First Data 2008 Annual Report Download - page 96

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
initial payments for contracts and conversion costs only occurs when management is satisfied that such costs are recoverable through future operations,
contractual minimums and/or penalties in case of early termination.
The Company develops software that is used in providing processing services to customers. To a lesser extent, the Company also develops software to
be sold or licensed to customers. Capitalization of internally developed software, primarily associated with operating platforms, occurs only upon
management's estimation that the likelihood of successful development and implementation reaches a probable level. Currently unforeseen circumstances in
software development could require the Company to implement alternative plans with respect to a particular effort, which could result in the impairment of
previously capitalized software development costs.
The Company's accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows
from the contract or the termination fees the Company would receive in the event of early termination of the contract by the customer. The Company's
entitlement to termination fees may, however, be subject to challenge if a customer were to allege that the Company was in breach of contract. This
entitlement is also subject to the customer's ability to pay.
The following table discloses aggregate net book values for conversion costs, contract costs and software development (in millions):
Successor
December 31,
2008 2007
Conversion costs $ 21.9 $ 4.7
Contract costs 91.0 47.2
Software 823.1 970.6
As a result of the merger, asset balances were adjusted through purchase accounting to their estimated fair value. Note that conversion costs and
contract costs were reduced to zero due to the merger and the value of the related contracts were included in customer relationship intangible assets; however,
the software balance was marked to fair value at the merger date. The Company tests contract and conversion costs greater than $1 million for recoverability
on an annual basis by comparing the remaining expected undiscounted cash flows under the contract to the net book value. Any assets that are determined to
be unrecoverable are written down to their fair value. This analysis requires significant assumptions regarding the future profitability of the customer contract
during its remaining term. In addition to this annual test, these assets and all other long lived assets (including customer relationships) are tested for
impairment upon an indicator of potential impairment.
Goodwill
Due to the merger, the Company recorded all assets and liabilities at their estimated fair value, which was finalized in 2008, on the acquisition date. The
Company's goodwill balance was $14.9 billion and $16.8 billion as of December 31, 2008 and 2007, respectively. Goodwill represents the excess of cost over
the fair value of net assets acquired, including identifiable intangible assets, and was allocated to reporting units upon finalization of the intangible valuation
that was completed due to the merger. The Company's reporting units are businesses at the operating segment level or one level below the operating segment
level for which discrete financial information is prepared and regularly reviewed by management.
The Company tests goodwill annually for impairment, as well as upon an indicator of impairment, using a fair value approach at the reporting unit
level. In step one of the impairment test, the Company estimates the fair value of each reporting unit using a discounted cash flow analysis. The Company
believes that this methodology provides
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