First Data 2009 Annual Report Download - page 89

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Additions to goodwill in the fourth quarter of 2009 resulted most significantly from purchase price
adjustments related to prior year acquisitions. The goodwill balance as of December 31, 2009 was
$17,475.8 million.
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 deterioration in general global economic
conditions. The impairment calculation is sensitive to certain inputs. A 50 basis point increase in the discount
rate would have increased the 2008 impairment charge by approximately $1.5 billion while a 50 basis point
decrease in the discount rate would have decreased the 2008 impairment charge by approximately $1.2 billion. A
$50 million decrease to the forecasted 2009 operating profit of the Merchant Services reporting unit (included
within the Retail and Alliance Services segment), with no change to expected growth rates or other assumptions,
would have increased the reporting unit’s 2008 impairment charge by approximately $0.9 billion while a
$50 million increase would have entirely eliminated the reporting unit’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. 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 Retail and Alliance Services and International
segments is conducted through merchant alliances. Merchant alliances are alliances between the Company and
financial institutions. If the Company has majority ownership and management control over an alliance, then the
alliance’s financial statements are consolidated with those of the Company and the related processing fees are
treated as an intercompany transaction and eliminated upon consolidation. If the Company does not have a
controlling ownership interest in an alliance, it uses the equity method of accounting to account for its investment
in the alliance. As a result, the Company’s consolidated revenues include processing fees charged to alliances
accounted for under the equity method. 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.
The Company negotiated all agreements with the alliance banks. Therefore, all transactions between the
Company and its alliances were conducted at arm’s length; nevertheless, accounting guidance defines a
transaction between the Company and an entity for which investments are accounted for under the equity method
by the Company as a related party transaction requiring separate disclosure in the financial statements provided
by the Company. Accordingly, the revenue associated with these related party transactions are presented on the
face of the Consolidated Statements of Operations.
Subsequent to the merger, certain members of the Company’s new Board of Directors are affiliated with KKR.
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