First Data 2013 Annual Report Download - page 53

The Company tests goodwill annually for impairment, as well as upon an indicator of impairment, using a fair value approach at the reporting unit
level. In 2011, the Company adopted new accounting guidance that provides the option of first assessing qualitative factors to determine whether events and
circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined that the fair value
is more likely than not greater than the carrying amount then the two-step impairment test is unnecessary. After performing a qualitative assessment, the
Company proceeded to step one of its 2012 and 2013 impairment tests. In step one of the impairment test, the Company estimates the fair value of each
reporting unit using a discounted cash flow analysis. The Company believes that this methodology provides the Company with a reasonable estimate of each
reporting unit’s fair value. The estimate of fair value requires various assumptions about a reporting unit’s future financial results and cost of capital. The
Company determines the cost of capital for each reporting unit giving consideration to a number of factors including the discount rates estimated by a third-
party valuation firm. All key assumptions and valuations are determined by and are the responsibility of management. If it is determined that the fair value of
the reporting unit is less than its carrying value, the Company proceeds to step two of the impairment test which requires the Company to estimate the fair
value of all of the reporting unit’s assets and liabilities and calculate an implied fair value of goodwill, which is the difference between the reporting unit’s fair
value and the fair value of all its other assets and liabilities. If the implied fair value of goodwill is less than its carrying value, the shortfall is recognized as
impairment. The methodology for estimating fair value in step two varies by asset; however, the most significant assets are intangible assets. The Company
estimates the fair value of the 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. An impairment charge of a reporting unit’s goodwill could have a material adverse effect on the Company’s financial results.
Changes in the underlying business and economic conditions could affect these estimates used in the analysis discussed above, which in turn could affect the
fair value of the reporting unit. Thus, it is possible for reporting units that record impairments to record additional impairments in the future.
The Company did not record any goodwill impairment charges in 2013 or 2011. Discussion of impairments that were recorded in 2012 is included in
Note 7 to the Company’s Consolidated Financial Statements in Item 8 of this Form 10-K. As of October 1, 2013, the most recent impairment analysis date, the
fair value of each reporting unit substantially exceeded its carrying value. As of December 31, 2013, these balances had not materially changed.
A substantial portion of the Company’s business within the Retail and Alliance Services and International
segments is conducted through merchant alliances. Merchant alliances are alliances between the Company and financial institutions. If the Company has
majority ownership and management control over an alliance, then the alliance’s financial statements are consolidated with those of the Company and the
related processing fees are treated as an intercompany transaction and eliminated upon consolidation. If the Company does not have a controlling ownership
interest in an alliance, it uses the equity method of accounting to account for its investment in the alliance. As a result, the Company’s consolidated revenues
include processing fees charged to alliances accounted for under the equity method. 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.
The Company negotiated all agreements with the alliance banks. Therefore, all transactions between the Company and its alliances were conducted at
arm’s length; nevertheless, accounting guidance defines a transaction between the Company and an equity method investee as a related party transaction
requiring separate disclosure in the financial statements of the Company. Accordingly, the revenue associated with these related party transactions are presented
on the face of the Consolidated Statements of Operations.
All members of the Company’s Board of Directors are affiliated with KKR. In addition, First Data has a management agreement with affiliates of KKR
pursuant to which such entities or their affiliates provide management services to the Company. Pursuant to such agreement, the Company pays an aggregate
annual base management fee and reimburses out-of-pocket expenses incurred in connection with the provision of services pursuant to the agreement. The
agreement provides that the Company will pay fees in connection with certain subsequent financing, acquisition, disposition and change of control
transactions, as well as a termination fee based on the net present value of future payment obligations under the management agreement, in the event of an
initial public offering or under certain other circumstances. The agreement also includes customary exculpation and indemnification provisions in favor of
KKR and its affiliates. The Company also paid fees to an affiliate of KKR for services in extending maturities under its senior secured lending facility and
issuing new secured notes.
Refer to Note 10 to the Company’s Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding transactions with
related parties.
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