First Data 2008 Annual Report Download - page 95

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
adverse changes in interest rates and foreign currency exchange rates. The Company's objective is to engage in risk management strategies that provide
adequate downside protection.
Derivative financial instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of
those exposures. The Company applies strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-
making or any other speculative activities. Although certain derivatives do not qualify for hedge accounting, they are entered into for economic hedge
purposes and are not considered speculative. 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.
In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), the Company designated interest rate swaps as cash flow hedges of forecasted interest rate payments related to its variable rate borrowings and
certain of the cross currency swaps as foreign currency hedges of its net investment in a foreign subsidiary. Other cross currency swaps and forward contracts
on various foreign currencies did not qualify or have not been designated as accounting hedges and do not receive hedge accounting treatment.
As required, derivative financial instruments are recognized in the Company's Consolidated Balance Sheets at their fair value. The Company's
derivatives are not exchange listed and therefore the estimated fair value of derivative financial instruments is modeled in Bloomberg using the Bloomberg
reported market data and the actual terms of the derivative contracts. These models reflect the contractual terms of the derivatives, such as notional value and
expiration date, as well as market-based observable inputs including interest and foreign currency exchange rates, yield curves and the credit quality of the
counterparties along with the Company's creditworthiness in order to appropriately reflect non-performance risk. The Company's counterparties also provide
it with the indicative fair values of its derivative instruments which it compares to the results obtained using Bloomberg software. Considering Bloomberg
software is a widely accepted financial modeling tool and there is limited visibility to the preparation of the third-party quotes, the Company chooses to rely
on the Bloomberg software in estimating the fair value of its derivative financial instruments. Inputs to the derivative pricing models are generally observable
and do not contain a high level of subjectivity. While the Company believes its estimates result in a reasonable reflection of the fair value of these
instruments, the estimated values may not be representative of actual values that could have been realized as of December 31, 2008 or that will be realized in
the future.
With respect to derivative financial 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 associated with the aforementioned derivative financial instruments as well as the periodic
change in the mark-to-market of the derivative financial instruments not designated as accounting hedges are recorded immediately in "Other income
(expense)" in the Consolidated Statements of Operations.
Capitalized Costs
FDC capitalizes initial payments for new contracts, contract renewals and conversion costs associated with customer contracts and system development
costs. Capitalization of such costs is subject to strict accounting policy criteria and requires management judgment as to the appropriate time to initiate
capitalization. Capitalization of
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