First Data 2008 Annual Report Download - page 93

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
liabilities and non-financial assets and liabilities that are recognized at fair value in its financial statements on a recurring basis (at least annually). It will be
effective beginning January 1, 2009 for certain other non-financial assets and non-financial liabilities. Although this statement does not require any new fair
value measurements, in certain cases its application has changed previous practice in determining fair value.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The Company's approach to estimating the fair value of its financial instruments varies depending upon the nature of the
instrument and may require the Company to make significant judgments regarding inputs into the valuation.
In estimating fair values for investment securities and derivative financial instruments, the Company believes that third-party market prices are the best
evidence of exit price and where available, bases its estimates on such prices. If such prices are unavailable for the instruments held by the Company, fair
values are estimated using market prices of similar instruments, third-party broker quotes or a probability weighted discounted cash flow analysis. Where
observable market data is unavailable or impracticable to obtain, the valuation involves substantial judgment by the Company.
Investment Securities
As of December 31, 2008, $3.8 billion of the Company's $8.7 billion of "Settlement assets" were comprised of financial instruments that were carried at
fair value. These investments included $492.2 million of student loan auction rate securities ("SLARS") and $3,293.6 million of other available-for-sale
securities.
Beginning in mid-February 2008 and due largely to uncertainty in the global credit and capital markets, investment banks and broker dealers became
less willing to support auction rate securities ("ARS") auctions. As a result, multiple auctions failed, including auctions for SLARS held by the Company. Due
to these market changes the valuation of SLARS became highly judgmental in 2008.
The Company will not be able to readily access liquidity for the SLARS until the auction market successfully resumes, a secondary market is
established for long-term investors, or issuers redeem the securities. The Company believes that the SLARS held by it will recover substantially all of their
principal value by their maturity date due to the Federal Family Education Loan Program ("FFELP") backing of the underlying collateral; however, the
Company currently cannot assert that it has the intent to hold these securities until they fully recover their par value as it may be willing to sell the securities at
a loss if the price exceeds a certain minimum threshold. In January 2009, the Company sold $11.0 million of par value SLARS to the issuer at the specified
minimum threshold. The Company has the ability and intent to hold these securities for an extended time period and until the securities recover in value at
least to the specified minimum threshold. This ability is based on the projected timing of when certain IPS related settlement liabilities will need to be funded
and the ability to use its revolving credit facility in the event the settlement liabilities need to be funded before the SLARS are liquid. The Company has
recognized an other than temporary impairment loss in 2008 of $48.0 million in "Investment income, net" in the Consolidated Statements of Operations to
write down the value of the SLARS to the specified minimum threshold. Any decline in value of the securities below the specified minimum threshold has
been deemed to be temporary and, accordingly, the Company recognized an additional unrealized loss of $13.3 million in OCI during 2008. The SLARS were
reclassified from "Settlement assets" (part of "Current assets") to "Long-term settlement assets" in the Consolidated Balance Sheet in the first quarter 2008.
Due to the lack of observable market activity for the SLARS held by the Company as of December 31, 2008, the Company with the assistance of a third
party valuation firm, upon which the Company in part relied,
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