NetSpend 2013 Annual Report Download - page 12

Contract Acquisition Costs
In evaluating for recoverability, expected cash flows
are estimated by management. The Company
evaluates the carrying value of contract acquisition
costs associated with each customer for impairment
on the basis of whether these costs are fully
recoverable from either contractual minimum fees
(conversion costs) or from expected undiscounted net
operating cash flows of the related contract (cash
incentives paid). The determination of expected
undiscounted net operating cash flows requires
management to make estimates. 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.
These costs may become impaired with the loss of a
contract, the financial decline of a client, termination
of conversion efforts after a contract is signed, or
diminished prospects for current clients. Note 10 in
the consolidated financial statements contains a
discussion of contract acquisition costs. The net
carrying value of contract acquisition costs on the
Company’s Consolidated Balance Sheet as of
December 31, 2013 was $184.9 million.
Software Development Costs
In evaluating for recoverability, expected cash flows
are estimated by management. The Company
evaluates the unamortized capitalized costs of
software development as compared to the net
realizable value of the software product, which is
determined by expected undiscounted net operating
cash flows. The amount by which the unamortized
software development costs exceed the net
realizable value is written off in the period that such
determination is made. If the actual cash flows are
not consistent with the Company’s estimates, a
material write-off may result and net income may be
materially different than was initially recorded.
Assumptions and estimates about future cash flows
and remaining useful lives of software are complex
and subjective. They can be affected by a variety of
factors, including industry and economic trends,
changes in the Company’s business strategy, and
changes in internal forecasts. Note 8 in the
consolidated financial statements contains a
discussion of internally developed software costs. The
net carrying value of internally developed software on
the Company’s Consolidated Balance Sheet as of
December 31, 2013 was $82.0 million.
Acquisitions — Purchase Price Allocation
TSYS’ purchase price allocation methodology
requires the Company to make assumptions and to
apply judgment to estimate the fair value of acquired
assets and liabilities. TSYS estimates the fair value of
assets and liabilities based upon appraised market
values, the carrying value of the acquired assets and
widely accepted valuation techniques, including
discounted cash flows and market multiple analyses.
Management determines the fair value of fixed assets
and identifiable intangible assets such as developed
technology or customer relationships, and any other
significant assets or liabilities. TSYS adjusts the
purchase price allocation, as necessary, up to one
year after the acquisition closing date as TSYS
obtains more information regarding asset valuations
and liabilities assumed. Unanticipated events or
circumstances may occur which could affect the
accuracy of the Company’s fair value estimates,
including assumptions regarding industry economic
factors and business strategies, and result in an
impairment or a new allocation of purchase price.
Given its history of acquisitions, TSYS may allocate
part of the purchase price of future acquisitions to
contingent consideration as required by GAAP for
business combinations. The fair value calculation of
contingent consideration will involve a number of
assumptions that are subjective in nature and which
may differ significantly from actual results. TSYS may
experience volatility in its earnings to some degree in
future reporting periods as a result of these fair value
measurements.
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
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