Western Union 2013 Annual Report Download - page 213

2013 FORM 10-K
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
103
Foreign Currency Translation
The United States dollar is the functional currency for substantially all of the Company's businesses. Revenues and expenses
are translated at average exchange rates prevailing during the period. Foreign currency denominated assets and liabilities for those
businesses for which the local currency is the functional currency are translated into United States dollars based on exchange rates
at the end of the year. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of these
businesses are included as a component of "Accumulated other comprehensive loss" in the accompanying Consolidated Balance
Sheets. Foreign currency denominated monetary assets and liabilities of businesses for which the United States dollar is the
functional currency are remeasured based on exchange rates at the end of the period, and the resulting remeasurement gains and
losses are recognized in net income. 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 uses derivatives to (a) minimize its 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. 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, except for cash flows associated with foreign currency forward contracts entered into in order to reduce the economic
variability related to the cash amounts used to fund acquisitions of businesses with purchase prices denominated in foreign
currencies, which are recorded in investing activities.
• 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 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 - 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 from a few days up to one month, and (b) certain foreign currency denominated
cash and other asset positions, typically with maturities of less than one year at inception, 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 Business Solutions payments foreign currency exposures arising from customer contracts, including the derivative
contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established
financial institution counterparties (economic hedge contracts) 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).