First Data 2008 Annual Report Download - page 97

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
the Company with a reasonable estimate of each reporting unit's fair value. The estimate of fair value requires various assumptions about a reporting unit's
future financial results and cost of capital. If it is determined that the fair value of the reporting unit is less than its carrying value, the Company proceeds to
step two of the impairment test which requires the Company to estimate the fair value of all of the reporting unit's assets and liabilities and calculate an
implied fair value of goodwill, which is the difference between the reporting unit's fair value and the fair value of all its other assets and liabilities. If the
implied fair value of goodwill is less than its carrying value, the shortfall is recognized as an impairment. The methodology for estimating fair value in step
two varies by asset; however, the most significant assets are intangible assets. The Company estimates the fair value of the intangible assets using the excess
earnings method, royalty savings method, or cost savings method, all of which are a form of a discounted cash flow analysis. An impairment charge of a
reporting unit's goodwill could have a material adverse effect on the Company's financial results. Changes in the underlying business and economic conditions
could affect these estimates used in the analysis discussed above, which in turn could affect the fair value of the reporting unit. Thus, it is possible for
reporting units that record impairments to record additional impairments in the future.
The Company performed its annual goodwill impairment test in the fourth quarter of 2008 and recorded a total impairment charge of $3.2 billion that
impacted every reporting unit. The primary causes of the impairment charges were higher discount rates and revised projections of financial results as
compared to those used to allocate the purchase price of the merger. The assumptions used in the test reflect the Company's estimates as of December 31,
2008 and appropriately consider the impact of the current deterioration in general global economic conditions. The Company relied in part on a third party
valuation firm in determining the appropriate discount rates. The impairment calculation is sensitive to certain inputs. 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. A $50 million decrease to the forecasted 2009 operating profit of the Merchant Services segment, with no
change to expected growth rates or other assumptions, would have increased the segment's impairment charge by approximately $0.9 billion while a $50
million increase would have entirely eliminated the segment's impairment charge of $0.7 billion. Thus, a continued deterioration in the economy could have a
material effect on the impairment calculation and result in additional impairment charges in future periods.
Due to the valuation of the Company's intangible assets associated with the merger, it was determined an annual goodwill impairment test was not
needed for 2007. The Company's annual goodwill impairment test did not identify any impairment in 2006; however, there was an impairment in goodwill
that was triggered by the changes in strategic direction of specific businesses made in 2007. Discussion of impairments that were recorded is included in Note
3 of the Company's Consolidated Financial Statements in Item 8 of this Form 10-K.
Transactions with Related Parties as defined by SFAS No. 57
A substantial portion of the Company's business within the Merchant Services and International segments is conducted through merchant alliances.
Certain merchant alliances, as it pertains to investments accounted for under the equity method, are joint ventures between the Company and financial
institutions. No directors or officers of the Company have ownership interests in any of the alliances. The formation of each of these alliances generally
involves the Company and the bank contributing contractual merchant relationships to the alliance and a cash payment from one owner to the other to achieve
the desired ownership percentage for each. The Company and the bank contract a long-term processing service agreement as part of the negotiation process.
This agreement governs the Company's provision of transaction processing services to the alliance. Therefore, the Company has two income streams from
these alliances: its share of the alliance's net income (classified as "Equity earnings in affiliates") and the processing fees it charges to the alliance (classified
as "Transaction processing and service fees"). The processing fees are based on transaction volumes and unit pricing as contained in the processing services
agreement negotiated with the alliance partner.
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