First Data 2008 Annual Report Download - page 142

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
With respect to derivative instruments that are afforded hedge accounting pursuant to SFAS No. 133, the effective portion of changes in the fair value
of a derivative that is designated and qualifies as a cash flow hedge is recorded in OCI and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. The effective portion of changes in the fair value of a net investment hedge is recorded as part of the
cumulative translation adjustment in OCI. Any ineffectiveness is recorded immediately in the Consolidated Statements of Operations.
The Company formally documents all relationships between hedging instruments and the underlying hedged items, as well as its risk management
objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to
forecasted transactions and net investment hedges to the underlying investment in a foreign subsidiary or affiliate. The Company formally assesses, both at
inception of the hedge and on an ongoing basis, whether the hedge is highly effective in offsetting changes in cash flows or foreign currency exposure of the
underlying hedged items. The Company also performs an assessment of the probability of the forecasted transaction on a periodic basis. If it is determined
that a derivative ceases to be highly effective during the term of the hedge or if the forecasted transaction is no longer probable, the Company will discontinue
hedge accounting prospectively for such derivative.
CREDIT RISK
The Company is monitoring the financial stability of its derivative counterparties. Certain of these counterparties are receiving support from the federal
government in light of current financial conditions. Although these counterparties remain highly-rated (in the "A" category or higher), their ability to satisfy
their commitments may be dependent on receiving continued support from the federal government. The credit risk inherent in these agreements represents the
possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review at inception of the hedge, as
circumstances warrant, and at least on a quarterly basis of the credit risk of these counterparties. The Company also monitors the concentration of its contracts
with individual counterparties. FDC's exposures are in liquid currencies (primarily in U.S. dollars, euros and Australian dollars), so there is minimal risk that
appropriate derivatives to maintain the hedging program would not be available in the future.
DERIVATIVES NOT QUALIFYING FOR HEDGE ACCOUNTING
At the time of the merger, all previous hedge accounting designations were nullified because of the merger. The Company redesignated certain of the
previous derivatives in the same hedging relationships to continue to qualify for hedge accounting. The remaining derivative instruments continued to
function as economic hedges but were not designated to qualify for hedge accounting. At December 31, 2008, those derivative instruments not designated as
accounting hedges included foreign currency forward contracts to hedge forecasted foreign currency sales, a cross-currency swap to hedge foreign currency
exposure from an intercompany loan, and cross-currency swaps to hedge an investment in a foreign subsidiary from fluctuations in foreign currency exchange
rates.
In the third quarter of 2007 and prior to the consummation of the merger, the Company entered into two forward starting, deal contingent interest rate
swaps. Such swaps did not qualify for hedge accounting until consummation of the merger as discussed below in "Cash Flow Hedges". From the date the
swaps were entered into until designated as hedges on September 24, 2007, the swaps were marked-to-market which resulted in a charge of approximately
$19 million. This amount was recorded as a successor transaction in "Other income (expense)" in the Consolidated Statements of Operations.
141