sold
If a pawn loan is not redeemed, we record the forfeited collateral at cost (the principal amount of the pawn loan) in "Inventory, net" in our consolidated balance sheets. We do not record loan loss allowances or charge-offs on the principal portion of pawn loans, as they are fully collateralized. We record our inventory using the specific identification method of accounting.
In order to state inventory at the lower of cost or net realizable value, we record an allowance for excess, obsolete or slow-moving inventory based on the type and age of merchandise. Our inventory consists primarily of general merchandise and jewelry. Our "Merchandise cost of goods sold" includes the historical cost of inventory sold, inventory shrinkage and any change in the allowance for inventory shrinkage and valuation. We include the cost of operating our central jewelry processing unit under “Jewelry scrapping cost of goods sold,” as it relates directly to sales of precious metals to refiners.
We consider our estimates of obsolete or slow-moving inventory and shrinkage critical estimates in determining the appropriate overall valuation allowance for inventory. We monitor our sales margins for each type of inventory on an ongoing basis and compare to historical margins. Significant variances in those margins may require a revision to future inventory reserve estimates. We monitor our reserve estimates pertaining to jewelry inventory depending on the current and projected prices of gold. Future declines in the value of gold prices may cause an increase in reserve rates pertaining to jewelry inventory.
With respect to our Mexico pawn operations, we do not own the forfeited collateral; however, we assume the risk of loss on such collateral and are solely responsible for its care and disposition and as such, record such collateral under “Inventory, net” in our consolidated balance sheets. The amount of inventory from our Mexico pawn operations classified as “Inventory, net” in our consolidated balance sheets was $26.9 million and $25.1 million as of September 30, 2019 and 2018, respectively.
Cash and Cash Equivalents and Cash Concentrations
Cash and cash equivalents consist primarily of cash on deposit or highly liquid investments with original contractual maturities of three months or less, or money market mutual funds. We hold cash at major financial institutions that often exceed FDIC insured limits. We manage our credit risk associated with cash and cash equivalents and cash concentrations by concentrating our cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions issuing investments or holding such deposits. Historically, we have not experienced any losses due to such cash concentrations.
Notes Receivable
As discussed under “Notes Receivable from Grupo Finmart Divestiture” in Note 5, in September 2017 we restructured the repayment arrangements for certain promissory notes that we had received from Grupo Finmart in connection with the divestiture of Grupo Finmart in September 2016. We accounted for the restructuring as new notes receivable for which the modification was more than minor, recognizing $3.0 million of discount remaining on the original notes receivable as a gain, which we included in our income statement as a component of “Interest income” in fiscal 2017. As part of the restructuring of the notes receivable, we negotiated a deferred compensation amount of up to $14.0 million which we are accounting for as “Interest income” under the effective interest method, accreting to its ultimate estimated settlement amount at September 2020. We review the payment history, creditworthiness, projected cash flows and related assumptions of Grupo Finmart and Alpha Holding, S.A. de C.V. (“AlphaCredit”) (the guarantor of such notes receivable) in determining whether our notes receivable and deferred compensation amounts are collectible. Prior to the restructuring, we amortized the discount on our notes receivable into “Interest income” under the effective interest method over the life of the notes receivable. We currently accrue interest under the terms of the repayment schedules. These items are included in “Corporate items” and “Latin America Pawn” within our segment disclosure in Note 15. As of September 30, 2019, we have included no impairment due to non-collectability on our notes receivable. In September 2019, Grupo Finmart repaid the remainder of the loan principal and the first approximate $6.0 million of the deferred compensation amount. At September 30, 2019, the only amounts remaining receivable are $8.0 million of the deferred compensation fee due in fiscal 2020 and interest on that amount. The precise amount will vary slightly due to movements in the exchange rate on the peso-denominated note.
