First Data 2009 Annual Report Download - page 86

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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, 2009 or that will be
realized in the future. All key assumptions and valuations are the responsibility of management.
With respect to derivative financial instruments that are afforded hedge accounting, 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.
Intangible Assets
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 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.
In addition to the internally generated intangible assets discussed above, the Company also acquires
intangible assets through business combinations and asset acquisitions. In these transactions, the Company
typically acquires and recognizes intangible assets such as customer relationships, software, and trade names.
Acquired customer relationships consist of customer contracts that are within their initial terms as well as those
in renewal status. The amounts recorded for these relationships include both the value of remaining contractual
terms and the value of potential future renewals. These relationships are with customers such as merchants and
financial institutions.
In a business combination, each intangible asset is recorded at its fair value. In an asset acquisition, the cost
of the acquisition is allocated among the intangible assets, generally by their relative fair values. The Company
generally estimates the fair value of acquired 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. These estimates
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