Visa 2012 Annual Report Download - page 53

Table of Contents
(i) Visa Europe's stated intentions; (ii) indications that Visa Europe is preparing to exercise as reflected in its reported financial
results; (iii) evaluation of market conditions, including the regulatory environment, that could impact the potential future profitability
of Visa Europe; and (iv) qualitative factors applicable to Visa Europe's largest members, which could indicate a change in their
need or desire to liquidate their investment holdings.
P/E Differential— The P/E differential is determined by estimating the relative difference in the forward price-to-earnings
multiples applicable to our common stock, as defined in the put option agreement, and that applicable to Visa Europe at the time of
exercise. For valuation purposes, the forward price-to-earnings multiple applicable to our common stock at the time of exercise is
estimated by evaluating various quantitative measures and qualitative factors. Quantitatively, we estimate our P/E ratio by dividing
the average stock price over the preceding 24 months (the “long-term P/E calculation”) and the last 30 trading dates (the “30-day
P/E calculation”) prior to the measurement date by the median estimate of our net income per share for the 12 months starting with
the next calendar quarter immediately following the reporting date. This median earnings estimate is obtained from the Institutional
Brokers' Estimate System (I/B/E/S). We then determine the best estimate of our long-term price-to-earnings multiple for valuation
purposes by qualitatively evaluating the 30-day P/E calculation as compared to the long-term P/E calculation. In this evaluation we
examine both measures to determine whether differences, if any, are the result of a fundamental change in our long-term value or
the result of short-term market volatility or other non-Company specific market factors that may not be indicative of our long-term
forward P/E. We believe, given the perpetual nature of the put option, that a market participant would more heavily weight long-
term
value indicators, as opposed to short-term indicators.
Factors that might indicate a fundamental change in long-term value include, but are not limited to, changes in the regulatory
environment, client portfolio, long-term growth rates or new product innovation. A consistent methodology is applied to a group of
comparable public companies used to estimate the forward price-to-earnings multiple applicable to Visa Europe. These estimates,
therefore, are impacted by changes in stock prices and the financial market's expectations of our future earnings and those of the
comparable companies.
Other estimates of lesser significance include growth rates and foreign currency exchange rates applied in the calculation of
Visa Europe's adjusted sustainable income. The valuation model assumes a large range of annual growth rates, reflecting the
different economic environments and circumstances under which Visa Europe could decide to exercise. The lowest growth rates
assumed reflect Visa Europe's current business model as an association, owned by its member banks, while the highest reflect a
successful shift to a for-profit model in anticipation of exercise. The scenarios with higher growth rates are assigned a significantly
higher probability in the valuation model, as we believe a market participant would more heavily weight these scenarios as it is likely
that, should it choose to exercise its option, Visa Europe will seek to maximize the purchase price by adopting a for-profit business
model in advance of exercising the put option. The foreign exchange rate used to translate Visa Europe's results from Euros to U.S.
dollars reflects a blend of forward exchange rates observed in the marketplace. The assumed timing of exercise of the put option
used in the various modeled scenarios is not an overly significant assumption in the valuation, as obligations calculated in later
years are more heavily discounted in the calculation of present value.
Impact if Actual Results Differ from Assumptions. In the determination of the fair value of the put option at September 30,
2012 , we have assumed a 40% probability of exercise by Visa Europe at some point in the future and an estimated long-term P/E
differential at the time of exercise of approximately 1.9 x. The use of a probability of exercise that is 5% higher than our estimate
would have resulted in an increase of approximately
$18 million in the value of the put option. An increase of 1.0x in the assumed
P/E differential would have resulted in an increase of approximately $84 million in the value of the put option. The put option is
exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities on our
consolidated balance sheet at September 30, 2012 . Classification in current liabilities is not an indication of management's
expectation of exercise and simply reflects the fact that this obligation could become payable within 12 months.
Legal and Regulatory Matters
Critical Estimates. We are currently involved in various legal proceedings, the outcomes of which are not within our complete
control or may not be known for prolonged periods of time. Management is required to assess the probability of loss and amount of
such loss, if any, in preparing our financial statements.
Assumptions and Judgment. We evaluate the likelihood of a potential loss from legal or regulatory proceedings to which we
are a party. We record a liability for such claims when a loss is deemed probable and the amount can be reasonably estimated.
Significant judgment may be required in the determination of both probability
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