Western Union 2010 Annual Report Download - page 91

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functional currency are remeasured based on exchange rates at the end of the period and are recognized in
operations. Non-monetary assets and liabilities of these operations are remeasured at historical rates in effect when
the asset was recognized or the liability was incurred.
Derivatives
The Company utilizes derivatives to (a) minimize its exposures 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. The Company recognizes all derivatives in the “Other assets” and “Other liabilities” captions in the
accompanying Consolidated Balance Sheets at their fair value. All cash flows associated with derivatives are
included in cash flows from operating activities in the Consolidated Statements of Cash Flows.
• Cash Flow hedges—Changes in the fair value of derivatives that are designated and qualify as cash flow
hedges 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 the forecasted issuance of
fixed rate debt. 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. The portions of the
change in fair value that are excluded from the measure of effectiveness are recognized immediately in
“Derivative losses, net.”
• Fair Value hedges—Changes in the fair value of derivatives that are designated as fair value hedges of fixed
rate debt are recorded in “Interest expense.” The offsetting change in value of the related debt instrument
attributable to changes in the benchmark interest rate is also recorded in “Interest expense.”
• Undesignated—Derivative contracts entered into to reduce the variability related to (a) money transfer
settlement assets and obligations, generally with maturities of a few days up to one month, and (b) certain
money transfer related foreign currency denominated cash positions and intercompany loans, generally with
maturities of less than one year, are not designated as hedges for accounting purposes and changes in their fair
value are included in “Selling, general and administrative.” Subsequent to the acquisition of Custom House,
the Company is also exposed to risk from derivative contracts written to its customers arising from its cross-
currency business-to-business payments operations. These contracts have durations generally of nine months
or less. The Company aggregates its foreign exchange exposures in its Business Solutions business, including
the exposure generated by the derivative contracts it writes to its customers as part of its cross-currency
payments business, and typically hedges the net exposure through offsetting contracts with established
financial institution counterparties (economic hedge contract) as part of a broader foreign currency portfolio,
including significant spot exchanges of currency in addition to forwards and options. To mitigate credit risk,
the Company performs credit reviews of the customer on an ongoing basis. The changes in fair value related
to these contracts are recorded in “Foreign exchange revenues.”
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).
The details of each designated hedging relationship are 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.
Stock-Based Compensation
The Company currently has a stock-based compensation plan that provides for grants of Western Union stock
options, restricted stock awards and restricted stock units to employees who perform services 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.
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