NetSpend 2015 Annual Report Download - page 19

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Given its history of acquisitions, TSYS may allocate part of the purchase price of future acquisitions to contingent
consideration as required by generally accepted accounting principles (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 GAAP, 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 7 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, 2015 was $1.5 billion.
Long-lived Assets and Intangibles
In evaluating long-lived assets and intangibles 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. The Company did not recognize any impairment charges
during the years ended December 31, 2015, 2014 and 2013.
Revenue Recognition
The Company recognizes revenues in accordance with the provisions of GAAP, 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 GAAP to address 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 TSYS’ business and service offerings change in the future, the determination of the number of deliverables in
an arrangement and related units of accounting and future pricing practices may result in changes in the
estimates of vendor-specific objective evidence of selling price (VSOE) and estimates of the standalone selling
price (ESP), which may change the ratio of fees allocated to each service or unit of accounting in a given
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