First Data 2008 Annual Report Download - page 39

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
historically accounted for its minority interest in the joint venture under the equity method of accounting. Beginning November 1, 2008, the portion of the
alliance's business received by the Company in the separation is reflected on a consolidated basis throughout the financial statements. CPS accounted for the
vast majority of the "Equity earnings in affiliates" and the processing and other fees noted in footnote (b) on the face of the Consolidated Statements of
Operations. The receipt of the Company's proportionate share of CPS was accounted for as a purchase business combination. The assets and liabilities
received were recorded at their fair values. Purchase accounting and the allocation of the purchase price is preliminary. As a result of the alliance termination
and subsequent business combination, the Company assessed its deferred tax liabilities established at the time of the merger and reversed $836 million of
those liabilities through purchase accounting for the Company's proportionate share of CPS. The separation resulted in the loss of JPMorgan Chase branch
referrals and access to the JPMorgan Chase brand. The separation of the joint venture also poses the following potential risks: loss of certain processing
volume over time, disruption of the business due to the need to transition to a new financial institution for sponsorship and clearing services for the merchants
allocated to FDC, and post-separation competition by JPMorgan, any of which could have a material adverse effect on the Company's operations and results.
Wells Fargo Merchant Services
On December 31, 2008, the Company and Wells Fargo & Company ("WFB") extended their merchant alliance joint venture, Wells Fargo Merchant
Services, LLC ("WFMS") for five years through December 31, 2014. In connection with the agreement to extend WFMS, FDC sold 12.5% of the membership
interests to WFB for cash consideration. This resulted in FDC and WFB owning 40% and 60% of WFMS, respectively, as of December 31, 2008. WFB and
FDC also extended their existing non-alliance sponsorship agreement to provide for non-alliance merchant sponsorship. As a result of the transaction, FDC
deconsolidated the WFMS balance sheet as of December 31, 2008 and is reflecting its remaining ownership interest as an equity method investment. In 2009,
the Company's share of WFMS's earnings will be reflected in the "Equity earnings in affiliates" line in the Consolidated Statements of Operations and
therefore consolidated revenues and expenses will decrease. A $3.8 million loss was recorded related to this transaction.
Goodwill Impairment
In the fourth quarter of 2008, the Company recorded a $3.2 billion goodwill impairment charge. Every reporting unit had an impairment charge
representing a percentage of goodwill ranging from a small charge for one reporting unit to all of the goodwill at two small reporting units. During the fourth
quarter and in connection with the deterioration in general global economic conditions, the Company experienced a decrease in its operating results. These
operating results caused the Company to reassess its near and long-term projections as part of its annual budgeting process. The Company followed a
discounted cash flow approach in estimating the fair value of the reporting units and intangible assets consistent with the approach used to allocate the
purchase price of the merger. The significant factors that drove most of the impairment were higher discount rates and revised projections of financial results
as compared to those used to allocate the purchase price of the merger. The revised projections resulted from the current global economic situation that caused
a decrease in near-term projections and a delay in the attainment of long-term projections. Discount rates were determined on a market participant basis and
increased due to the increased risk in the current marketplace and more costly access to capital. The Company relied in part on a third party valuation firm in
determining the appropriate discount rates. A relatively small change in these inputs would have a significant impact on the impairment recorded in the
current period and could impact future impairment assessments. For instance, a 50 basis point increase in the discount rate would have increased the
impairment charge by approximately $1.5 billion while a 50 basis point decrease in the discount rate would have decreased the impairment charge by
approximately $1.2 billion. Similarly, a $50 million decrease to the forecasted 2009 operating profit of the Merchant Services segment, with no change to
expected growth rates or other
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