Equity Method Investments
We account for our investment in Cash Converters International and RDC using the equity method. Since Cash Converters International’s fiscal year ends three months prior to ours, we report the income from this investment on a three-month lag. Thus, income reported for fiscal years ended September 30, 2019, 2018 and 2017 represents our percentage interest in the results of Cash Converters International’s operations for the twelve-month periods ended June 30, 2019, 2018 and 2017, respectively. Because Cash Converters International publicly files semi-annual financial reports with the Australian Securities & Investments Commission as of and for the periods ended June 30 and December 31, we make estimates for our equity in Cash Converters International’s net income (loss) for Cash Converters International three-month periods ended March 31 (our
reporting period ended June 30) and September 30 (our reporting period ended December 31). Those estimates may vary from actual results. We adjust our estimates as necessary in our reporting periods ended March 31 and September 30 to conform to Cash Converters International actual results as shown in their published semi-annual reports. We measure and record all other-than-temporary impairments as of the date of our reporting period.
We accounted for the negative basis in our investment in Cash Converters International generated as a result of impairments and other items as a reduction in our portion of Cash Converters International goodwill. To the extent Cash Converters International recognizes future impairments in its goodwill, we will not record our share of such impairments until the negative basis is restored.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets having indefinite lives are not subject to amortization. We test goodwill and intangible assets with indefinite useful lives for potential impairment annually as of September 30, or more frequently 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. We compare the fair value of our reporting units with their carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, without exceeding the total amount of goodwill allocated to that reporting unit.
We perform our impairment analyses utilizing the income approach. This approach uses future cash flows and estimated terminal values for each of our reporting units (discounted using a market participant perspective) to determine the fair value of each reporting unit, which is then compared to the carrying value of the reporting unit to determine if there is an impairment. We have determined that our reporting units are equivalent to our operating segments for fiscal 2019. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint. We use discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in our internally developed forecasts. Discount rates used in fiscal 2019 goodwill valuations ranged from 10% to 15% similar to rates used in fiscal 2018. In testing other intangible assets for potential impairment, we apply key assumptions that are consistent with those utilized in our goodwill impairment test.
In performing our goodwill impairment analysis as of September 30, 2019, we acknowledge the existence of a control premium relative to our market capitalization representing the incremental amount a buyer would pay to acquire a controlling stake. Our control premium was assessed on the evaluation of our average market capitalization during the fourth quarter of fiscal 2019 rather than only at the end of the period. If all equity interests in EZCORP were to be sold, we expect that a further premium would be paid for the Class B Voting Common Stock, none of which is publicly traded. We will continue to monitor our market capitalization in future periods relative to our underlying business performance to determine an appropriate control premium for purposes of our goodwill impairment analysis.
Changes in the economic conditions or regulatory environment could negatively affect our key assumptions. Future negative developments including a decline in loan portfolio performance, merchandise sales or demand for our products, a decline in precious metal commodity values, or inflation in costs relative to revenues in our Latin American operations in Guatemala, Honduras, El Salvador or Peru could lead to potential impairment of the $34.5 million in goodwill recorded in our “GPMX” reporting unit within our Latin America reporting segment. At September 30, 2019, the estimated fair value of GPMX exceeded its carrying value by 7%.
We may perform a qualitative assessment in making our determination of whether it is more likely than not goodwill and other intangible assets are impaired under appropriate accounting guidance on an annual basis in future reporting periods. In addition to the assumptions discussed above pertaining to the income approach, we consider the assessment of potential triggering events to be a critical estimate.
Property and Equipment
We record property and equipment at cost. We depreciate these assets on a straight-line basis using estimated useful lives of 30 years for buildings and two to seven years for furniture, equipment and software development costs. We depreciate leasehold improvements over the shorter of their estimated useful life (typically 10 years) or the reasonably assured lease term at the inception of the lease.
Valuation of Tangible Long-Lived Assets
We assess the impairment of tangible long-lived assets whenever events or changes in circumstances indicate that the net recorded amount may not be recoverable. The following factors could trigger an impairment review: significant
underperformance relative to historical or projected future cash flows, significant changes in the manner of use of the assets or the strategy for the overall business, or significant negative industry trends or legislative changes prohibiting us from offering our loan products. 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 carrying value.
