MasterCard 2014 Annual Report Download - page 55

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Future events and their
effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting
estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more
experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results
may differ from these estimates.
Revenue recognition - Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. Revenue is generally derived from
transactional information accumulated by our systems or reported by our customers. The Company’s revenue is based on the
volume of activity on cards that carry the Company’s brands, the number of transactions processed or the nature of other payment-
related products and services.
Volume-based revenue (domestic assessments and cross-border volume fees) is recorded as revenue in the period it is earned,
which is when the related volume is generated on the cards. Certain revenue is based upon information reported to us by our
customers. Transaction-based revenue (transaction processing fees) is primarily based on the number and type of transactions and
is recognized as revenue in the same period as the related transactions occur. Other payment-related products and services are
recognized as revenue in the same period as the related transactions occur or services are rendered.
MasterCard has business agreements with certain customers that provide for rebates or other support when the customers meet
certain volume hurdles as well as other support incentives such as marketing, which are tied to performance. Rebates and incentives
are recorded as a reduction of revenue either when the revenue is recognized by the Company or at the time the rebate or incentive
is earned by the customer. Rebates and incentives are calculated based upon estimated performance and the terms of the related
business agreements. In addition, MasterCard may make payments to a customer directly related to entering into an agreement,
which are generally deferred and amortized over the life of the agreement on a straight-line basis.
Business combinations - The Company accounts for business combinations under the acquisition method of accounting. The
Company measures the tangible and intangible identifiable assets acquired, liabilities assumed, and any non-controlling interest
in the acquiree, at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred and are included in
general and administrative expenses. Any excess of purchase price over the fair value of net assets acquired, including identifiable
intangible assets, is recorded as goodwill.
Intangible assets - Intangible assets consist of capitalized software costs, trademarks, tradenames, customer relationships and other
intangible assets, which have finite lives, and customer relationships which have indefinite lives. Intangible assets with finite
useful lives are amortized over their estimated useful lives, on a straight-line basis, which range from one to ten years. Capitalized
software includes internal and external costs incurred directly related to the design, development and testing phases of each
capitalized software project.
Impairment of assets - Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment
whenever events or circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset
cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated
using the present value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment
is recorded.
Goodwill and indefinite-lived intangible assets are not amortized and are tested annually for impairment in the fourth quarter, or
sooner when circumstances indicate an impairment may exist. Goodwill is tested for impairment at the reporting unit level. The
impairment evaluation utilizes a quantitative assessment using a two-step impairment test. The first step is to compare the reporting
unit’s carrying value, including goodwill, to the fair value. If the fair value exceeds the carrying value, then no potential impairment
is considered to exist. If the carrying value exceeds the fair value, the second step is performed to determine if the implied fair
value of the reporting unit’s goodwill exceeds the carrying value of the reporting unit. An impairment charge would be recorded
if the carrying value exceeds the implied fair value. Impairment charges, if any, are recorded in general and administrative expenses.