First Data 2007 Annual Report Download - page 96

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
information is prepared and regularly reviewed by management. Goodwill is generally allocated to reporting units based upon relative fair value (taking into
consideration other factors such as synergies) when an acquired business is integrated into multiple reporting units. If it is determined that the fair value of the
reporting unit is less than its carrying value, an impairment charge would be recognized. Fair value is generally established using discounted cash flows.
When a business within a reporting unit is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value method. As a result
of the merger, the Company did not perform an annual goodwill impairment test in 2007. The Company's annual goodwill impairment test did not identify
any impairments in 2006 and 2005. However, there were impairments in goodwill that were triggered by the changes in strategic direction of specific
businesses made in 2007 and 2005 as discussed in Note 3.
Customer relationships represent the estimated value of the Company's relationships with customers, primarily merchants and financial institutions, for
which it provides services. Prior to the merger, customer relationships were amortized over the term of the contract. Subsequent to the merger, the amounts
allocated to customer relationships as part of the purchase price allocation are being amortized based on the pattern of undiscounted cash flows for the period
as a percentage of total projected undiscounted cash flows or the term of the contract for certain items capitalized after the merger.
FDC capitalizes initial payments for new contracts, contract renewals and conversion costs associated with customer processing relationships to the
extent recoverable through future operations, contractual minimums and/or penalties in the case of early termination. 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 initial payments for new contracts and contract renewals are
amortized over the term of the contract as a reduction of the associated revenue (transaction and processing service fees). Conversion costs are also amortized
over the term of the contract but are recorded as an expense in "Cost of services" in the Consolidated Statements of Income. In connection with the allocation
of the purchase price related to the merger, previously recorded conversion and contract costs were eliminated.
The Company develops software that is used in providing processing services to customers. To a lesser extent, the Company also develops software to
be sold or licensed to customers. Software development costs are capitalized once technological feasibility of the software has been established. Costs
incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all
planning, designing, coding and testing activities that are necessary to determine that a product can be produced to meet its design specifications, including
functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general use. Software
development costs are amortized using the straight-line method over the estimated useful life of the software, which is generally five years. Software
development costs allocated as part of the purchase price allocation are amortized over three to 10 years.
In addition to capitalized contract and software development costs, other intangibles include copyrights, patents, acquired software, trademarks and
noncompete agreements acquired in business combinations. Other intangibles are amortized on a straight–line basis over the length of the contract or benefit
period, which generally ranges from three to 25 years. Other intangible amortization expense (including amortization associated with investments in affiliates)
totaled $362.2 million for the successor period from September 25, 2007 through December 31, 2007, $375.1 million for the predecessor period from
January 1, 2007 through September 24, 2007, $484.8 million in 2006 and $464.9 million in 2005.
The following table provides the components of other intangibles (in millions):
Successor Predecessor
Year Ended December 31,
2007
Cost
2007
Accumulated
Amortization
2007
Net of
Accumulated
Amortization
2006
Cost
2006
Accumulated
Amortization
2006
Net of
Accumulated
Amortization
Customer relationships $ 7,016.0 $ (230.5) $ 6,785.5 $ 2,567.6 $ (968.9) $ 1,598.7
Other intangibles:
Conversion costs $ 5.1 $ (0.4) $ 4.7 $ 415.8 $ (239.5) $ 176.3
Contract costs 54.3 (7.1) 47.2 352.9 (144.3) 208.6
Software 1,029.4 (58.8) 970.6 829.7 (590.2) 239.5
Other 726.2 (10.6) 715.6 527.4 (173.0) 354.4
Total other intangibles $ 1,815.0 $ (76.9) $ 1,738.1 $ 2,125.8 $ (1,147.0) $ 978.8
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