Western Union 2009 Annual Report Download - page 80

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Description Judgments and Uncertainties
Effect if Actual Results Differ from
Assumptions
Derivative Financial Instruments
We utilize derivatives to (a) minimize
our exposure related to changes in
foreign currency exchange rates and
interest rates and (b) facilitate cross-
currency business-to-business
payments by writing derivatives to
customers and entering into offsetting
derivatives with established financial
institution counterparties, or by
holding sufficient foreign currency
cash balances to cover those
transactions. We recognize all
derivatives in other assets and other
liabilities in our consolidated balance
sheets at their fair value. Certain of
our derivative arrangements are
designated as either cash flow hedges
or fair value hedges at the time of
inception, and others are not
designated as accounting hedges.
Cash Flow hedges—Cash flow hedges
consist of foreign currency hedging of
forecasted money transfer revenues
and hedges of anticipated fixed rate
debt issuances. Derivative fair value
changes that are captured in
accumulated other comprehensive loss
are reclassified 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 offsetting 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
(losses)/gains, net.”
Fair Value hedges—Fair value hedges
consist of hedges of fixed rate debt,
through interest 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.
The accounting guidance related to
derivative accounting is complex and
contains strict documentation
requirements.
The details of each designated hedging
relationship must be formally
documented at the inception of the
arrangement, including the risk
management objective, hedging
strategy, hedged item, specific 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 flows or fair value
of the hedged item, and effectiveness
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.
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 reflected in
earnings which could have a
significant impact on our reported
results.
As of December 31, 2009, the
cumulative pre-tax unrealized losses
classified within accumulated other
comprehensive loss from such cash
flow hedges that would be reflected in
earnings if our hedges were
disqualified from hedge accounting
was $24.6 million.
As of December 31, 2009, the
cumulative debt adjustments from our
fair value hedges that would be
reflected in earnings if such hedges
were disqualified from hedge
accounting was a $47.1 million gain.
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