First Data 2007 Annual Report Download - page 94

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Translation
The U.S. dollar is the functional currency for most of the Company's U.S. based businesses and certain foreign based businesses. Significant operations
with a local currency as their functional currency include operations in the United Kingdom, Australia, Germany, Greece and Poland. Foreign currency
denominated assets and liabilities for these units and other less significant operations are translated into U.S. dollars based on exchange rates prevailing at the
end of the period, and revenues and expenses are translated at average exchange rates during the period. The effects of foreign exchange gains and losses
arising from the translation of assets and liabilities of those entities where the functional currency is not the U.S. dollar are included as a component of Other
Comprehensive Income ("OCI"). Intercompany loans were considered invested on a long-term basis in the predecessor period and accordingly foreign
exchange gains and losses were recorded in OCI. In the successor period, the intercompany loans are not considered invested on a long-term basis and such
foreign currency gains and losses were recorded in income. Transaction gains and losses related to operating assets and liabilities are included in the "Cost of
services" and "Selling, general and administrative" lines of the Consolidated Statements of Income and were immaterial. Non-operating transaction gains and
losses derived from non-operating assets and liabilities are included in the "Other income (expense)" line of the Consolidated Statements of Income and are
separately disclosed in Note 11.
Derivative Financial Instruments
The Company utilizes derivative instruments primarily to mitigate interest rate risk and foreign currency risk. To a lesser extent, derivative instruments
are utilized to mitigate market risk. The Company recognizes all derivative financial instruments in the Consolidated Balance Sheets as assets or liabilities at
fair value. Such amounts are recorded in either the "Other assets" or "Accounts payable and other liabilities" captions in the Consolidated Balance Sheets.
Changes in fair value of derivative instruments, including those that qualify as fair value hedges, are recognized immediately in earnings unless the derivative
is designated and qualifies as a hedge of future cash flows or a hedge of a net investment in a foreign operation. For derivatives that qualify as hedges of
future cash flows, the effective portion of changes in fair value is recorded temporarily in stockholders' equity as a component of OCI and then recognized in
earnings in the same period or periods during which the hedged item affects earnings. For derivatives that qualify as a hedge of a net investment in a foreign
operation, the gain or loss is reported in OCI as part of the cumulative translation adjustment to the extent the hedge is effective. Any ineffective portions of
cash flow hedges and net investment hedges are recognized in the "Other income (expense)" line in the Consolidated Statements of Income during the period
of change. Additional discussion of derivative instruments is provided in Note 8.
Minority Interest
Minority interest in earnings of consolidated subsidiaries represents the minority shareholders' share of the equity and after-tax net income or loss of
consolidated subsidiaries. Substantially all of the Company's minority interest is presented pretax in the Consolidated Statements of Income since the majority
of the Company's non-wholly owned consolidated subsidiaries are flow through entities for tax purposes. The minority interest included in "Accounts payable
and other liabilities" in the Consolidated Balance Sheets reflects the original investments by these minority shareholders in the consolidated subsidiaries,
along with their proportionate share of the earnings or losses of the subsidiaries, net of dividends.
Reserve for Merchant Credit Losses and Check Guarantees
With respect to the merchant acquiring business, the Company's merchant customers (or those of its unconsolidated alliances) have the liability for any
charges properly reversed by the cardholder. In the event, however, that the Company is not able to collect such amounts from the merchants, due to merchant
fraud, insolvency, bankruptcy or another reason, the Company may be liable for any such reversed charges. The Company's risk in this area primarily relates
to situations where the cardholder has purchased goods or services to be delivered in the future such as airline tickets.
The Company's obligation to stand ready to perform is minimal in relation to the total dollar volume processed. The Company requires cash deposits,
guarantees, letters of credit or other types of collateral by certain merchants to minimize its obligation. Collateral held by the Company is classified within
"Settlement obligations" on the Company's Consolidated Balance Sheets. The Company also utilizes a number of systems and procedures to manage merchant
risk. Despite these efforts, the Company historically has experienced some level of losses due to merchant defaults.
The Company's contingent obligation relates to imprecision in its estimates of required collateral. A provision for this obligation is recorded based
primarily on historical experience and other relevant factors such as economic downturns or increases in merchant fraud. Merchant credit losses are included
in "Cost of services" in the Company's Consolidated Statements of Income. The amount of the reserves attributable to entities consolidated by the Company
was $24.1 million and $20.5 million at December 31, 2007 and 2006, respectively.
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