First Data 2007 Annual Report Download - page 115

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
opposite to the de-designated proportions of the existing swaps. The de-designated proportions of the swaps and the new mirror swaps were not designated as
accounting hedges and accordingly these derivatives were marked-to-market through the "Other income (expense)" line item of the Consolidated Statements
of Income. Since the terms of the de-designated swaps and the mirror swaps were exactly opposite, the changes in fair value of these instruments offset each
other and resulted in no or immaterial impact on a net basis on the Consolidated Statements of Income. These swaps were terminated at the time of the
merger.
The Company had certain foreign currency derivative instruments that were effective as economic hedges prior to their termination in 2007, but were
not designated as accounting hedges. Accordingly, the changes in fair value of such derivative instruments were recorded in the Consolidated Statements of
Income and substantially offset the transaction gain or loss recognized on the underlying. The aggregate notional amount of these derivative instruments was
375.0 million yen at December 31, 2006.
DERIVATIVES THAT QUALIFY FOR HEDGE ACCOUNTING
Hedge of a Net Investment in a Foreign Operation
A cross currency swap that was designated as a net investment hedge prior to the merger was redesignated at the merger date as a hedge of net
investments in foreign operations. Since the existing derivative instrument was not at zero fair value at the time of redesignation, the redesignated hedging
relationship will result in some ineffectiveness which will be recognized immediately in the Consolidated Statements of Income. The effective portion of the
change in fair value of the cross currency swap is recognized in the Consolidated Statements of Stockholders' Equity. As of December 31, 2007, the aggregate
notional amount of the Australian dollar cross currency swap was 115.0 million Australian dollars (approximately $100.5 million). As of December 31, 2007,
the Company realized a $2.6 million gain in OCI in the successor period in the Consolidated Statements of Stockholders' Equity associated with the net
investment hedge.
The aggregate notional amount of the Australian dollar cross currency swaps was 230.0 million Australian dollars at December 31, 2006. The aggregate
notional amounts of the euro cross currency swaps were 492.5 million euros at December 31, 2006. All but one of the Australian dollar swaps were
terminated at the time of the merger.
Cash Flow Hedges
As noted above and in the third quarter 2007, prior to the consummation of the merger, Sub entered into two forward starting, deal contingent interest
rate swaps. At the merger date such interest rate swaps were designated as cash flow hedges of the variability in the interest payments on a specified $3.0
billion portion of the approximate $12.8 billion variable rate senior secured term loan due to changes in the LIBOR interest rate (the benchmark interest rate).
Since these swaps were entered into prior to the date of their designation and they were not at zero fair value on that date, the hedging relationships will result
in some ineffectiveness. In the fourth quarter 2007, the Company entered into additional interest rate swaps designated as cash flow hedges of the variability
in the interest payments on $4.5 billion of the variable rate senior secured term loan due to changes in the LIBOR interest rate (the benchmark interest
rate). At December 31, 2007, the maximum length of time over which the Company is hedging its exposure is approximately five years. The effective portion
of changes in fair value of the cash flow hedges is recorded temporarily in the Consolidated Statements of Stockholders' Equity as a component of OCI and
then recognized in the Consolidated Statements of Income in the same period or periods during which the payment of variable interest associated with the
floating rate debt is recorded in earnings. Any ineffective portions of changes in fair value are recognized in the Consolidated Statements of Income, in "Other
income (expense)," during the period of change. The Company follows the hypothetical derivative method to measure hedge ineffectiveness. Since the
interest rate swaps entered into during the fourth quarter 2007 match the hypothetical derivative, there has been no ineffectiveness to recognize in the
Consolidated Statements of Income for these hedges. A $1.2 million loss associated with ineffectiveness was recognized in earnings during the successor
period from September 25, 2007 to December 31, 2007 related to the cash flow hedges of the first $3.0 billion portion of the debt. The amount of losses in
OCI as of December 31, 2007 related to the hedged transactions that is expected to be reclassified into the Consolidated Statements of Income during the 12
months ending December 31, 2008 is approximately $31.9 million.
In the predecessor periods, the Company entered into derivatives to hedge certain cash flows associated with foreign currency exposures and the
forecasted sale of an investment security. At their initiation, these derivative instruments qualified, and were designated, as cash flow hedges. On an
individual and aggregate basis such derivatives were immaterial to the financial statements for the predecessor periods presented. The amount of
ineffectiveness related to these cash flow hedges was immaterial. These derivative instruments were either terminated at the time of the merger or are
currently not designated as hedges.
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