First Data 2007 Annual Report Download - page 77

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company's accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows
from the contract or the termination fees the Company would receive in the event of early termination of the contract by the customer. The Company's
entitlement to termination fees may, however, be subject to challenge if a customer were to allege that the Company was in breach of contract. This
entitlement is also subject to the customer's ability to pay.
The following table discloses capitalized expenditures related to customer contracts, conversion costs and software (in millions).
Successor Predecessor
Period from
September 25 through
December 31,
2007
Period from
January 1 through
September 24,
2007
Year ended December 31,
2006 2005
Customer relationships $ (34.0) $ (39.2) $ (27.2) $ (42.1)
Conversion costs (4.4) (20.9) (35.4) (43.1)
Software (18.6) (55.9) (65.7) (52.6)
As a result of the merger, asset balances were adjusted through purchase accounting to their estimated fair value. The Company tests certain identifiable
intangible assets on an annual basis and the remainder upon an indicator of impairment. The tests of impairment include various assumptions including the
use of projections of future cash flows and discount rates.
Investment Securities
The Company has investments in the equity securities of both public and private companies where it does not have the ability to exercise significant
influence over the investee's business. Investments in public companies and certain investment partnerships are carried at fair value based on quoted market
prices with changes in fair value recorded through the "Other comprehensive income" component of stockholders' equity or for investment partnerships
through "Investment income." Investments in private companies are recorded at cost.
In the case of either investment type, declines in the fair value of the investments are reviewed to determine whether they are other than temporary in
nature. Declines in value that are judged to be other than temporary in nature are recognized in the Consolidated Statements of Income. For public company
investments, absent any other indications of a decline in value being other than temporary in nature, the Company's policy is to treat a decline in the
investment's quoted market value that has lasted for more than six months as an other than temporary decline in value. The Company's policy is the same for
private company investments, however, their fair values are estimated. In estimating fair value, the Company considers market conditions, offering prices,
trends of earnings/losses, price multiples, financial position, new financing and other key measures. The Company believes its estimates result in a reasonable
reflection of the fair values of these investments.
The Company maintains various other investments many of which are classified as available-for-sale and carried at fair market value of $43.6 million
and $92.7 million at December 31, 2007 and 2006, respectively. The Company also has investments in non-marketable equity securities and other investments
that are carried at cost of $27.5 million and $34.8 million at December 31, 2007 and 2006, respectively. These investments are reflected in "Other assets" on
the Consolidated Balance Sheets. Gains and losses upon sale or impairment of investment are classified within the "Other income (expense)" caption in the
Consolidated Statements of Income.
Transactions with Related Parties as defined by SFAS No. 57
A substantial portion of the Company's business within the Commercial Services segment and International segment is conducted through merchant
alliances. Certain merchant alliances, as it pertains to investments accounted for under the equity method, are joint ventures between the Company and
financial institutions. No directors or officers of the Company have ownership interests in any of the alliances. The formation of each of these alliances
generally involves the Company and the bank contributing contractual merchant relationships to the alliance and a cash payment from one owner to the other
to achieve the desired ownership percentage for each. The Company and the bank contract a long-term processing service agreement as part of the negotiation
process. This agreement governs the Company's provision of transaction processing services to the alliance. Therefore, the Company has two income streams
from these alliances: its share of the alliance's net income (classified as "Equity earnings in affiliates") and the processing fees it charges to the alliance
(classified as "Transaction processing and service fees"). The processing fees are based on transaction volumes and unit pricing as contained in the processing
services agreement negotiated with the alliance partner.
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