First Data 2009 Annual Report Download - page 87

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
require various assumptions about the future cash flows associated with the assets, appropriate costs of capital
and other inputs such as an appropriate royalty rate. Changes to these estimates would materially impact the
value assigned to the assets as well as the amounts subsequently recorded as amortization expense.
The following table discloses aggregate net book values for conversion costs, contract costs, software (both
developed and acquired), and customer relationships (in millions):
December 31,
2009 2008
Conversion costs ......................................... $ 43.5 $ 21.9
Contract costs ........................................... 109.1 91.0
Software ............................................... 652.6 823.1
Customer relationships .................................... 6,008.8 5,987.6
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. Such indicators include, but are not limited to: a
current period operating or cash flow loss associated with the use of an asset or asset group, combined with a
history of such losses and/or a forecast anticipating continued losses; a significant adverse change in the
business, legal climate, market price of an asset or manner in which an asset is being used; an accumulation of
costs for a project significantly in excess of the amount originally expected; or an expectation that an asset will
be sold or otherwise disposed of at a loss.
In 2009, the Company recorded impairment charges as follows: $147 million related to customer contracts;
$7 million related to software; $6 million related to real property; $6 million related to other intangibles; and $2
million related to trade name impairment charges. The Company followed a discounted cash flow approach in
estimating the fair value of the affected asset groups and individual intangible assets within those groups
consistent with the approach used to allocate the purchase price of the merger. The factors that drove most of the
impairments were lower projections of financial results as compared to those used in prior years, the
deterioration of profitability and negative cash flow in existing business and higher risk of revenue attrition in
future years. The trade name impairment was a result of the Company’s decision to discontinue the use of a
certain trade name in the Canadian market and instead continue the business under the First Data brand. Discount
rates were determined on a market participant basis. The Company relied in part on a third party valuation firm in
determining the appropriate discount rates. The Company obtained an appraisal from a third party brokerage firm
to assist in estimating the value of real property. All key assumptions and valuations were determined by and are
the responsibility of management. A relatively small change in these inputs would have had an immaterial impact
on the impairments.
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 $17.5 billion and $14.9 billion
as of December 31, 2009 and 2008, 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.
87