In addition to the assumptions associated with the determination of projected future cash flows, we consider the assessment of potential triggering events to be a critical estimate.
Software Development Costs and Cloud Computing Arrangements
We capitalize certain costs incurred in connection with developing or obtaining software for internal use and amortize the costs on a straight-line basis over the estimated useful lives of each system, typically five years. Net capitalized development costs are included in “Capital expenditures, net” in our consolidated statements of cash flows.
We consider whether cloud computing arrangements include a software license. In evaluating whether our arrangements include a software license, we consider whether we have the contractual right to take possession of the software at any time during the hosting period without significant penalty and whether it is feasible for us to either run the software on our own hardware or contract with another party unrelated to the vendor to host the software. If a cloud computing arrangement includes a software license, then we account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, we account for the arrangement as a service contract.
Insurance Recoveries
We incur legal costs with respect to a variety of issues on an ongoing basis. To the extent that such costs are reimbursable under applicable insurance policies and we believe it is probable such costs will be reimbursed and such reimbursements can be reasonably estimated, we record a receivable from the insurance enterprise and a recovery of the costs in our statements of operations. When such recoveries are received, they are generally recorded under “Operating activities” in our consolidated statements of cash flows. All loss contingencies are recorded gross of the insured recoveries as applicable.
Business Combinations
We allocate the total acquisition price to the fair value of assets and liabilities acquired under the acquisition method with goodwill representing the excess of purchase price over the fair value of net assets acquired. We immediately expense transaction costs. We recognize any adjustments to provisional amounts and goodwill that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, with the effect on current period earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
Convertible Debt Securities
In accounting for our 2.375% Convertible Senior Notes Due 2025 (the “2025 Convertible Notes”) and the 2.875% Convertible Senior Notes Due 2024 (the “2024 Convertible Notes”) at issuance, we separated the securities into debt and equity components pursuant to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The carrying value of the liability components was calculated by measuring the fair value of similar liabilities that do not have an associated conversion feature, including discount rates of approximately 8%. The excess of the principal amount over the fair value of the liability component was recorded as a discount with a corresponding increase in additional paid-in capital. The debt discounts will be accreted to “Interest expense” over the respective terms of the 2025 Convertible Notes and the 2024 Convertible Notes using the effective interest method. The amount recorded to “Additional paid-in capital” will not be remeasured as long as they continue to meet the conditions for equity classification.
We account for the conversion premium of the 2025 Convertible Notes and the 2024 Convertible Notes under the treasury method in accordance with our accounting policy, which assumes settlement of the conversion premium (equal to the as-converted value over the face principal amount) in shares of our Class A Common Stock.
Foreign Currency
Empeño Fácil’s functional currency is the Mexican peso, and the functional currencies of our other operations included in our Latin America Pawn segment include the Guatemalan quetzal (Guatemala), United States dollar (El Salvador), Honduran lempira (Honduras) and Peruvian sol (Peru). The functional currency of our wholly owned foreign subsidiary in Canada is the Canadian dollar. Our foreign subsidiaries' balance sheet accounts are translated from their respective functional currencies into United States dollars at the exchange rate at the end of each quarter, and their earnings are translated into United States dollars
at the average exchange rate each quarter. We present resulting translation adjustments as a separate component of stockholders’ equity.
Our equity investment in Cash Converters International is translated from Australian dollars into United States dollars at the exchange rates as of Cash Converters International’s balance sheet date each reporting period. The related interest in Cash Converters International’s net income is translated at the average exchange rate for each six-month period reported by Cash Converters International.
Foreign currency transaction gains and losses not accounted for as translations as discussed above are included under “Other expense (income)” in our consolidated statements of operations. These gains were $0.3 million, $0.4 million and $0.5 million for fiscal 2019, 2018 and 2017, respectively.
Operations Expense
Included in “Operations” expense are costs related to operating our stores and any direct costs of support offices. These costs include labor, other direct expenses such as utilities, supplies and banking fees and indirect expenses such as store rent, building repairs and maintenance, advertising, store property taxes and insurance and regional and area management expenses.
