Western Union 2006 Annual Report Download - page 44

WESTERN UNION 2006 Annual Report 42
Components of Revenue and Expenses
The following briefly describes the components of revenue
and expenses as presented in the consolidated statements
of income. Descriptions of our revenue recognition policies
are included in Note 2 — “Summary of Significant Accounting
Policies” in our consolidated financial statements.
TRANSACTION FEES — Transaction fees are charged to
consumers for sending money transfers and consumer-
to-business payments. Consumer-to-consumer transaction
fees generally vary according to the principal amount of
the money transfer and the locations from and to which
the funds are sent. Transaction fees represented 83% of
Western Union’s total consolidated revenues for the year
ended December 31, 2006, and are most reflective of our
performance.
FOREIGN EXCHANGE REVENUE — In certain consumer
money transfer transactions involving different send
and receive currencies, we generate revenue based
on the difference between the exchange rate set by us
to the consumer and the rate at which we or our agents
are able to acquire currency. Foreign exchange revenue
growth has historically been driven principally by growth
in international cross-currency transactions rather than
changes to the foreign exchange spread. Foreign exchange
revenue represented approximately 15% of Western
Union’s total consolidated revenues for the year ended
December 31, 2006.
COMM I S S I ON A N D OTH E R REVEN U ES — Commission
and other revenues represented approximately 2% of
our total consolidated revenue for the year ended
December 31, 2006. Commission and other revenues
consist of commissions we receive in connection with the
sale of money orders, enrollment fees received when
consumers enroll in our Equity Accelerator® program
(a recurring mortgage payment service program), revenue
recorded for reimbursable costs incurred to operate
payment services programs and investment income
primarily derived from interest generated on money transfer
and payment services settlement assets as well as realized
net gains and losses from such assets.
COST OF SERVICES — Cost of services includes the costs
directly associated with providing services to consumers,
including commissions paid to agents and billers, personnel
expenses, software maintenance costs, equipment,
telecommunications costs, bank fees, infrastructure costs
to provide the resources and materials necessary to offer
money transfer and other payment services (including
reimbursable costs), depreciation and amortization expense,
and other operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE — Selling, general
and administrative, or “SG&A,” primarily consists of salaries,
wages and related expenses paid to sales and administrative
personnel, as well as advertising and promotional costs
and other selling and administrative expenses. Prior to
September 29, 2006, the date of the spin-off, SG&A also
includes allocations of general corporate overhead costs
from First Data.
INTEREST INCOME — Interest income consists of interest
earned on cash balances not required to satisfy settlement
obligations and in connection with a loan made to one of
our agents.
INTEREST EXPENSE — Interest expense represents interest
incurred in connection with outstanding borrowings payable
to third parties.
DERIVATIVE (LOSSES)/GAINS, NET — Derivative gains and
losses include realized and unrealized gains and losses
associated with certain foreign currency forward contracts
that did not qualify as hedges under derivative accounting
rules prior to September 29, 2006, and the portion of the
change in fair value that is considered ineffective or is
excluded from the measure of effectiveness related to
contracts designated as accounting hedges entered into
on or after September 29, 2006. Derivative gains and losses
do not include fluctuations in foreign currency forward
contracts intended to mitigate exposures on settlement
activities of our money transfer business, which along
with the gains and losses on the revaluation of the related
settlement assets and obligations, are reflected in operating
expenses.
FOREIGN EXCHANGE EFFECT ON NOTES RECEIVABLE FROM
FIRST DATA, NET — Certain of the notes receivable from First
Data in our consolidated balance sheets were repayable
in euros, and certain of those euro denominated notes also
had foreign currency swap agreements associated with
them. These notes receivable were translated based on
current exchange rates between the euro and the United
States dollar, and changes in fair value of the related foreign
currency swap agreements were recorded based on current
market valuations. The effect of translation adjustments
and recording the foreign currency swaps to market
is reflected in our consolidated statements of income
as foreign exchange effect on notes receivable from
First Data. All notes receivable and payable with First
Data were settled in connection with the spin-off on
September 29, 2006.
INTEREST INCOME FROM FIRST DATA, NET — Interest income
from First Data, net consists of interest income earned on
notes receivable from First Data, net of interest expense
incurred on notes payable to First Data. All notes receivable
and payable were settled in connection with the spin-off
on September 29, 2006.
OTHER INCOME, NET — Other income, net is comprised
primarily of equity earnings from equity investments and
other income and expenses.