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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
72
Beginning on February 11, 2008, the auction mechanism that normally provided liquidity to the ARS investments began
to fail. Since mid-February 2008, all investment positions in the Company’s ARS investment portfolio have experienced
failed auctions. The securities for which auctions have failed have continued to pay interest in accordance with the
contractual terms of such instruments and will continue to accrue interest and be auctioned at each respective reset date
until the auction succeeds, the issuer redeems the securities or they mature. As of December 31, 2013, the ARS market
remained illiquid, but issuer call and redemption activity in the ARS student loan sector has occurred periodically since
the auctions began to fail. During 2013, 2012 and 2011, the Company did not sell any ARS in the auction market, but
there were calls at par.
The table below includes a roll-forward of the Company’s ARS investments from January 1, 2012 to December 31,
2013.
Significant
Unobservable
Inputs (Level 3)
(in millions)
Fair value, December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70
Calls, at par. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42)
Recovery of unrealized losses due to issuer calls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Fair value, December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Calls, at par. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23)
Recovery of unrealized losses due to issuer calls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fair value, December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11
The Company evaluated the estimated impairment of its ARS portfolio to determine if it was other-than-temporary.
The Company considered several factors including, but not limited to, the following: (1) the reasons for the decline in
value (changes in interest rates, credit event, or market fluctuations); (2) assessments as to whether it is more likely
than not that it will hold and not be required to sell the investments for a sufficient period of time to allow for recovery
of the cost basis; (3) whether the decline is substantial; and (4) the historical and anticipated duration of the events
causing the decline in value. The evaluation for other-than-temporary impairments is a quantitative and qualitative
process, which is subject to various risks and uncertainties. The risks and uncertainties include changes in credit quality,
market liquidity, timing and amounts of issuer calls, and interest rates. The securities are fully collateralized by student
loans with guarantees (ranging from approximately 95% to 98% of principal and interest) by the U.S. government via
the Department of Education. As of December 31, 2013, the Company believed that the unrealized losses on the ARS
were not related to credit quality but rather due to the lack of liquidity in the market. The Company believes that it is
more likely than not that the Company will hold and not be required to sell its ARS investments until recovery of their
cost basis which may be at maturity or earlier if called. Therefore, the Company does not consider the unrealized losses
to be other-than-temporary. The Company estimated a 10% discount to the par value of the ARS portfolio at
December 31, 2013 and 2012. The pre-tax impairment included in accumulated other comprehensive income related
to the Company’s ARS was $1 million and $3 million as of December 31, 2013 and 2012, respectively. A hypothetical
increase of 100 basis points in the discount rate used in the discounted cash flow analysis would have increased the
impairment by less than $1 million at December 31, 2013 and $2 million at December 31, 2012.