Administrative Expense
Included in “Administrative” expense are costs related to our executive and administrative offices. This includes executive and administrative salaries, wages, stock and incentive compensation, professional fees, license fees, costs related to the operation of our administrative offices such as rent, property taxes, insurance, information technology and other corporate costs.
Advertising
Advertising costs are expensed as incurred and included primarily under “Operations” expense in our consolidated statements of operations. These costs were $2.0 million, $2.5 million and $1.9 million for fiscal 2019, 2018 and 2017, respectively.
Stock Compensation
We measure share-based compensation expense at the grant date based on the price of underlying shares at that date and recognize it as expense, net of estimated forfeitures, ratably over the vesting or service period, as applicable, of the stock award. Our policy is to recognize expense on performance-based awards, where satisfaction of the performance condition is probable, ratably over the awards’ vesting period and recognize expense on awards that only have service requirements on a straight-line basis.
Income Taxes
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law. Among other things, the Act reduced the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The corporate tax rate reduction was effective as of January 1, 2018 and, accordingly, reduced our federal statutory rate for fiscal 2018 to a blended rate of 24.5%, and further reduced our federal statutory rate to 21% in fiscal 2019. We recognized a $2.1 million charge for the revaluation of our deferred tax assets and liabilities to the reduced tax rate upon enactment of the Act in fiscal 2018. In addition, we recorded a charge of approximately $2.6 million to record a valuation allowance against foreign tax credit carryforwards which are not more likely than not to be utilized as a result of changes in tax law enacted as part of the Act in fiscal 2018. Both items are included as components of "Income tax expense" in our consolidated statements of operations.
In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows entities to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the Act. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As allowed, we early adopted ASU 2018-02 on a prospective basis as of January 1, 2018 and reclassified $1.5 million of accumulated foreign currency translation associated with our unconsolidated affiliate Cash Converters International, resulting from the stranded tax effects from the reduction of our effective tax rate, from accumulated other comprehensive loss to retained earnings. Our policy is to release income tax effects from accumulated other comprehensive income on a segregated unit of account basis.
Other
We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and their tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We have not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes of our undistributed earnings of foreign subsidiaries indefinitely invested outside the U.S.
We may be subject to income tax audits by the respective tax authorities in any or all of the jurisdictions in which we operate or have operated within a relevant period. Significant judgment is required in determining uncertain tax positions. We utilize the required two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments, and which may not accurately forecast actual outcomes. We adjust these reserves in light of changing facts and circumstances, such as the closing of an audit or the refinement of an estimate. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We believe adequate provisions for income taxes have been made for all periods. We recognize interest and penalties related to unrecognized tax benefits as “Income tax expense” in our consolidated statements of operations, which were $0.2 million in each of 2019, 2018 and 2017.
We consider our assessment of the recognition of deferred tax assets as well as estimates of uncertain tax positions to be critical estimates.
Earnings per Share and Common Stock
We compute basic earnings per share based on the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding, including conversion features embedded in our outstanding convertible debt, during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock awards as well as shares issuable on conversion of our outstanding convertible debt securities and exercise of outstanding warrants. Potential common shares are required to be excluded from the computation of diluted earnings per share if the assumed proceeds upon exercise or vest are greater than the cost to re-acquire the same number of shares at the average market price, and therefore the effect would be anti-dilutive. There were no participating securities outstanding during fiscal 2019, 2018 and 2017 requiring the application of the two-class method.
Our capital stock consists of two classes of common stock designated as Class A Non-Voting Common Stock (“Class A Common Stock”) and Class B Voting Common Stock (“Class B Common Stock”). The rights, preferences and privileges of the Class A and Class B Common Stock are similar except that each share of Class B Common Stock has one vote and each share of Class A Common Stock has no voting privileges, except as required by law. All Class A Common Stock is publicly held. Holders of Class B Common Stock may, individually or as a class, convert some or all of their shares into Class A Common Stock on a one-to-one basis. Class A Common Stock becomes voting common stock upon the conversion of all Class B Common Stock to Class A Common Stock. We are required to reserve the number of authorized but unissued shares of Class A Common Stock that would be issuable upon conversion of all outstanding shares of Class B Common Stock.
