Western Union 2012 Annual Report Download - page 102

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THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
97
• 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, 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.” In addition,
changes in fair value of derivative contracts, consisting of forward contracts with maturities of less than one year entered
into to reduce the economic variability related to the cash amounts used to fund acquisitions of businesses with purchase
prices denominated in foreign currencies, are recorded in “Derivative gains/(losses), net.” The Company is also exposed
to risk from derivative contracts written to its customers arising from its cross-currency Business Solutions payments
operations. The duration of these derivative contracts at inception is generally less than one year. The Company aggregates
its foreign exchange exposures in its cross-currency Business Solutions payments operations, including the exposure
generated by the derivative contracts it writes to its customers, 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. 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 and unrestricted stock units to employees and non-employee directors of the Company 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.
All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service
period and also requires an estimate of forfeitures when calculating compensation expense. The Company recognizes compensation
expense on awards on a straight-line basis over the requisite service period for the entire award. Refer to Note 16 for additional
discussion regarding details of the Company's stock-based compensation plans.
Severance and Other Related Expenses
The Company records severance-related expenses once they are both probable and estimable in accordance with the provisions
of the applicable accounting guidance for severance provided under an ongoing benefit arrangement. One-time, involuntary benefit
arrangements and other costs are generally recognized when the liability is incurred. Expenses arising under the Company's defined
benefit pension plans from curtailing future service of employees participating in the plans and providing enhanced benefits are
recognized in earnings when it is probable and reasonably estimable. The Company also evaluates impairment issues associated
with restructuring and other activities when the carrying amount of the assets may not be fully recoverable, in accordance with
the appropriate accounting guidance.