First Data 2013 Annual Report Download - page 52

With respect to derivative financial instruments that are afforded hedge accounting, the effective portion of changes in the fair value of a derivative that
is designated and qualifies as a cash flow hedge is recorded in OCI and reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The effective portion of changes in the fair value of a net investment hedge is recorded as part of the cumulative translation
adjustment in OCI. Any ineffectiveness associated with the aforementioned derivative financial instruments as well as the periodic change in the mark-to-
market of the derivative financial instruments not designated as accounting hedges are recorded immediately in “Other income (expense)” in the Consolidated
Statements of Operations. Refer to Note 6 to the Company’s Consolidated Financial Statements in Item 8 of this Form 10-K for additional information
regarding the Company’s derivatives.
. FDC capitalizes initial payments for new contracts, contract renewals and conversion costs associated with customer contracts and
system development costs. Capitalization of such costs is subject to strict accounting policy criteria and requires management judgment as to the appropriate
time to initiate capitalization. Capitalization of initial payments for contracts and conversion costs only occurs when management is satisfied that such costs
are recoverable through future operations, contractual minimums and/or penalties in 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 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 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. Capitalization of internally developed software, primarily associated with operating platforms, occurs only upon
management’s estimation that the likelihood of successful development and implementation reaches a probable level. Currently unforeseen circumstances in
software development could require the Company to implement alternative plans with respect to a particular effort, which could result in the impairment of
previously capitalized software development costs.
In addition to the internally generated intangible assets discussed above, the Company also acquires intangible assets through business combinations
and asset acquisitions. In these transactions, the Company typically acquires and recognizes intangible assets such as customer relationships, software, and
trade names. Acquired customer relationships consist of customer contracts that are within their initial terms as well as those in renewal status. The amounts
recorded for these relationships include both the value of remaining contractual terms and the value of potential future renewals. These relationships are with
customers such as merchants and financial institutions.
In a business combination, each intangible asset is recorded at its fair value. In an asset acquisition, the cost of the acquisition is allocated among the
acquired assets, generally by their relative fair values. The Company generally estimates the fair value of acquired intangible assets using the excess earnings
method, royalty savings method, or cost savings method, all of which are a form of a discounted cash flow analysis. These estimates require various
assumptions about the future cash flows associated with the assets, appropriate costs of capital and other inputs such as an appropriate royalty rate. Changes
to these estimates would materially impact the value assigned to the assets as well as the amounts subsequently recorded as amortization expense.
The Company tests contract and conversion costs greater than $1 million for recoverability on an annual basis by comparing the remaining expected
undiscounted cash flows under the contract to the net book value. Any assets that are determined to be unrecoverable are written down to fair value. This
analysis requires significant assumptions regarding the future profitability of the customer contract during its remaining term. Additionally, contracts,
conversion costs and all other long lived assets (including customer relationships) are tested for impairment upon an indicator of potential impairment. Such
indicators include, but are not limited to: a current period operating or cash flow loss associated with the use of an asset or asset group, combined with a
history of such losses and/or a forecast anticipating continued losses; a significant adverse change in the business, legal climate, market price of an asset or
manner in which an asset is being used; an accumulation of costs for a project significantly in excess of the amount originally expected; or an expectation that
an asset will be sold or otherwise disposed of at a loss.
Goodwill represents the excess of cost over the fair value of net assets acquired, including identifiable intangible assets, and has been
allocated to reporting units. The Company’s reporting units are businesses at the operating segment level or one level below the operating segment level for
which discrete financial information is prepared and regularly reviewed by management.
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