MasterCard 2012 Annual Report Download - page 87

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments in debt securities are classified as held-to-maturity when the Company has the intent and ability
to hold the debt securities to maturity and are stated at amortized cost. Investments in debt securities not
classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with unrealized
gains and losses, net of applicable taxes, recorded as a separate component of other comprehensive income on the
consolidated statement of comprehensive income. Net realized gains and losses on debt securities are recognized
in investment income on the consolidated statement of operations.
The fair values of the Company’s short-term bond funds are based on quoted prices for identical
investments in active markets and are therefore included in Level 1 of the Valuation Hierarchy. The fair values of
the Company’s available-for-sale municipal securities, U.S. Government and Agency securities, corporate
securities, asset-backed securities and other fixed income securities are based on quoted prices for similar assets
in active markets and are therefore included in Level 2 of the Valuation Hierarchy. The fair value determination
for the Company’s Auction Rate Securities (“ARS”) is based primarily on an income approach and is therefore
included in Level 3 of the Valuation Hierarchy. See Note 5 (Fair Value and Investment Securities) for additional
disclosures related to the fair value standard.
The Company has incorporated the considerations of guidance pertaining to determining the fair value of
financial assets in inactive markets in its assessment of the fair value of its ARS as of December 31, 2012 and
2011. The guidance provides consideration of how management’s internal cash flow and discount rate
assumptions should be considered when measuring fair value when relevant observable data does not exist, how
observable market information in a market that is not active should be considered when measuring fair value and
how the use of market quotes should be considered when assessing the relevance of observable and unobservable
data available to measure fair value. See Note 5 (Fair Value and Investment Securities) for further detail.
Investments in equity securities classified as available-for-sale are carried at fair value, with unrealized
gains and losses, net of applicable taxes, recorded as a separate component of other comprehensive income on the
consolidated statement of comprehensive income. Net realized gains and losses on available-for-sale equity
securities are recognized in investment income on the consolidated statement of operations. The specific
identification method is used to determine realized gains and losses.
Derivative financial instruments—The Company accounts for all derivatives, whether designated in hedging
relationships or not, by recording them on the balance sheet at fair value in other assets and other liabilities,
regardless of the purpose or intent for holding them. The Company’s foreign exchange forward contracts are
included in level 2 of the Valuation Hierarchy as the fair value of these contracts are based on broker quotes for
the same or similar instruments. Changes in the fair value of derivative instruments are reported in current-period
earnings. The Company did not have any derivative contracts accounted for under hedge accounting as of
December 31, 2012 and 2011.
Settlement due from/due to customers—The Company operates systems for clearing and settling payment
transactions among MasterCard customers. Net settlements are generally cleared daily among customers through
settlement cash accounts by wire transfer or other bank clearing means. However, some transactions may not
settle until subsequent business days, resulting in amounts due from and due to MasterCard customers.
Restricted security deposits held for MasterCard customers—MasterCard requires collateral from certain
customers for settlement of their transactions. Additionally, MasterCard holds cash deposits and certificates of
deposit from certain customers of MasterCard as collateral for settlement of their transactions. These assets are
fully offset by corresponding liabilities included on the consolidated balance sheet. The majority of collateral for
settlement is typically in the form of standby letters of credit and bank guarantees which are not recorded on the
balance sheet.
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