MoneyGram 2004 Annual Report Download - page 55

Table of Contents
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
level yield over the life of the investment. Interest income on mortgage-backed and other asset-backed investments for which risk of credit loss is not
deemed remote is recorded under the prospective method as adjustments of yield in accordance with EITF Issue No. 99-20, Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.
Securities with gross unrealized losses at the Consolidated Balance Sheet date are subject to our process for identifying other-than-temporary impairments in
accordance with SFAS No. 115 and EITF Issue No. 99-20. Securities that we deem to be other-than-temporarily impaired are written down to fair value in
the period the impairment occurs. Under SFAS No. 115, the assessment of whether such impairment has occurred is based on management's case-by-case
evaluation of the underlying reasons for the decline in fair value. We consider a wide range of factors about the security and use our best judgment in
evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. We evaluate mortgage-backed and
other asset-backed investments rated A and below for which risk of credit loss is deemed more than remote for impairment under EITF Issue No. 99-20.
When an adverse change in expected cash flows occurs, and if the fair value of a security is less than its carrying value, the investment is written down to
fair value. Any impairment charges are included in the Consolidated Statement of Income under "Net securities gains and losses."
Substantially Restricted — We are regulated by various state agencies which generally require us to maintain liquid assets and investments with an investment
rating of A or higher in an amount generally equal to the payment service obligation for those regulated payment instruments, namely teller checks, agent
checks, money orders, and money transfers. Consequently, a significant amount of cash and cash equivalents, receivables and investments are restricted to
satisfy the liability to pay the face amount of regulated payment service obligations upon presentment. We are not regulated by state agencies for payment
service obligations resulting from outstanding cashier's checks; however, we restrict a portion of the funds related to these payment instruments due to
contractual arrangements and/or Company policy. Assets restricted for regulatory or contractual reasons are not available to satisfy working capital or other
financing requirements.
We have unrestricted cash and cash equivalents, receivables and investments to the extent those assets exceed all payment service obligations. These amounts
are generally available; however, management considers a portion of these amounts as providing additional assurance that regulatory requirements are
maintained during the normal fluctuations in the value of investments. The following table shows the total amount of unrestricted assets at December 31:
2004 2003
(Dollars in thousands)
Cash and cash equivalents $ 927,042 $ 1,025,026
Receivables, net 771,966 755,734
Investments 6,335,493 6,013,757
8,034,501 7,794,517
Amounts restricted to cover payment service obligations (7,640,581) (7,421,481)
Unrestricted assets $ 393,920 $ 373,036
Derivative Financial Instruments — We recognize derivative instruments as either assets or liabilities on the Consolidated Balance Sheet and measure those
instruments at fair value. The accounting for changes in the fair value depends on the intended use of the derivative and the resulting designation.
For a derivative instrument designated as a fair value hedge, we recognize the gain or loss in earnings in the period of change, together with the offsetting loss
or gain on the hedged item. For a derivative instrument designated as a cash flow hedge, we initially report the effective portion of the derivative's gain or loss
in "Accumulated other comprehensive gain (loss)" in the Consolidated Statement of Stockholders' Equity and subsequently reclassify the net gain or loss into
earnings when the hedged exposure affects earnings. Derivatives designated as hedges are expected to be highly effective as the critical terms of these
instruments are the same as the underlying risks being hedged. The Company evaluates hedge effectiveness at its inception and on an on-going basis. Hedge
ineffectiveness, if any, is recorded in earnings on the F-11