First Data 2007 Annual Report Download - page 110

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6: Settlement Assets and Obligations
Settlement assets and obligations result from FDC's processing services and associated settlement activities, including settlement of payment
transactions. Settlement assets are generated principally from payment instrument sales (primarily official checks and financial institution money orders) and
merchant services transactions. Certain merchant settlement assets that relate to settlement obligations accrued by the Company are held by partner banks to
which the Company does not have legal ownership but has the right to use to satisfy the related settlement obligation. FDC records corresponding settlement
obligations for amounts payable to merchants and for payment instruments not yet presented for settlement. At December 31, 2006, the difference in the
aggregate amount of such assets and liabilities is primarily due to unrealized net investment gains and losses, which are reported as OCI in stockholders'
equity. As noted below and at December 31, 2007, the majority of settlement assets were invested in short-term investments so there was no such difference.
The principal components of FDC's settlement assets and obligations are as follows (in millions):
December 31,
Successor
2007
Predecessor
2006
Settlement assets:
Cash and cash equivalents $ 13,640.4 $ 2,750.6
Investment securities 1,085.8 12,106.7
Due from card associations and bank partners 3,214.7 4,279.3
Due from selling agents 287.5 13.2
$ 18,228.4 $ 19,149.8
Settlement obligations:
Payment instruments outstanding $ 11,258.4 $ 11,938.0
Card settlements due to merchants 5,283.0 5,312.9
Due to selling agents 1,687.0 1,915.6
$ 18,228.4 $ 19,166.5
Cash equivalents consist of short-term time deposits, commercial paper, short-term variable rate demand notes and other investments. See Note 7 for
information concerning the Company's investment securities.
FDC generates revenues from its investment of certain settlement assets, a substantial majority of which are cash equivalents and investment securities
within the Company's Integrated Payment Systems ("IPS") segment. During 2007, the IPS investment portfolio was repositioned from long-term municipal
obligations to principally short-term investments. At December 31, 2007, the IPS segment portfolio was invested in short-term investment securities with
ratings of "A1 / P1" or better. IPS's long-term investments were rated "AA" or better. IPS segment investment portfolio balances averaged $12.6 billion in
2007, $13.1 billion in 2006 and $13.4 billion in 2005. Investment revenues (before commissions to certain selling agents and hedging gains and losses) from
the IPS segment portfolio totaled $116.6 million for the successor period September 25, 2007 through December 31, 2007, $341.5 million for the predecessor
period January 1, 2007 through September 24, 2007, $469.5 million in 2006, and $448.3 million in 2005 ($172.5 million, $524.0 million, $720.5 million, and
$691.7 million, respectively, on a pretax equivalent basis).
Note 7: Investment Securities
Investment securities are a principal component of the Company's settlement assets, and represent the investment of funds received by FDC from the
sale of payment instruments (principally official checks and financial institution money orders) by authorized agents. During 2007, in conjunction with the
wind-down of the official check and money order business, the Company repositioned a majority of the investment portfolio classified within settlement
assets from long-term state and municipal obligations to more liquid investments of shorter duration, though still generally tax exempt. Realized pretax gains
and (losses) from the sale of these investment securities reclassified out of OCI into "Investment income" were $(3.9) million in the successor period from
September 25, 2007 through December 31, 2007, $4.4 million in the predecessor period from January 1, 2007 through September 24, 2007, $0.3 million for
2006 and $0.4 million for 2005. The Company uses specific identification to determine the cost of a security sold and the amount of gains and losses
reclassified out of OCI. The Company received proceeds from the sale of long-term investments of $0.7 billion in the successor period from September 25,
2007 through December 31, 2007, $10.9 billion in the predecessor period from January 1, 2007 through September 24, 2007, $18.5 million in 2006 and $46.2
million in 2005.
The Company also maintains various other investments many of which are classified as available-for-sale and carried at fair market value of $43.6
million at December 31, 2007 and $92.7 million at December 31, 2006. Such investments are recorded in the
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