MasterCard 2012 Annual Report Download - page 85

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Settlement and other risk management—MasterCard has global risk management policies and procedures,
which include risk standards to provide a framework for managing the Company’s settlement exposure.
Settlement risk is the legal exposure due to the difference in timing between the payment transaction date and
subsequent settlement. MasterCard’s rules guarantee the settlement of many of the MasterCard, Cirrus and
Maestro-branded transactions between its issuers and acquirers. The term and amount of the guarantee are
unlimited. Settlement exposure under the guarantee is short term and typically limited to a few days. In the event
that MasterCard effects a payment on behalf of a failed customer, MasterCard may seek an assignment of the
underlying receivables. Subject to approval by the Company’s Board of Directors, customers may be charged for
the amount of any settlement losses incurred during the ordinary activities of the Company. MasterCard has also
guaranteed the payment of MasterCard-branded travelers cheques, which are no longer being issued, in the event
of issuer default. The term of the guarantee is unlimited, while the amount is limited to cheques issued but not yet
cashed. The Company may also have other guarantee obligations in the course of its business. The Company
accounts for each of its guarantees issued or modified after December 31, 2002, the adoption date of the relevant
accounting standard, by recording the guarantee at its fair value at the inception or modification of the guarantee
through earnings. To the extent that a guarantee is significantly modified subsequent to the inception of the
guarantee, the Company remeasures the fair value of the guarantee at the date of modification through earnings.
The Company enters into agreements in the ordinary course of business under which the Company agrees to
indemnify third parties against damages, losses and expenses incurred in connection with legal and other
proceedings arising from relationships or transactions with the Company. As the extent of the Company’s
obligations under these agreements depends entirely upon the occurrence of future events, the Company’s
potential future liability under these agreements is not determinable. See Note 5 (Fair Value and Investment
Securities) and Note 19 (Settlement and Other Risk Management).
Income taxes—The Company follows an asset and liability based approach in accounting for income taxes
as required under GAAP. Deferred income tax assets and liabilities are recorded to reflect the tax consequences
on future years of temporary differences between the financial statement carrying amounts and income tax bases
of assets and liabilities. Deferred income taxes are displayed as separate line items or are included in other
current liabilities on the consolidated balance sheet. Valuation allowances are provided against assets which are
not more likely than not to be realized. The Company recognizes all material tax positions, including all
significant uncertain tax positions in which it is more likely than not that the position will be sustained based on
its technical merits and if challenged by the relevant taxing authorities. At each balance sheet date, unresolved
uncertain tax positions are reassessed to determine whether subsequent developments require a change in the
amount of recognized tax benefit. The allowance for uncertain tax positions is recorded in other current and
noncurrent liabilities on the consolidated balance sheet.
The Company records interest expense related to income tax matters as interest expense in its statement of
operations. The Company includes penalties related to income tax matters in the income tax provision. The
Company does not provide for U.S. federal income tax and foreign withholding taxes on undistributed earnings
from non-U.S. subsidiaries when such earnings are intended to be reinvested indefinitely outside of the U.S.
Cash and cash equivalents—Cash and cash equivalents include certain investments with daily liquidity or
with a maturity of three months or less from the date of purchase. Cash equivalents are recorded at cost, which
approximates fair value.
Restricted cash—The Company classifies cash as restricted when the cash is unavailable for withdrawal or
usage. Restrictions may include legally restricted deposits, contracts entered into with others, or the Company’s
statements of intention with regard to particular deposits. In December 2012, the Company made a $726 million
payment into a qualified settlement fund related to the U.S. merchant class litigation. The Company has
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