First Data 2009 Annual Report Download - page 82

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The reserve recorded on the Company’s Consolidated Balance Sheets only relates to the business conducted
by its consolidated subsidiaries. The reserve for unconsolidated alliances is recorded only in the alliances’
respective financial statements. The Company has not recorded any reserve for estimated losses in excess of
reserves recorded by the unconsolidated alliances nor has the Company identified needs to do so. At
December 31, 2009 and 2008, the Company and its consolidated and unconsolidated alliances had aggregate
merchant credit loss reserves of $46.5 million and $23.4 million, respectively. The amount of the reserves
attributable to entities consolidated by the Company was $45.2 million and $20.3 million at December 31, 2009
and 2008, respectively. The Company believes the recorded reserve approximates the fair value of the contingent
obligation.
The credit loss reserves, both for the unconsolidated alliances and the Company, are comprised of amounts
for known losses and a provision for losses incurred but not reported (“IBNR”). These reserves primarily are
determined by performing a historical analysis of chargeback loss experience. Other factors are considered that
could affect that experience in the future. Such items include the general economy and economic challenges in a
specific industry or those affecting certain types of clients. Once these factors are considered, the Company or
the unconsolidated alliance establishes a rate (percentage) that is calculated by dividing the expected chargeback
(credit) losses by dollar volume processed. This rate is then applied against the dollar volume processed each
month and charged against earnings. The resulting reserve balance is then compared to requirements for known
losses and estimates for IBNR items. Historically, this estimation process has proven to be materially accurate
and the Company believes the recorded reserve approximates the fair value of the contingent obligation.
The majority of the TeleCheck business involves the guarantee of checks received by merchants. If the
check is returned, TeleCheck is required to purchase the check from the merchant at its face value and pursue
collection from the check writer. A provision for estimated check returns, net of anticipated recoveries, is
recorded at the transaction inception based on recent history. At December 31, 2009 and 2008, the Company had
accrued warranty balances of $16.6 million and $15.2 million, and accrued recovery balances of $32.5 million
and $45.1 million, respectively. Accrued warranties are included in “Other current liabilities” and accrued
recoveries are included in “Accounts receivable” in the Consolidated Balance Sheets.
The Company establishes an incremental liability (and deferred revenue) for the fair value of the check
guarantee. The liability is relieved and revenue is recognized when the check clears, is presented to TeleCheck,
or the guarantee period expires. The majority of the guarantees are settled within 30 days. The incremental
liability was approximately $2.5 million and $1.9 million at December 31, 2009 and 2008, respectively.
The following table details the check guarantees of TeleCheck for the years ended December 31, 2009 and
2008, the successor period from September 25, 2007 through December 31, 2007, the predecessor period from
January 1, 2007 through September 24, 2007.
Successor Predecessor
Year ended December 31,
Period from
September 25,
2007
through
December 31,
2007
Period from
January 1,
2007
through
September 24,
20072009 2008
Aggregate face value of guaranteed checks (in billions) . . . $ 42.7 $ 43.4 $ 12.7 $ 30.4
Aggregate amount of checks presented for warranty
(in millions) ................................... $366.2 $404.4 $128.2 $303.6
Warranty losses net of recoveries (in millions) .......... $115.8 $106.3 $ 35.8 $ 80.0
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