Use of Estimates and Assumptions
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory, collectability of notes receivable, loan loss allowances, long-lived and intangible assets, income taxes, potential impairments of investments, contingencies and litigation. We base our estimates on historical experience, observable trends and various other assumptions that we believe are reasonable under the circumstances. We use this information to make judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from the estimates under different assumptions or conditions.
Recently Adopted Accounting Policies
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In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification ("ASC") 350-40 to determine which implementation costs to defer and recognize as an asset. This ASU generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. Our hosting arrangements that are service contracts include various third-party software applications. We adopted this ASU during the first quarter of fiscal 2019 on a prospective basis for all service contracts entered into after adoption, with no material impact upon adoption.
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In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this ASU during the first quarter of fiscal 2019 with no impact on our financial position or results of operations. However, we have recast our statements of cash flows on a retrospective basis to include restricted cash when reconciling the beginning-of-period and end-of-period total amounts.
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In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on eight specific cash flow issues. We adopted this ASU during the first quarter of fiscal 2019 on a prospective basis with no impact on our financial position, results of operations or cash flows.
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In May 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10). The amendments in this ASU make targeted improvements to GAAP primarily as it pertains to equity investments (not including equity method of accounting), fair value disclosures, balance sheet presentation, and other items pertaining to financial instruments. We adopted this ASU during the first quarter of fiscal 2019 on a prospective basis, as applicable, with no impact on our financial position, results of operations or cash flows upon adoption.
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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) to defer the effective date to December 15, 2017 for annual reporting periods beginning after that date, with early adoption permitted, but not before the original effective date of December 15, 2016. The core principle of this ASU, and the subsequently issued ASUs modifying or clarifying this ASU, is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance.
We adopted this ASU and related guidance as of October 1, 2018 using the modified retrospective method. We evaluated the impact of ASC 606 on our consolidated financial position, results of operations, cash flows and disclosure requirements noting no material impact to our consolidated financial statements or disclosures. See Note 15 for disaggregated information about our sources of revenue and accounting policies above for enhanced disclosures. Additionally, we have concluded that ASC 606 does not impact our revenue recognition for pawn service charges or consumer loan fees as we believe neither of those revenue streams are within the scope of ASC 606.
Recently Issued Accounting Pronouncements
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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework. This ASU modifies the disclosure requirements for fair value measurements in Accounting Standards Codification (“ASC”) 820. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted based upon guidance issued within the ASU. A reporting entity should apply the amendment either retrospectively or prospectively based on the specific guidance within the ASU. We do not anticipate that the adoption of the ASU will have a material effect on our disclosures.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU, along with subsequently issued related ASUs, requires financial assets (or groups of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected, among other provisions. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A reporting entity should generally apply the amendment on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting periods in which the amendment is effective. We have not identified any impacts to our financial statements that we believe will be material as a result of the adoption of the ASU, although we continue to evaluate the impact of adoption. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption of this ASU which is effective for fiscal 2021.
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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are in the process of evaluating the impact of adopting ASU 2016-02 on our consolidated financial position, results of operations and cash flows, and anticipate a material impact on our consolidated financial position. We are currently assessing the potential impact this ASU and related ASUs on our consolidated financial statements, though the adoption will result in a material increase in the assets and liabilities reflected on our consolidated balance sheets. We will complete our implementation to allow for proper recognition, presentation and disclosure upon adoption of the ASU which is effective for fiscal 2020. We plan to adopt this ASU using the optional prospective transition method provided under ASU 2018-11, Leases, (Topic 842): Targeted Improvement which was issued in July 2018, allowing for application of ASU 2016-02 at the adoption date.