Western Union 2007 Annual Report Download - page 41

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
DESCRIPTION
Tax Allocation agreement with First Data
Pursuant to a tax allocation agreement signed
in connection with our spin-off from First Data,
we and First Data each are liable for taxes
imposed on our respective businesses both
prior to and after the spin-off.
We are in the process of resolving certain
tax matters with First Data relating to periods
prior to the spin-off.
Derivative Financial Instruments
We utilize derivative instruments to mitigate
foreign currency and interest rate risk. We
recognize all derivative instruments in other
assets and other liabilities in our consolidated
balance sheets at their fair value. Cer tain of
our derivative arrangements are designated
as either cash fl ow hedges or fair value hedges
at the time of inception, and others are not
designated as hedges in accordance with SFAS
No. 133.
Cash Flow hedges — Cash flow hedges
consist of foreign currency hedging of fore-
casted sales and hedges of anticipated fi xed
rate debt issuances. Derivative value changes
that are captured in accumulated other com-
prehensive loss are reclassifi ed to earnings in
the same period or periods the hedged item
affects earnings, to the extent the change in the
fair value of the instrument is effective in offset-
ting the change in fair value of the hedged item.
The portion of the change in fair value that is
either considered ineffec tive or is excluded
from the measure of effectiveness is recognized
immediately in the income statement.
Fair Value hedges — Fair value hedges con-
sist of hedges of fi xed rate debt, through inter-
est rate swaps. The changes in fair value of
these hedges, along with offsetting changes
in fair value of the related debt instrument are
recorded in interest expense.
JUDGMENTS AND UNCERTAINTIES
Under the tax allocation agreement, with
respect to taxes and other liabilities that could
be imposed as a result of a fi nal determination
that is inconsistent with the anticipated tax
consequences of the spin-off (as set forth in
the private letter ruling and relevant tax opin-
ion), we may be liable to First Data for all or a
portion of any such taxes or liabilities.
The accounting guidance related to derivative
accounting is complex and contains strict docu-
mentation requirements.
The details of each designated hedging
relationship must be formally documented at
the inception of the arrangement, including
the risk management objective, hedging strat-
egy, hedged item, specifi c risks being hedged,
the derivative instrument, how effectiveness is
being assessed and how ineffectiveness, if any,
will be measured. The derivative must be highly
effective in offsetting the changes in cash fl ows
or fair value of the hedged item, and effective-
ness is evaluated quarterly on a retrospective
and prospective basis.
If the hedge is no longer deemed effective,
we discontinue applying hedge accounting to
that relationship prospectively.
EFFECT IF ACTUAL RESULTS
DIFFER FROM ASSUMPTIONS
Although we believe that we have appropriately
apportioned such taxes between First Data
and us through 2007, subsequent adjustments
may occur.
If we are required to indemnify First Data
for taxes incurred as a result of the spin-off
being taxable to First Data, it likely would have
a material adverse effect on our business,
fi nancial position, results of operations and
cash fl ows.
While we expect that our derivative instruments
that currently qualify for hedge accounting will
continue to meet the conditions for hedge
accounting, if hedges do not qualify for hedge
accounting, the changes in the fair value of the
derivatives used as hedges would be refl ected
in earnings which could have a significant
impact on our reported earnings.
As of December 31, 2007, the cumulative
amount of unrealized losses classifi ed within
accumulated other comprehensive loss that
would be refl ected in earnings if our hedges
were disqualifi ed from hedge accounting, net
of income taxes, was $43.7 million.