Western Union 2007 Annual Report Download - page 59

57
Notes to Consolidated Financial Statements
redemption history and trends, measured on a quarterly basis.
Revenue is deferred for the portion of points expected to be
ultimately redeemed for discounts in a manner that refl ects the
consumer’s progress toward earning such discounts. Costs associ-
ated with the redemption of merchandise are refl ected in operating
expenses in the Consolidated Statements of Income.
Cost of Services
Cost of services consists of costs directly associated with providing
services to consumers, and is primarily comprised of commissions
paid to agents, which are recognized at the time of sale. Most
agents outside the U.S. also receive additional commissions
based on a portion of the foreign exchange revenue associated
with money transfer transactions. Other costs included in costs
of services include personnel, software, equipment, telecom-
munications, bank fees, depreciation and amortization, and other
operating expenses incurred in connection with providing money
transfers and other payment services.
Advertising Costs
Advertising costs are charged to operating expenses as incurred
or at the time the advertising fi rst takes place. Advertising costs
for the years ended December 31, 2007, 2006 and 2005 were
$264.2 million, $261.4 million and $243.3 million, respectively.
Income Taxes
For periods subsequent to the Spin-off, Western Union fi les its
own U.S. federal and state income tax returns. Western Union
fi les its own separate tax returns in foreign jurisdictions for periods
prior to and subsequent to the Spin-off, and foreign taxes are
paid in each respective jurisdiction locally.
Prior to the Spin-off, Western Union’s taxable income was
included in the consolidated U.S. federal income tax return of
First Data and also in a number of state income tax returns fi led
with First Data on a combined or unitary basis. Western Union’s
provision for income taxes was computed as if it were a separate
tax-paying entity for periods prior to the Spin-off, and federal
and state income taxes payable were remitted to First Data prior
to the Spin-off.
Western Union accounts for income taxes under the liability
method, which requires that deferred tax assets and liabilities be
determined based on the expected future income tax conse-
quences of events that have been recognized in the consolidated
fi nancial statements. Deferred tax assets and liabilities are rec-
ognized based on temporary differences between the fi nancial
statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the temporary
differences are expected to reverse.
The Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. FIN
48 addresses the determination of how tax benefi ts claimed or
expected to be claimed on a tax return should be recorded in
the consolidated fi nancial statements. Under FIN 48, the Company
recognizes the tax benefi ts from an uncertain tax position only
when it is more likely than not, based on the technical merits of
the position, that the tax position will be sustained upon examina-
tion, including the resolution of any related appeals or litigation.
The tax benefi ts recognized in the consolidated fi nancial state-
ments from such a position are measured as the largest benefi t
that has a greater than fi fty percent likelihood of being realized
upon ultimate resolution. As a result of the implementation of
FIN 48, the Company recognized an increase in the liability for
unrecognized tax benefi ts plus associated accrued interest and
penalties of $0.6 million, which was accounted for as a reduction
to the January 1, 2007 balance of retained earnings.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of Western
Union’s businesses except certain investments and subsidiaries
located primarily in Ireland and Argentina. Foreign currency
denominated assets and liabilities for those entities for which
the local currency is the functional currency are translated into
United States dollars based on exchange rates prevailing at the
end of the period. Revenues and expenses are translated at
average exchange rates prevailing during the period. The effects
of foreign exchange gains and losses arising from the translation
of assets and liabilities of those entities where the functional
currency is not the United States dollar are included as a com-
ponent of “Accumulated other comprehensive loss.” Foreign
currency translation gains and losses on assets and liabilities of
foreign operations in which the United States dollar is the func-
tional currency are recognized in operations.
Derivative Financial Instruments
Western Union utilizes derivative instruments to mitigate foreign
currency and interest rate risk. The Company recognizes all
derivative instruments in the “Other assets” and “Other liabilities”
captions in the accompanying Consolidated Balance Sheets at
their fair value. All cash fl ows associated with derivatives are
included in cash fl ows from operating activities in the Consol-
idated Statements of Cash Flows other than those previously
designated as cash fl ow hedges that were determined to not
qualify for hedge accounting as described in Note 12.
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CASH FLOW HEDGES — Changes in the fair value of derivatives
that are designated and qualify as cash fl ow hedges in accor-
dance with Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” as amended and interpreted (“SFAS No.
133”) are recorded in “Accumulated other comprehensive
loss.” Cash fl ow hedges consist of foreign currency hedging
of forecasted sales, as well as, from time to time, hedges of
anticipated fi xed rate debt issuances. Derivative fair value
changes that are captured in Accumulated other comprehen-
sive 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 ineffective
or is excluded from the measure of effectiveness is recognized
immediately in “Derivative gains/(losses), net.”