NetSpend 2012 Annual Report Download - page 12

Goodwill
In evaluating for impairment, discounted net cash
flows for future periods are estimated by
management. In accordance with the provisions of
Accounting Standards Codification (ASC) 350,
“Intangibles — Goodwill and Other,” goodwill is
required to be tested for impairment at least
annually. The combination of the income approach
utilizing the discounted cash flow (DCF) method and
the market approach, utilizing readily available
market valuation multiples, is used to estimate the
fair value. Under the DCF method, the fair value of
the asset reflects the present value of the projected
earnings that will be generated by each asset after
taking into account the revenues and expenses
associated with the asset, the relative risk that the
cash flows will occur, the contribution of other assets,
and an appropriate discount rate to reflect the value
of invested capital. Cash flows are estimated for
future periods based on historical data and
projections provided by management. If the actual
cash flows are not consistent with the Company’s
estimates, a material impairment charge may result
and net income may be materially different than was
initially recorded. Note 10 in the consolidated
financial statements contains a discussion of goodwill.
The net carrying value of goodwill on the Company’s
Consolidated Balance Sheet as of December 31,
2012 was $518.3 million.
Long-lived Assets and Intangibles
In evaluating for recoverability, expected
undiscounted net operating cash flows are estimated
by management. The Company reviews long-lived
assets, such as property and equipment and
intangibles subject to amortization, including contract
acquisition costs and certain computer software, for
impairment whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of
assets to be held and used is measured by a
comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected
to be generated by the asset. If the actual cash flows
are not consistent with the Company’s estimates, a
material impairment charge may result and net
income may be materially different than was initially
recorded.
Revenue Recognition
The Company recognizes revenues in accordance
with the provisions of Staff Accounting Bulletin (SAB)
No. 104, which sets forth guidance as to when
revenue is realized or realizable and earned when all
of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has
occurred or services have been performed; (3) the
seller’s price to the buyer is fixed or determinable;
and (4) collectability is reasonably assured.
The Company evaluates its contractual
arrangements that provide services to clients through
a bundled sales arrangement in accordance with the
provisions of ASC 605 Revenue Recognition.
ASC 605 addresses the determination of whether an
arrangement involving more than one deliverable
contains more than one unit of accounting and how
the arrangement consideration should be measured
and allocated to the separate units of accounting.
A deliverable in multiple element arrangements
indicates any performance obligation on the part of
the seller and includes any combination of
obligations to perform different services, grant
licenses or other rights. Revenue is allocated to the
separate units of accounting in a multiple element
arrangement based on relative fair values, provided
the delivered element has standalone value to the
customer and delivery of any undelivered items is
probable and substantially within the Company’s
control. Evidence of fair value must be objective and
reliable. An item has value to the customer on a
standalone basis if it is sold separately by any vendor
or the customer could resell the deliverable on a
standalone basis.
As our business and service offerings change in
the future, our determination of the number of
deliverables in an arrangement and related units of
accounting and our future pricing practices may
result in changes in our estimates of vendor-specific
objective evidence of selling price (VSOE) and
estimate of the standalone selling price (ESP), which
may change the ratio of fees allocated to each
service or unit of accounting in a given customer
arrangement. There were no material changes or
impact to revenue in revenue recognition in the year
ended December 31, 2012 due to any changes in our
determination of the number of deliverables in an
arrangement, units of accounting, or estimates of
VSOE or ESP.
Reserve for Merchant Losses
The Company has potential liability for losses
resulting from disputes between a cardholder and a
merchant that arise as a result of, among other
things, the cardholder’s dissatisfaction with
merchandise quality or merchant services. Such
disputes may not be resolved in the merchant’s favor.
In these cases, the transaction is “charged back” to
the merchant, which means the purchase price is
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