Western Union 2007 Annual Report Download - page 62

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WESTERN UNION 2007 Annual Report
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4. Related Party Transactions
Related Party Transactions with First Data
The Consolidated Statements of Income prior to the Spin-off
include expense allocations for certain corporate functions histori-
cally provided to Western Union by First Data. If possible, these
allocations were made on a specific identification basis.
Otherwise, the expenses related to services provided to Western
Union by First Data were allocated to Western Union based on
relative percentages, as compared to First Data’s other businesses,
of headcount or other appropriate methods depending on the
nature of each item or cost to be allocated.
Charges for functions historically provided to Western Union
by First Data are primarily attributable to First Data’s performance
of many shared services that the Company utilized prior to the
Spin-off. First Data continued to provide certain of these services
subsequent to the Spin-off through a transition services agree-
ment until September 29, 2007. In addition, prior to the Spin-off,
the Company participated in certain First Data insurance, benefi t
and incentive plans, and it received services directly related to
the operations of its businesses such as call center services,
credit card processing, printing and mailing. The Consolidated
Statements of Income refl ect charges incurred prior to the
spin-off from First Data and its affi liates for these services of
$152.4 million and $166.3 million for the years ended December
31, 2006 and 2005, respectively. Included in these charges are
amounts recognized for stock-based compensation expense,
as well as net periodic benefit income associated with the
Company’s pension plans.
Included in “Interest income from First Data, net” in the
Consolidated Statements of Income for the years ended Decem-
ber 31, 2006 and 2005 was interest income of $37.4 million and
$28.8 million, respectively, earned on notes receivable from First
Data subsidiaries and interest expense of $1.7 million and $4.5
million, respectively, incurred on notes payable to First Data which
were settled in connection with the Spin-off. Certain of the notes
receivable were euro denominated, and as such, the Company
had related foreign currency swap agreements to mitigate the
foreign exchange impact to the Company on such notes. Included
in “Foreign exchange effect on notes receivable from First Data,
net” in the Consolidated Statements of Income during the years
ended December 31, 2006 and 2005 are foreign exchange gains/
(losses) of $10.1 million and $(5.9) million, respectively, from the
revaluation of these euro denominated notes receivable and
related foreign currency swap agreements.
During the period from January 1, 2006 through September
29, 2006 and the year ended December 31, 2005, the Company
recognized commission revenues from a First Data subsidiary in
connection with its money order business of $23.6 million and
$29.6 million, respectively. Subsequent to the Spin-off, the
Company continues to recognize commission revenue from this
First Data subsidiary.
Other Related Party Transactions
The Company has ownership interests in certain of its agents, all
of which are accounted for under the equity method of account-
ing. The Company pays these agents, as it does its other agents,
commissions for money transfer and other services provided on
the Company’s behalf. Commissions paid to these agents for the
years ended December 31, 2007, 2006 and 2005 totaled $256.6
million, $212.2 million and $177.7 million, respectively. For those
agents where an ownership interest was acquired during the
year, only amounts paid subsequent to the investment date have
been refl ected as a related party transaction.
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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 material adverse
effect on Western Union’s fi nancial position, results of operations
or cash fl ows. 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 (“Western Union 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 Western Union MT East in Russia
during 2003 and 2004. On October 24, 2006, the Tax Inspectorate
issued its fi nal decision for tax assessment and tax demand
notices to Western Union MT East for approximately $20 million,
including a 20% penalty and applicable interest to date. The
assessment was challenged at successive levels within the Russian
courts, and all such courts have ruled in favor of Western Union
MT East, holding that the services provided in Russia by Western
Union MT East qualify as banking services which are not subject
to VAT. The Tax Inspectorate requested a hearing by the Presidium
of the Supreme Arbitrazh Court of the Russian Federation, the
highest court in Russia, which request was denied on December
26, 2007, and, accordingly no further appeals are available to the
Tax Inspectorate with respect to this matter. However, the Tax
Inspectorate has the ability to assert the same position in subse-
quent tax years since decisions of Russian courts are not viewed
as binding precedents by the Russian tax authorities. As of
December 31, 2007, the Company has not accrued any potential
loss or associated penalties and interest for this matter.
Western Union is subject to unclaimed or abandoned property
(escheat) laws in the United States and abroad. These laws
require the Company to remit to certain government authorities
the property of others held by the Company that has been
unclaimed for a specifi ed period of time, such as unpaid money
transfers. The Company holds property subject to escheat laws
and the Company has an ongoing program to comply with such
laws. The Company is subject to audits with regard to its escheat-
ment practices.