MoneyGram 2004 Annual Report Download - page 54

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Table of Contents
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain structured investments we own represent beneficial interests in grantor trusts or other similar entities. These trusts typically contain an investment
grade security, generally a U.S. Treasury strip, and an investment in the residual interest in a collateralized debt obligation, or in some cases, a limited
partnership interest. For certain of these trusts, we own a majority of the beneficial interests, and therefore, consolidate those trusts by recording and
accounting for the assets of the trust separately in our consolidated financial statements.
Management Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications — Certain reclassifications have been made to prior period financial statements to conform to the current presentation.
Cash and Cash Equivalents, Receivables and Investments — We generate funds from the sale of money orders, official checks (including cashier's checks,
teller checks, and agent checks) and other payment instruments (classified as "Payment service obligations" in the Consolidated Balance Sheets). The
proceeds are invested in cash and cash equivalents and investments until needed to satisfy the liability to pay the face amount of the payment service
obligations upon presentment.
Cash and Cash Equivalents (substantially restricted) — We consider cash on hand and all highly liquid debt instruments purchased with original maturities
of three months or less to be cash and cash equivalents.
Receivables, net (substantially restricted) — We have receivables due from financial institutions and agents for payment instruments sold. These receivables
are outstanding from the day of the sale of the payment instrument until the financial institution or agent remits the funds to us. We provide an allowance for
the portion of the receivable estimated to become uncollectible using historical charge-off and recovery patterns, as well as current economic conditions.
We sell an undivided percentage ownership interest in certain of these receivables, primarily receivables from our money order agents. The sale is recorded
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Upon sale, we remove the sold agent receivables from the Consolidated Balance Sheets as we have surrendered control over
those receivables.
Investments (substantially restricted) — Our investments consist primarily of mortgage-backed securities, other asset-backed securities, state and municipal
government obligations and corporate debt securities, and are recorded at fair value. These investments are held in custody with major financial institutions.
We classify securities as available-for-sale or held-to-maturity in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. During the first quarter of 2003, we determined that we no longer had the positive intent to hold to maturity the securities classified as held-to-
maturity due to the desire to have more flexibility in managing the investment portfolio. Accordingly, on March 31, 2003, we reclassified securities in the
portfolio from held-to-maturity to available-for-sale. As a result of this reclassification, we cannot classify any securities as held-to-maturity until March 31,
2005.
Securities held for indefinite periods of time, including those securities that may be sold to assist in the clearing of payment service obligations or in the
management of securities, are classified as securities available-for-sale. These securities are reported at fair value, with the net after-tax unrealized gain or
loss reported as a separate component of stockholders' equity. There are no securities classified as trading securities.
Other asset-backed securities are collateralized by various types of loans and leases, including home equity, corporate, manufactured housing, credit card
and airline. Interest income on mortgage-backed and other asset-backed securities for which risk of credit loss is deemed remote is recorded utilizing the
level yield method. Changes in estimated cash flows, both positive and negative, are accounted for with retrospective changes to the carrying value of
investments in order to maintain a F-10