MoneyGram 2007 Annual Report Download - page 85

Table of Contents
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sheets are unclassified due to the short-term nature of the settlement obligations, contrasted with the ability to invest cash awaiting
settlement in long-term investment securities.
Principles of Consolidation — The consolidated financial statements include the accounts of MoneyGram International, Inc. and its
subsidiaries. Inter-company profits, transactions and account balances have been eliminated in consolidation.
Consolidation of Special Purpose Entities — The Company participates in various trust arrangements (special purpose entities) related to
official check processing agreements with financial institutions and structured investments within the investment portfolio. The Company
has determined that these special purpose entities ("SPE") meet the definition of a variable interest entity under Financial Interpretation
("FIN") 46R, Consolidation of Variable Interest Entities, and must be included in our Consolidated Financial Statements. Working in
cooperation with certain financial institutions, the Company has established separate consolidated entities (SPEs) and processes that
provide these financial institutions with additional assurance of our ability to clear their official checks. These processes include
maintenance of specified ratios of segregated investments to outstanding payment instruments, typically 1 to 1. The Company remains
liable to satisfy the obligations, both contractually and by operation of the Uniform Commercial Code, as issuer and drawer of the official
checks. Accordingly, the obligations have been recorded in the Consolidated Balance Sheets under "Payment service obligations." Under
certain limited circumstances, clients have the right to either demand liquidation of the segregated assets or to replace us as the
administrator of the SPE. Such limited circumstances consist of material (and in most cases continued) failure of MoneyGram to uphold
its warranties and obligations pursuant to its underlying agreements with the financial institution clients. While an orderly liquidation of
assets would be required, any of these actions by a client could nonetheless diminish the value of the total investment portfolio, decrease
earnings and result in loss of the client or other customers or prospects. The Company offers the SPE to certain financial institution
clients as a benefit unique in the payment services industry.
Certain structured investments owned by the Company 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, the Company owns a percentage
of the beneficial interests which results in the Company absorbing a majority of the expected losses. Therefore, the Company
consolidates these trusts by recording and accounting for the assets of the trust separately in the Consolidated Financial Statements.
The Company follows the accounting guidance in Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, to determine whether or not SPEs are qualifying SPEs (a
"QSPE"). A QSPE is an entity with significantly limited permissible activities which are entirely specified in the legal documents
establishing the SPE and may only be significantly changed with the approval of the holders of at least a majority of the beneficial
interests held by parties other than the sponsoring company. If the Company has a variable interest in a QSPE, or is a sponsor of an SPE
that does not meet the criteria required to be a QSPE, the Company follows the accounting guidance in FIN 46R to determine if the
Company is required to consolidate the SPE.
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.
Cash and Cash Equivalents, Receivables and Investments — The Company generates funds from the sale of money orders, official
checks (including cashier's checks, teller checks and agent checks) and other payment instruments, all of which are 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.
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