First Data 2013 Annual Report Download - page 51

instances, amortized cost is considered an appropriate approximation of market value. Due to the lack of observable market activity for the SLARS held by
the Company, the valuation of the SLARS is highly judgmental. The Company, with the assistance of a third-party valuation firm upon which the Company
in part relied, valued the securities using an income approach based on a probability weighted discounted cash flow analysis incorporating certain
assumptions. All key assumptions and valuations were determined by and are the responsibility of management. Other investments are valued based upon
either quoted prices from active exchanges or available third-party broker quotes.
Changes in fair value of investment securities are recorded through the “Other comprehensive income” (“OCI”) component of equity with the exception
of investment partnerships which are recorded through “Investment income” in the Consolidated Statements of Operations. Regardless of investment type,
declines in the fair value of the investments are reviewed to determine whether they are other than temporary in nature. Absent any other indications of a decline
in value being temporary in nature, the Company’s policy is to treat a decline in an equity investment’s quoted market price that has lasted for more than six
months as an other-than-temporary decline in value. For equity securities, declines in value that are judged to be other than temporary in nature are recognized
in the Consolidated Statements of Operations. For debt securities, when the Company intends to sell an impaired debt security or it is more likely than not it
will be required to sell prior to recovery of its amortized cost basis, an other-than-temporary-impairment (“OTTI”) has occurred. The impairment is recognized
in earnings equal to the entire difference between the debt security’s amortized cost basis and its fair value. When the Company does not intend to sell an
impaired debt security and it is not more likely than not it will be required to sell prior to recovery of its amortized cost basis, the Company assesses whether it
will recover its amortized cost basis. If the entire amortized cost will not be recovered, a credit loss exists resulting in the credit loss portion of the OTTI being
recognized in earnings and the amount related to all other factors recognized in OCI. Refer to Note 7 to the Company’s Consolidated Financial Statements in
Item 8 of this Form 10-K for additional information regarding the Company’s Fair Value Measurements.
Derivative financial instruments. The Company uses derivative financial instruments to enhance its ability to manage its exposure to certain financial
and market risks, primarily those related to changes in interest rates and foreign currency exchange rates. Interest rate swaps are entered into to manage interest
rate risk associated with the Company’s variable-rate borrowings. Cross-currency swaps for various foreign currencies are entered into to manage foreign
currency exchange risk associated with the Company’s initial investments in certain foreign subsidiaries or certain intercompany loans to foreign subsidiaries.
Forward contracts on various foreign currencies are entered into to manage foreign currency exchange risk associated with the Company’s forecasted foreign
currency denominated sales or purchases. The Company’s policy is to minimize its cash flow and net investment exposures related to adverse changes in
interest rates and foreign currency exchange rates. The Company’s objective is to engage in risk management strategies that provide adequate downside
protection.
Derivative financial instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of
those exposures. The Company applies strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-
making or any other speculative activities. Although certain derivatives do not qualify for hedge accounting, they are entered into for economic hedge purposes
and are not considered speculative. The Company is monitoring the financial stability of its derivative counterparties.
The Company designated interest rate swaps as cash flow hedges of forecasted interest rate payments related to its variable rate borrowings and certain
of the cross-currency swaps as foreign currency hedges of its net investments in foreign subsidiaries. During 2012 and 2011, certain of the Company’s
interest rate swaps previously designated as hedges for accounting purposes ceased to be highly effective and the Company discontinued hedge accounting for
the affected derivatives. Additionally, certain other interest rate swaps, cross-currency swaps and forward contracts on various foreign currencies did not
qualify or were not designated as accounting hedges and did not receive hedge accounting treatment.
Derivative financial instruments are recognized in the Company’s Consolidated Balance Sheets at their fair value. The Company’s derivatives are not
exchange listed and therefore the estimated fair value of derivative financial instruments is modeled in Bloomberg using the Bloomberg reported market data
and the actual terms of the derivative contracts. These models reflect the contractual terms of the derivatives, such as notional value and expiration date, as
well as market-based observable inputs including interest and foreign currency exchange rates, yield curves and the credit quality of the counterparties along
with the Company’s creditworthiness in order to appropriately reflect non-performance risk. The Company’s counterparties also provide it with the indicative
fair values of its derivative instruments which it compares to the results obtained using Bloomberg software. Considering Bloomberg software is a widely
accepted financial modeling tool and there is limited visibility to the preparation of the third-party quotes, the Company chooses to rely on the Bloomberg
software in estimating the fair value of its derivative financial instruments. Inputs to the derivative pricing models are generally observable and do not contain
a high level of subjectivity. While the Company believes its estimates result in a reasonable reflection of the fair value of these instruments, the estimated
values may not be representative of actual values that could have been realized as of December 31, 2013 or that will be realized in the future. All key
assumptions and valuations are the responsibility of management.
50