Visa 2014 Annual Report Download - page 72

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Assumptions and judgment. Estimation of client incentives relies on forecasts of payments
volume, card issuance and card conversion. Performance is estimated using customer-reported
information, transactional information accumulated from our systems, historical information and
discussions with our clients.
Impact if actual results differ from assumptions. If our clients’ actual performance or recoverable
cash flows are not consistent with our estimates, client incentives may be materially different than
initially recorded. Increases in incentive payments are generally driven by increased payments and
transaction volume, which drive our net revenues. As a result, in the event incentive payments exceed
estimates, such payments are not expected to have a material effect on our financial condition, results
of operations or cash flows. The cumulative impact of a revision in estimates is recorded in the period
such revisions become probable and estimable. For the year ended September 30, 2014, client
incentives represented 17% of gross operating revenues.
Fair Value—Visa Europe Put Option
Critical estimates. We have granted Visa Europe a perpetual put option which, if exercised, will
require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members.
The put option provides a formula for determining the purchase price of the Visa Europe shares, which,
subject to certain adjustments, applies our forward price-to-earnings multiple, or the P/E ratio (as
defined in the option agreement), at the time the option is exercised to Visa Europe’s projected
adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income (as
defined in the option agreement). The calculation of Visa Europe’s adjusted sustainable income under
the terms of the put option agreement includes potentially material adjustments for cost synergies and
other negotiated items.
Upon exercise, the key inputs to this formula, including Visa Europe’s adjusted sustainable
income, will be the result of negotiation between us and Visa Europe. The put option provides an
arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase
price. See Note 2—Visa Europe to our consolidated financial statements for further detail regarding the
calculation of the put exercise price under the agreement.
The fair value of Visa Europe’s option was estimated to be approximately $145 million at
September 30, 2014. While the put option is in fact non-transferable, this amount, recorded in our
financial statements, represents our estimate of the amount we 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.
While this amount represents the fair value of the put option at September 30, 2014, it does not
represent the actual purchase price that we may be required to pay if the option is exercised. Given
current economic conditions, the purchase price under the terms of the put option would likely be in
excess of $10 billion. See the Liquidity and Capital Resources section of Management’s Discussion
and Analysis of Financial Condition and Results of Operations for further discussion.
Assumptions and judgment. The most significant estimates used in the valuation of the put option
are the assumed probability that Visa Europe will elect to exercise its option and the estimated
differential between the forward price-to-earnings multiple applicable to our common stock, as defined
in the put option agreement, and that applicable to Visa Europe on a stand-alone basis at the time of
exercise, which we refer to as the P/E differential.
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