First Data 2013 Annual Report Download - page 66

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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, Ireland, Greece and Argentina.
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 each monthly 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 are generally not considered invested on a long-term basis and such foreign
currency gains and losses are 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 Operations 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 Operations and are
separately disclosed in Note 9 of these Consolidated Financial Statements.
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The Company utilizes derivative instruments to enhance its ability to manage interest rate risk and foreign exchange 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 current
assets”, “Other long-term assets”, “Other current liabilities” or “Other long-term liabilities” captions in the Consolidated Balance Sheets. The Company’s
policy is to present all derivative balances on a gross basis, without regard to counterparty master netting agreements or similar arrangements. Changes in fair
value of derivative instruments 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 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 Operations during the period of change. Additional discussion of derivative instruments is provided
in Note 6 of these Consolidated Financial Statements.
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Noncontrolling interests represent the minority shareholders’ share of the net income or loss and equity in consolidated subsidiaries. Substantially all of
the Company’s noncontrolling interests are presented pretax in the Consolidated Statements of Operations as “Net income attributable to noncontrolling
interests” since the majority of the Company’s non-wholly owned consolidated subsidiaries are flow through entities for tax purposes. Noncontrolling interests
are presented as a component of equity in the Consolidated Balance Sheets and reflect the original investments by these noncontrolling shareholders in the
consolidated subsidiaries, along with their proportionate share of the earnings or losses of the subsidiaries, net of dividends or distributions. Noncontrolling
interests that are redeemable at the option of the holder are presented outside of equity and are carried at their estimated redemption value. A noncontrolling
interest is recorded on the date of acquisition based on the total fair value of the acquired entity and the noncontrolling interest’s share of that value.
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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 from certain merchants to minimize this obligation. Collateral held by the Company is classified within
“Settlement assets” and the obligation to repay the collateral if it is not needed 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.
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