Western Union 2014 Annual Report Download - page 242

2014 FORM 10-K
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
104
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.
• 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 instrument is effective in offsetting the change in cash flows attributable to the risk
being hedged. 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 and liability 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."
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).