MasterCard 2015 Annual Report Download - page 65

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. A financial instrument’s categorization within the Valuation Hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The three levels of the Valuation Hierarchy are as follows:
• Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets.
• Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in inactive markets and inputs that are observable for the asset
or liability.
• Level 3 - inputs to the valuation methodology are unobservable and cannot be directly corroborated by observable
market data.
Certain assets are measured at fair value on a nonrecurring basis. The Company’s assets measured at fair value on a nonrecurring
basis include property, plant and equipment, nonmarketable equity investments, goodwill and other intangible assets. These
assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
The valuation methods for goodwill and other intangible assets involve assumptions concerning comparable company multiples,
discount rates, growth projections and other assumptions of future business conditions. The Company uses an income approach
for estimating the fair value of its intangible assets and a market approach for estimating the fair value of its reporting unit, when
necessary. As the assumptions employed to measure these assets and liabilities on a nonrecurring basis are based on
management’s judgment using internal and external data, these fair value determinations are classified in Level 3 of the Valuation
Hierarchy.
Investment securities - The Company classifies investments in debt and equity securities as available-for-sale. Available-for-sale
securities that are available to meet the Company’s current operational needs are classified as current assets. Available-for-sale
securities that are not available to meet the Company’s current operational needs are classified as non-current assets.
The investments in debt and equity securities are carried at fair value, with unrealized gains and losses, net of applicable taxes,
recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statement of
comprehensive income. Net realized gains and losses on debt and 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.
The Company classifies time deposits with maturities greater than 3 months as held-to-maturity. Held-to-maturity securities
that mature within one year are classified as current assets while held-to-maturity securities with maturities of greater than one
year are classified as non-current assets. Time deposits are carried at amortized cost on the consolidated balance sheet and are
intended to be held until maturity.
Derivative financial instruments - The Company records all derivatives at fair value. The Company’s foreign exchange forward
and option contracts are included in Level 2 of the Valuation Hierarchy as the fair value of these contracts are based on inputs,
which are observable based on broker quotes for the same or similar instruments. Changes in the fair value of derivative
instruments are reported in current-period earnings. These derivative contracts hedge foreign exchange risk and were not entered
into for trading or speculative purposes. The Company did not have any derivative contracts accounted for under hedge accounting
as of December 31, 2015 and 2014.
The Company has numerous investments in its foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility
in foreign currency exchange rates. The Company uses foreign currency denominated debt to hedge a portion of its net investment
in foreign operations against adverse movements in exchange rates. The effective portion of the foreign currency gains and
losses related to the foreign currency denominated debt are reported in accumulated other comprehensive income (loss) as part
of the cumulative translation adjustment component of equity. The ineffective portion, if any, is recognized in earnings in the
current period. The Company evaluates the effectiveness of the net investment hedge each quarter.
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. The majority of collateral for settlement is in the form of standby letters of credit and bank guarantees