Visa 2012 Annual Report Download - page 76

Table of Contents VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2012
could obligate the Company to purchase its member equity interest for an amount above fair value. The fair value of the put option
does not represent the actual purchase price that the Company may be required to pay if the option is exercised, which could be
several billion dollars or more. While the put option is in fact non-transferable, its fair value represents the Company's estimate of
the amount the Company would be required to pay a third-party market participant to transfer the potential obligation in an orderly
transaction.
The fair value of the put option is computed by comparing the estimated strike price, under the terms of the Put agreement, to
the estimated fair value of Visa Europe. The fair value of Visa Europe is defined as the estimated amount a third-party market
participant might pay in an arm's-length transaction under normal business conditions. A probability of exercise assumption is
applied to reflect the possibility that Visa Europe will never exercise its option.
The estimated fair value of the put option represents a Level 3 accounting estimate due to a lack of trading in active markets
and a lack of observable inputs in measuring fair value. See Note 4—Fair Value Measurements and Investments . The valuation of
the put option therefore requires substantial judgment. The most subjective of estimates applied in valuing the put option are the
assumed probability that Visa Europe will elect to exercise its option and the estimated differential between the P/E ratio and the
P/E ratio applicable to Visa Europe on a standalone basis at the time of exercise, which the Company refers to as the “P/E
differential.”
Exercise of the put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe shareholders pursuant to
authority granted to Visa Europe, under its Articles of Association). The Company estimates the assumed probability of exercise
based on reasonably available information including, but not limited to: (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. Factors
impacting the assumed P/E differential used in the calculation include material changes in the P/E ratio of Visa and those of a group
of comparable companies used to estimate the forward price-to-earnings multiple applicable to Visa Europe.
The Company determined the fair value of the put option to be approximately $145 million at September 30, 2012
and 2011. In
determining the fair value of the put option on these dates, the Company 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 1.9 x. During fiscal 2011, the
Company reduced the value of the put option by $122 million , recording non-cash, non-operating other income in the consolidated
statement of operations. The decrease in the value of the put option reflects the overall decrease in Visa's P/E during fiscal 2012
and 2011 as compared to fiscal 2010, and does not reflect any change in the likelihood that Visa Europe will exercise its option.
Reductions in the fair value of the put option are recorded as non-cash other non-operating income in the Company's consolidated
statements of operations.
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 the obligation resulting from the exercise of the instrument
could become payable within 12 months.
Visa Call Option Agreement. Visa Europe granted to Visa a perpetual call option under which the Company may be entitled to
purchase all of the share capital of Visa Europe. The Company may exercise the call option in the event of certain triggering events.
These triggering events involve the performance of Visa Europe measured as an unremediated decline in the number of merchants
or ATM's in the Visa Europe region that accepts Visa-branded products. The Company believes the likelihood of these triggers
occurring is remote.
The Framework Agreement. The relationship between Visa and Visa Europe is governed by a Framework Agreement, which
provides for trademark and technology licenses and bilateral services as described below.
The Company granted to Visa Europe exclusive, irrevocable and perpetual licenses to use the Visa trademarks and
technology intellectual property owned by the Company and certain affiliates within the Visa Europe region for use in the field of
financial services, payments, related information technology and information processing services and participation in the Visa
system. Visa Europe may sublicense the Visa trademarks and technology
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