Western Union 2012 Annual Report Download - page 79

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74
Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
Derivative Financial Instruments
We use derivatives to (a) minimize our
exposures related to changes in foreign
currency exchange rates and interest rates
and (b) facilitate cross-currency Business
Solutions payments by writing derivatives
to customers. 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 revenues, as well as 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, 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 portions of the change in fair value
that are either considered ineffective or are
excluded from the measure of
effectiveness are recognized immediately
in “Derivative gains/(losses), 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, 2012, 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
$33.7 million.
As of December 31, 2012, 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 $20.2 million
gain.