MasterCard 2015 Annual Report Download - page 87

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
81
General economic and political conditions in countries in which MasterCard operates affect the Company’s settlement risk. Many
of the Company’s financial institution customers have been directly and adversely impacted by political instability and uncertain
economic conditions. These conditions present increased risk that the Company may have to perform under its settlement
guarantee. This risk could increase if political, economic and financial market conditions deteriorate further. The Company’s
global risk management policies and procedures are revised and enhanced from time to time. Historically, the Company has
experienced a low level of losses from financial institution failures.
MasterCard also provides guarantees to customers and certain other counterparties indemnifying them from losses stemming
from failures of third parties to perform duties. This includes guarantees of MasterCard-branded travelers cheques issued, but
not yet cashed of $420 million and $465 million at December 31, 2015 and 2014, respectively, of which $332 million and $370
million at December 31, 2015 and 2014, respectively, is mitigated by collateral arrangements. In addition, the Company enters
into business 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. Certain indemnifications do not provide a stated maximum exposure. 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. Historically, payments made by the Company under these types of
contractual arrangements have not been material.
Note 20. Foreign Exchange Risk Management
Derivatives
The Company enters into foreign currency derivative contracts to manage risk associated with anticipated receipts and
disbursements which are either transacted in a non-functional currency or valued based on a currency other than its functional
currency. The Company may also enter into foreign currency derivative contracts to offset possible changes in value due to foreign
exchange fluctuations of earnings, assets and liabilities denominated in currencies other than its functional currency. The objective
of these activities is to reduce the Company’s exposure to gains and losses resulting from fluctuations of foreign currencies against
its functional currencies.
The Company does not designate foreign currency derivatives as hedging instruments pursuant to the accounting guidance for
derivative instruments and hedging activities. The Company records the change in the estimated fair value of the outstanding
derivatives at the end of the reporting period on its consolidated balance sheet and consolidated statement of operations.
As of December 31, 2015, the majority of derivative contracts to hedge foreign currency fluctuations had been entered into with
customers of MasterCard. MasterCard’s derivative contracts are summarized below:
December 31, 2015 December 31, 2014
Notional Estimated Fair
Value Notional Estimated Fair
Value
(in millions)
Commitments to purchase foreign currency . . . . . . . . . . . . $ 232 $ 1 $ 47 $ 4
Commitments to sell foreign currency . . . . . . . . . . . . . . . . . 1,430 12 614 27
Options to sell foreign currency. . . . . . . . . . . . . . . . . . . . . . . 44 1 — —
Balance sheet location:
Accounts receivable 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23 $35
Other current liabilities 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (4)
1 The fair values of derivative contracts are presented on a gross basis on the balance sheet and are subject to enforceable master netting arrangements,
which contain various netting and setoff provisions.
The amount of gain (loss) recognized in income for foreign currency derivative contracts is summarized below:
Year Ended December 31,
2015 2014 2013
(in millions)
Foreign currency derivative contracts
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51 $ (78) $ 48
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 4
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51 $ (78) $ 52