Western Union 2008 Annual Report Download - page 58

WESTERN UNION
2008 Annual Report
5656
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 consequences of events that have been recog-
nized in the consolidated financial statements. Deferred
tax assets and liabilities are recognized based on tempo-
rary differences between the financial statement carry-
ing amounts and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the tem-
porary differences are expected to reverse.
The Company adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), on January 1, 2007. FIN 48 addresses the
determination of how tax benefits claimed or expected to
be claimed on a tax return should be recorded in the con-
solidated financial statements. Under FIN 48, the Company
recognizes the tax benefits 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 examination, including the resolution of any related
appeals or litigation. The tax benefits recognized in the
consolidated financial statements from such a position are
measured as the largest benefit that has a greater than
fifty 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 benefits plus associated accrued inter-
est 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 sub-
sidiaries located primarily in Ireland, Argentina and Peru.
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
component 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 functional currency are recognized in
operations.
Derivatives
Western Union utilizes derivatives to mitigate foreign cur-
rency and interest rate risk. The Company recognizes all
derivatives in the “Other assets” and “Other liabilities” cap-
tions in the accompanying Consolidated Balance Sheets
at their fair value. All cash flows associated with deriva-
tives are included in cash flows from operating activities
in the Consolidated Statements of Cash Flows other than
those previously designated as cash flow hedges that
were determined to not qualify for hedge accounting as
described in Note 14.
º
CASH FLOW HEDGES—Changes in the fair value of deriv-
atives that are designated and qualify as cash flow
hedges in accordance with 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 flow hedges consist of foreign currency
hedging of forecasted revenues, as well as, from time
to time, hedges of anticipated fixed rate debt issu-
ances. Derivative fair value changes that are captured in
Accumulated other comprehensive loss are reclassified
to revenues in the same period or periods the hedged
item affects earnings. The portion of the change in fair
value that is excluded from the measure of effective-
ness is recognized immediately in “Derivative (losses)/
gains, net.”
º
FAIR VALUE HEDGES— Changes in the fair value of deriva-
tives that are designated as fair value hedges of fixed
rate debt in accordance with SFAS No. 133 are recorded
in interest expense. The offsetting change in value
attributable to changes in the benchmark interest rate of
the related debt instrument is also recorded in interest
expense consistent with the related derivative’s change.
º
UNDESIGNATED — Derivative contracts entered into to
reduce the variability related to (a) settlement assets
and obligations, generally with maturities of a few
days up to one month, and (b) certain foreign currency
denominated cash positions, generally with maturities
of less than one year, are not designated as hedges
for accounting purposes and, as such, changes in their
fair value are included in “Cost of services” consistent
with foreign exchange rate fluctuations on the related
settlement assets and obligations or cash positions.
The Company also had certain other foreign currency
swap arrangements with First Data, prior to September 29,
2006, to mitigate the foreign exchange impact on
certain euro denominated notes receivable with First Data.
These foreign currency swaps did not qualify for hedge
accounting and, accordingly, the fair value changes of
these agreements were reported in the accompanying
Consolidated Statements of Income as “Foreign exchange
effect on notes receivable from First Data, net.” The fair
value of these swaps were settled in cash along with the
related notes receivable in connection with the Spin-off.
The fair value of the Company’s derivatives is derived
from standardized models that use market based inputs
(e.g., forward prices for foreign currency).
Stock-Based Compensation
The Company currently has a stock-based compensation
plan that provides for the granting of Western Union stock
options, restricted stock awards and restricted stock units
to employees and other key individuals who perform ser-
vices for the Company. In addition, the Company has a
stock-based compensation plan that provides for grants
of Western Union stock options and stock unit awards
to non-employee directors of the Company. Prior to the
Spin-off, employees of Western Union participated in First
Data’s stock-based compensation plans.