MoneyGram 2007 Annual Report Download - page 101

Table of Contents
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
points on the fair value of the collateral. The collateral advisor also received and recognized a one-time fee of $0.4 million in August
2006 for the placement of the preferred shares of the QSPE.
The Company evaluated the sale of the securities under the accounting guidance of SFAS No. 140 to determine if the transfer of
securities to the acquiring party constituted a sale for accounting purposes, as well as to determine if the subsequent placement of the sold
securities into the QSPE by the acquiring party would be deemed a transfer of securities by the Company to the QSPE. Based upon the
terms of the sale to the acquiring party and legal documents relating to the QSPE, the Company determined that sale accounting was
achieved upon transfer of the securities to the acquiring party and that the Company was not a transferor of securities to the QSPE. The
Company then evaluated the accounting guidance of FIN 46R to determine whether the Company was required to consolidate the QSPE.
As the Company does not have the unilateral ability to liquidate the QSPE or to change the entity so that it no longer meets the
requirements of a QSPE through either its ownership of the preferred shares or its subsidiary's role as collateral advisor, the Company is
not required to consolidate the QSPE.
Note 5 — Derivative Financial Instruments
Derivative contracts are financial instruments such as forwards, futures, swaps or option contracts that derive their value from underlying
assets, reference rates, indices or a combination of these factors. A derivative contract generally represents future commitments to
purchase or sell financial instruments at specified terms on a specified date or to exchange currency or interest payment streams based on
the contract or notional amount. The Company uses derivative instruments primarily to manage exposures to fluctuations in interest rates
and foreign currency exchange rates.
Cash flow hedges use derivatives to offset the variability of expected future cash flows. Variability can arise in floating rate assets and
liabilities, from changes in interest rates or currency exchange rates or from certain types of forecasted transactions. The Company enters
into foreign currency forward contracts of 12 months to hedge forecasted foreign currency money transfer transactions. The Company
designates these currency forwards as cash flow hedges. If the forecasted transaction underlying the hedge is no longer probable of
occurring, any gain or loss recorded in equity is reclassified into earnings. The notional amount of these currency forwards as of
December 31, 2007 is $40.5 million, all maturing in 2008.
The Company has also entered into swap agreements to mitigate the effects on cash flows of interest rate fluctuations on variable rate
debt and commissions paid to financial institution customers of our Payment Systems segment. The agreements involve varying degrees
of credit and market risk in addition to amounts recognized in the financial statements. These swaps are designated as cash flow hedges.
The swap agreements are contracts to pay fixed and receive floating payments periodically over the lives of the agreements without the
exchange of the underlying notional amounts. The notional amounts of such agreements are used to measure amounts to be paid or
received and do not represent the amount of the exposure to credit loss. The amounts to be paid or received under the swap agreements
are accrued in accordance with the terms of the agreements and market interest rates.
The notional amount of the swap agreements totaled $1.4 billion and $2.6 billion at December 31, 2007 and 2006, respectively, with an
average fixed pay rate of 4.3 percent and 4.3 percent and an average variable receive rate 4.2 percent and 5.2 percent at December 31,
2007 and 2006, respectively. The variable rate portion of the swaps is generally based on Treasury bill, federal funds or 6 month LIBOR.
As the swap payments are settled, the net difference between the fixed amount the Company pays and the variable amount the Company
receives is reflected in the Consolidated Statements of (Loss) Income in "Investment commissions expense." The amount recognized in
earnings due to ineffectiveness of the cash flow hedges is not material for any year presented. The Company estimates that approximately
$3.6 million (net of tax) of the unrealized loss reflected in the "Accumulated other comprehensive loss" component in the Consolidated
Balance Sheet as of December 31, 2007 will be reflected in the
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