First Data 2008 Annual Report Download - page 91

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 of credit losses 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 following table presents the aggregate merchant credit
losses incurred compared to total dollar volumes processed:
Successor Predecessor
Year ended
December 31,
2008
Period from
September 25,
2007
through
December 31,
2007
Period from
January 1,
2007
through
September 24,
2007
Year ended
December 31,
2006
FDC and consolidated and unconsolidated alliances credit losses (in millions) $ 40.4 $ 14.0 $ 33.7 $ 36.3
FDC and consolidated alliances credit losses (in millions) $ 35.0 $ 12.0 $ 27.9 $ 26.6
Total dollar volume acquired (in billions) $ 1,437.9 $ 443.0 $ 1,101.5 $ 1,372.6
The reserve recorded on the Company's Consolidated Balance Sheets only relates to the business conducted by its consolidated subsidiaries. The
reserve for unconsolidated alliances is recorded only in the alliances' respective financial statements. The Company has not recorded any reserve for estimated
losses in excess of reserves recorded by the unconsolidated alliances nor has the Company identified needs to do so. At December 31, 2008 and 2007, the
Company and its consolidated and unconsolidated alliances had aggregate merchant credit loss reserves of $23.4 million and $34.9 million, respectively. 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 decrease in credit loss reserves resulted from reflecting only the Company's 49% of the Chase Paymentech Alliance reserves and the mix of
lower risk merchants received upon the termination of the alliance as well as the deconsolidation of WFMS. The Company believes the recorded reserve
approximates the fair value of the contingent obligation.
The credit loss reserves, both for the unconsolidated alliances and the Company, are comprised of amounts for known losses and a provision for losses
incurred but not reported ("IBNR"). These reserves primarily are determined by performing a historical analysis of chargeback loss experience. Other factors
are considered that could affect that experience in the future. Such items include the general economy and economic challenges in a specific industry or those
affecting certain types of clients. Once these factors are considered, the Company or the unconsolidated alliance establishes a rate (percentage) that is
calculated by dividing the expected chargeback (credit) losses by dollar volume processed. This rate is then applied against the dollar volume processed each
month and charged against earnings. The resulting reserve balance is then compared to requirements for known losses and estimates for IBNR items.
Historically, this estimation process has proven to be materially accurate and the Company believes the recorded reserve approximates the fair value of the
contingent obligation.
The majority of the 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.
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