MoneyGram 2011 Annual Report Download - page 96

Table of Contents
trading securities at fair value, with gains or losses reported in the Consolidated Statements of Income (Loss). Securities held for indefinite periods of time,
including any securities that may be sold to assist in the clearing of payment service obligations or in the management of the investment portfolio, are
classified as available−for−sale securities. These securities are recorded at fair value, with the net after−tax unrealized gain or loss recorded as a separate
component of stockholders’ deficit. Realized gains and losses and other−than−temporary impairments are recorded in the Consolidated Statements of
Income (Loss).
Interest income on “Residential mortgage−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 level yield over the life of the investment. Interest income on mortgage−backed securities for which risk of credit loss is not deemed remote is
recorded under the prospective method as adjustments of yield.
The Company applies the cost recovery method of accounting for interest to its investments categorized as “Other asset−backed securities.” The cost
recovery method accounts for interest on a cash basis and treats any interest payments received as deemed recoveries of principal, reducing the book value
of the related security. When the book value of the related security is reduced to zero, interest payments are then recognized as income upon receipt. The
Company applies the cost recovery method of accounting as it believes it is probable that the Company will not recover all, or substantially all, of its
principal investment and interest for its “Other asset−backed securities” given the sustained deterioration in the investment and securities market, the
collapse of many asset−backed securities and the low levels to which the securities have been written down.
Securities with gross unrealized losses at the balance sheet date are subject to a process for identifying other−than−temporary impairments. Securities that
the Company deems to be other−than−temporarily impaired are written down to fair value in the period the impairment occurs. The assessment of whether
such impairment has occurred is based on management’s evaluation of the underlying reasons for the decline in fair value on an individual security basis.
The Company considers a wide range of factors about the security and uses its best judgment in evaluating the cause of the decline in the estimated fair
value of the security and the prospects for recovery. The Company considers an investment to be other−than−temporarily impaired when it is deemed
probable that the Company will not receive all of the cash flows contractually stipulated for the investment. The Company evaluates mortgage−backed and
other asset−backed investments rated A and below for which risk of credit loss is deemed more than remote for impairment. 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 through a permanent
reduction to its amortized cost. Securities gains and losses are recognized upon the sale, call or maturity of securities using the specific identification method
to determine the cost basis of securities sold. Unrealized gains and losses resulting from changes in the fair value of trading investments and put options
related to trading investments are recognized in the period in which the change occurs. Any impairment charges and other securities gains and losses are
included in the Consolidated Statements of Income (Loss) under “Net securities (gains) losses.”
Payment Service Obligations — Payment service obligations primarily consist of: outstanding payment instruments; amounts owed to financial institutions
for funds paid to the Company to cover clearings of official check payment instruments, remittances and clearing adjustments; amounts owed to agents for
funds paid to consumers on behalf of the Company; commissions owed to financial institution customers and agents for instruments sold; amounts owed to
investment brokers for purchased securities; and unclaimed instruments owed to various states. These obligations are recognized by the Company at the
time the underlying transactions occur.
Fair Value of Financial Instruments — Financial instruments consist of cash and cash equivalents, investments, derivatives, deferred compensation and
debt. The carrying values of cash and cash equivalents and short−term investments approximate fair value due to the short−term nature of these instruments.
The carrying value of debt is stated at amortized cost, and for disclosure purposes the fair value is estimated. See Note 4 — Financial Instruments and Fair
Value Measurement for information regarding the principles and processes used to estimate the fair value of financial instruments.
Derivative Financial Instruments — The Company recognizes derivative instruments in the Consolidated Balance Sheets at fair value. The accounting for
changes in the fair value depends on the intended use of the
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