First Data 2009 Annual Report Download - page 238

Chase Paymentech
NOTES TO COMBINED FINANCIAL STATEMENTS
For the years ended December 31, 2007 and 2006 and
the year ended December 31, 2005 (unaudited) (Continued)
The combined statements of income and comprehensive income include rental expense for operating leases
of $11.7 million, $9.7 million, and $8.6 million for the years ended December 31, 2007, 2006, and 2005,
respectively.
Guarantees
Under the card brand rules, when a merchant acquirer processes bankcard transactions, it has certain
obligations for those transactions. These obligations arise from disputes between cardholders and merchants due
to the cardholders’ dissatisfaction with merchandise quality or the merchants’ service, which are not resolved
with the merchant. In such cases, the transactions are “charged back” to the respective merchants and the related
purchase amounts are refunded to the cardholders by the card issuer. If the merchant does not fund the refund due
to insolvency, bankruptcy or other extraneous reasons, the Company, in certain circumstances is liable for the
full amount of the transaction. This obligation is considered a guarantee under FIN No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.
A cardholder generally has until the later of four months from the date of purchase or delivery of products
or services to present a chargeback. Management believes that the maximum exposure for its obligation at any
time does not exceed the total amount of bankcard transactions processed for the preceding four-month period.
For the four-month periods from September through December 2007, 2006, and 2005, these amounts were
$254.3 billion, $231.5 billion, and $175.0 billion, respectively.
The Company records a provision for its estimated obligation based upon factors surrounding the credit risk
of specific customers, historical credit losses, current processing volume and other relevant factors. As shown in
Note 6, for the years ended December 31, 2007, 2006, and 2005, the Company incurred aggregate merchant
credit losses, net of recoveries, of $9.6 million, $9.0 million, and $9.6 million, respectively, on total processed
volumes of $719.1 billion, $660.6 billion, and $332.1 billion, respectively.
The Company calculates its provision and evaluates the appropriateness of its reserve on a monthly basis.
The provision for credit losses is included in operating expenses on the combined statements of income and
comprehensive income. The reserve for this obligation is included in accounts receivable on the combined
balance sheets. The Company believes the recorded reserve approximates the fair value of its contingent
obligation.
The Company also requires cash deposits, guarantees and letters of credit from certain merchants to
minimize its obligation. As of December 31, 2007 and 2006, the Company held cash deposits of $524.2 million
and $651.7 million, respectively, which were classified as merchant deposits on the combined balance sheets.
The Company also held collateral in the form of letters of credit totaling $203.2 million and $192.1 million at
December 31, 2007 and 2006, respectively, and merchant certificates of deposit totaling $51.9 million and $49.0
million at December 31, 2007 and 2006, respectively.
Other Contingencies
Both the Company and its customers handle sensitive information, such as credit card numbers and personal
consumer data, utilizing computer and telecommunications systems operated by the Company, its customers and
outside third party providers. Despite internal controls and card brand imposed data security rules, which are in
place to protect this information, ever-evolving technology presents inherent risks of data compromises. Data
compromises of customers’ systems can result in significant financial liability to the Company if the fines and
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