First Data 2008 Annual Report Download - page 116

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's obligation to stand ready to perform is minimal in relation to the total dollar volume processed. The Company requires cash deposits,
guarantees, letters of credit or other types of collateral by certain merchants to minimize its obligation. Collateral held by the Company is classified within
"Settlement obligations" on the Company's Consolidated Balance Sheets. The Company also utilizes a number of systems and procedures to manage merchant
risk. Despite these efforts, the Company historically has experienced some level of losses due to merchant defaults.
The Company's contingent obligation relates to imprecision in its estimates of required collateral. A provision for this obligation is recorded based
primarily on historical experience and other relevant factors such as economic downturns or increases in merchant fraud. Merchant credit losses are included
in "Cost of services" in the Company's Consolidated Statements of Operations. The amount of the reserves attributable to entities consolidated by the
Company was $20.3 million and $23.4 million at December 31, 2008 and 2007, respectively.
The majority of the TeleCheck Services, Inc. ("TeleCheck") business involves the guarantee of checks received by merchants. If the check is returned,
TeleCheck is required to purchase the check from the merchant at its face value and pursue collection from the check writer. A provision for estimated check
returns, net of anticipated recoveries, is recorded at the transaction inception based on recent history. At December 31, 2008 and 2007, the Company had
accrued warranty balances of $15.2 million and $16.4 million, and accrued recovery balances of $45.1 million and $38.1 million, respectively. Accrued
warranties are included in "Other current liabilities" and accrued recoveries are included in "Accounts receivable" in the Consolidated Balance Sheets. The
maximum potential future payments under the guarantees were estimated by the Company to be approximately $1.5 billion at December 31, 2008 which
represented an estimate of the total uncleared checks presented at that time.
Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S. income tax return with its new parent "Holdings" as defined in Note 2. The
Company's foreign operations file income tax returns in their local jurisdictions. Income taxes are computed in accordance with SFAS No. 109, "Accounting
for Income Taxes" and reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the
corresponding income tax amounts. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not
that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its
deferred tax assets, then these deferred tax assets will be adjusted through the Company's provision for income taxes in the period in which this determination
is made.
Cash and Cash Equivalents
Investments (other than those included in settlement assets) with original maturities of three months or less (that are readily convertible to cash) are
considered to be cash equivalents and are stated at cost, which approximates market value. Cash and cash equivalents that were restricted from use due to
regulatory requirements are included in "Other long-term assets" in the Consolidated Balance Sheets and were immaterial at December 31, 2008 and 2007.
Accounts Receivable
Accounts receivable balances are stated net of allowance for doubtful accounts. Historically, the Company has not encountered significant write-offs.
The Company records allowances for doubtful accounts when it is probable that the accounts receivable balance will not be collected. Long-term accounts
receivable balances are included in "Other long-term assets" in the Consolidated Balance Sheets.
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