Western Union 2008 Annual Report Download - page 25

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accumulated other comprehensive income or loss until
settlement (i.e. spot rate changes), the remaining por-
tion of changes in value are recognized in income as they
occur. The significant volatility in the fluctuation in foreign
currency forward rates compared to spot rates primarily
related to the euro has resulted in charges of $6.9 million
in the year ended December 31, 2008 compared to gains
of $8.3 million in 2007.
Prior to September 29, 2006, we did not have any
forward contracts that qualified as hedges, and therefore
the unrealized gains and losses on these contracts were
reflected within this line item in the consolidated state-
ments of income prior to that date. Our foreign currency
forward contracts that did not qualify as hedges under
applicable derivative accounting rules were held primarily
in the euro and British pound and had maturities of one
year or less. Since these instruments did not qualify for
hedge accounting treatment, there was resulting volatil-
ity in our net income for the periods presented prior to
September 29, 2006. On September 29, 2006, we estab-
lished our foreign currency forward positions to qualify
for cash flow hedge accounting.
Foreign exchange effect on notes receivable from
First Data, net
All euro denominated notes receivable with First Data, and
related foreign currency swap agreements were settled
in connection with the spin-off on September 29, 2006.
Accordingly, no amounts related to the revaluation of
such notes or related swaps were recorded during the
years ended December 31, 2008 and 2007, explaining
the decrease from the year ended December 31, 2006.
No such amounts will be recognized in future periods.
Prior to the spin-off, the revaluation to fair market value
of these euro denominated notes receivable from First
Data and the related foreign currency swap arrangements
benefited income before income taxes for the year ended
December 31, 2006 by $10.1 million due to changes in the
value of the euro compared to the United States dollar.
Interest income from First Data, net
Interest income from First Data, net consists of interest
income earned on notes receivable from First Data, par-
tially offset by interest incurred on notes payable to First
Data. All notes receivable and payable were settled in
connection with the spin-off on September 29, 2006, and
accordingly, no such amounts were recognized during the
years ended December 31, 2008 and 2007.
Other income, net
Changes in other income, net during the years ended
December 31, 2008 and 2007 compared to the previous
corresponding years were primarily attributable to fluctua-
tions in equity earnings from equity method investments.
Income taxes
Our effective tax rates on pretax income were 25.8%, 29.9%
and 31.5% for the years ended December 31, 2008, 2007
and 2006, respectively. We continue to benefit from an
increasing proportion of profits being foreign-derived and
therefore taxed at lower rates than our combined federal
and state tax rates in the United States. In addition, the
decreasing effective tax rate in 2008 compared to 2007 is
also attributed to the implementation of foreign tax efficient
strategies consistent with our overall tax planning and the
favorable resolution of certain United States tax matters.
We have established contingency reserves for mate-
rial, known tax exposures, including potential tax audit
adjustments with respect to our international operations
restructured in 2003, whereby our income from certain
foreign-to-foreign money transfer transactions has been
taxed at relatively low foreign tax rates compared to our
combined federal and state tax rates in the United States.
As of December 31, 2008, the total amount of unrecog-
nized tax benefits is a liability of $397.0 million, includ-
ing accrued interest and penalties. Our reserves reflect
our judgment as to the resolution of the issues involved
if subject to judicial review. While we believe that our
reserves are adequate to cover reasonably expected tax
risks, there can be no assurance that, in all instances, an
issue raised by a tax authority will be resolved at a finan-
cial cost that does not exceed our related reserve. With
respect to these reserves, our income tax expense would
include (i) any changes in tax reserves arising from material
changes during the period in facts and circumstances (i.e.
new information) surrounding a tax issue, and (ii) any dif-
ference from our tax position as recorded in the financial
statements and the final resolution of a tax issue during
the period. Such resolution could materially increase or
decrease income tax expense in our consolidated financial
statements in future periods.
The United States Internal Revenue Service (“IRS”)
completed its examination of the United States federal
consolidated income tax returns of First Data for 2003
and 2004, of which we are a part, and issued a Notice of
Deficiency in December 2008. The Notice of Deficiency
alleges significant additional taxes, interest and penalties
owed with respect to a variety of adjustments involving us
and our subsidiaries, and we generally have responsibility
for taxes associated with these potential Western Union-
related adjustments under the tax allocation agreement
with First Data executed at the time of the spin-off. We
agree with a number of the adjustments in the Notice of
Deficiency; however, we do not agree with the Notice
of Deficiency regarding several substantial adjustments
representing total alleged additional tax and penalties
due of approximately $114 million. As of December 31,
2008, interest on the alleged amounts due for unagreed
adjustments would be approximately $23 million. A sub-
stantial part of the alleged amounts due for these unagreed
adjustments relates to our international restructuring, which
took effect in the fourth quarter 2003, and, accordingly,
the alleged amounts due related to such restructuring
largely are attributable to 2004. We expect to contest those
adjustments with which we do not agree with by filing a
petition in the United States Tax Court. We believe our
overall reserves are adequate, including those associated
with adjustments alleged in the Notice of Deficiency. If
the IRS’ position in the Notice of Deficiency is sustained,
our tax provision related to 2003 and later years would
materially increase.
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Management’s
Discussion and
Analysis of Financial
Condition and
Results of Operations