NetSpend 2014 Annual Report Download - page 56

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Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that
are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs for the asset or liability.
Goodwill is assessed annually for impairment in the second quarter of each year using fair value measurement
techniques. Specifically, goodwill impairment is determined using a two-step test. The first step of the goodwill
impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (RU) with
its book value, including goodwill. If the fair value of the RU exceeds its book value, goodwill is considered not
impaired and the second step of the impairment test is unnecessary. If the book value of the RU exceeds its fair
value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if
any. The second step of the goodwill impairment test compares the implied fair value of the RU’s goodwill with
the book value of that goodwill. If the book value of the RU’s goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess. The fair value of the RU is allocated
to all of the assets and liabilities of that unit as if the RU had been acquired in a business combination and the fair
value of the RU was the purchase price paid to acquire the RU.
The estimate of fair value of the Company’s RUs is determined using various valuation techniques, including
using an equally weighted combination of the market approach and the income approach. The market approach,
which contains Level 2 inputs, utilizes readily available market valuation multiples to estimate fair value. The
income approach is a valuation technique that utilizes the discounted cash flow (DCF) method, which includes
Level 3 inputs. Under the DCF method, the fair value of the RU reflects the present value of the projected
earnings that will be generated by each RU 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 the invested capital. Cash flows are estimated for future periods based upon
historical data and projections by management.
As of December 31, 2014, the Company had recorded goodwill in the amount of $1.5 billion. The Company
performed its annual impairment test of its goodwill balances as of May 31, 2014, and this test did not indicate
any impairment. The fair value of the RUs substantially exceeds the carrying value. Refer to Note 7 for more
information regarding goodwill.
The fair value of the Company’s long-term debt and obligations under capital leases is not significantly different
from its carrying value.
Note 4 Relationships with Affiliated Companies
During December 2014, TSYS Managed Services obtained a £900,000, or approximately $1.4 million, pound-
denominated term loan bearing interest at a rate of LIBOR plus two percent. The loan matures in December
2017, and has monthly interest payments. The lender in this transaction is Merchants Limited, who has a
noncontrolling interest in TSYS Managed Services. Refer to Note 13 for more information regarding this loan.
The Company provides electronic payment processing and other services to the Company’s equity investments,
TSYS de México and CUP Data.
The foregoing related party arrangements and services are performed under contracts that are similar to its
contracts with unrelated third party customers. The Company believes the terms and conditions of transactions
between the Company and these related parties are comparable to those which could have been obtained in
transactions with unaffiliated parties.
Through its related party transactions, TSYS generates accounts receivable and liability accounts with TSYS de
México and CUP Data.
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