Western Union 2006 Annual Report Download - page 79

Notes to Consolidated Financial Statements 77
|| 5. Commitments and
Contingencies
In the normal course of business, Western Union is subject
to claims and litigation. Management of Western Union
believes such matters involving a reasonably possible
chance of loss will not, individually or in the aggregate,
result in a materially adverse effect on Western Union’s
financial position, results of operations or cash flows.
Western Union accrues for loss contingencies as they
become probable and estimable.
On August 21, 2006, the Interregional Inspectorate
No. 50 of the Federal Tax Service of the Russian Federation
for the City of Moscow (“Tax Inspectorate”) issued a tax
audit report to OOO Western Union MT East (“MT East”),
an indirect wholly owned subsidiary of the Company,
asserting claims for the underpayment of Russian
Value Added Taxes (“VAT”) related to the money transfer
activities of MT East in Russia during 2003 and 2004.
On October 24, 2006, the Tax Inspectorate issued its final
decision for tax assessment and tax demand notices to
MT East for approximately $20 million, including a 20%
penalty and applicable interest to date, which assessment
MT East challenged in the applicable Russian court. The
court has issued its ruling in favor of MT East holding
that the services provided in Russia by MT East qualify
as banking services which are not subject to VAT.
The Tax Inspectorate may appeal this ruling. As of
December 31, 2006, the Company has not accrued any
potential loss or associated penalties and interest based
on the ruling issued by the court and the Company’s belief
that such services qualify as banking services and are not
subject to tax.
Western Union is subject to unclaimed or abandoned
property (escheat) laws in the United States and abroad.
These laws require the Company to turn over to certain
government authorities the property of others held by
the Company that has been unclaimed for a specified
period of time, such as unredeemed money transfers.
The Company holds property subject to escheat laws and
the Company has an ongoing program to comply with the
laws. The Company is subject to audits with regard to its
escheatment practices.
In 2002, Affiliated Computer Services (“ACS”) notified
First Data of its intent to audit First Data’s escheatment
practices (and those of all its subsidiaries) on behalf of
19 states (the “ACS States”). The ACS States have
subsequently increased to 43 states. However, the ACS
States have agreed to allow First Data and its subsidiaries
to conduct an internal examination of their escheatment
practices utilizing third-party experts. First Data has
independently entered into Voluntary Disclosure Agreements
with four other states (the “VDA States”). Like the ACS
States, the VDA States agreed to allow First Data and
its subsidiaries to conduct their own internal review in
place of an audit by the states.
First Data completed the majority of its internal review
in December 2005. As a result of that review, and in addition
to amounts already recorded, the Company recognized an
$8.2 million pretax charge, reflected in “Cost of Services”
in the Consolidated Statements of Income, in the fourth
quarter of 2005 for domestic and international escheatment
liabilities (portions of this charge are not scheduled to be
remitted until periods beyond 2006). Western Union
and First Data have agreed that First Data will continue
discussions with the ACS States and VDA States on behalf
of Western Union and is authorized to settle the escheat
liabilities within specified parameters.
Western Union has completed its internal review and
is in the final discussions of the results thereof with the
ACS States and the VDA States. Any difference between
the amounts accrued by the Company and those claimed
by a state or foreign jurisdiction will be reflected in the
periods in which any resolutions occur.
The Company has $55.9 million in outstanding letters
of credit and bank guarantees at December 31, 2006 with
expiration dates through 2011, certain of which contain a
one-year renewal option. The letters of credit and bank
guarantees are primarily held in connection with lease
arrangements and agent settlement agreements. The
Company expects to renew the letters of credit prior to
expiration in most circumstances.
Pursuant to the Separation and Distribution Agreement
with First Data in connection with the spin-off (see
Note 1), First Data and the Company are each liable for,
and agreed to perform, all liabilities with respect to their
respective businesses. In addition, the separation and
distribution agreement also provides for cross-indemnities
principally designed to place financial responsibility for the
obligations and liabilities of the Company’s business with
the Company and financial responsibility for the obligations
and liabilities of First Data’s retained businesses with
First Data. The Company also entered into a tax allocation
agreement that sets forth the rights and obligations of First
Data and the Company with respect to taxes imposed on
their respective businesses both prior to and after the
spin-off as well as potential tax obligations for which the
Company may be liable in conjunction with the spin-off
(see Note 10).
|| 6. Settlement Assets and
Settlement Obligations
Settlement assets represent funds received or to be
received from agents for unsettled money transfers and
consumer payments. Western Union records corresponding
settlement obligations relating to amounts payable under
money transfer and payment service arrangements. The
difference in the aggregate amount of settlement assets
and obligations is due to cumulative unrealized net investment
gains and losses.