First Data 2010 Annual Report Download - page 59

Table of Contents
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 with an affiliate of KKR in 2007. The assumptions used in the test reflected the
Company's estimates as of December 31, 2008 and appropriately considered the impact of the deterioration in general global economic conditions at the
time. 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.
Discussion of impairments that were recorded is included in Note 2 to the Company's Consolidated Financial Statements in Item 8 of this Form 10-K.
Transactions with related parties. 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 equity method investee as a related party transaction
requiring separate disclosure in the financial statements of the Company. Accordingly, the revenue associated with these related party transactions are
presented on the face of the Consolidated Statements of Operations.
Certain members of the Company's Board of Directors are affiliated with KKR. In addition, First Data has a management agreement with affiliates of
KKR pursuant to which such entities or their affiliates provide management services to the Company. Pursuant to such agreement, the Company pays an
aggregate annual base management fee and reimburses out-of-pocket expenses incurred in connection with the provision of services pursuant to the
agreement. The agreement provides that the Company will pay fees in connection with certain subsequent financing, acquisition, disposition and change of
control transactions, as well as a termination fee based on the net present value of future payment obligations under the management agreement, in the event
of an initial public offering or under certain other circumstances. The agreement also includes customary exculpation and indemnification provisions in favor
of KKR and its affiliates.
Refer to Note 10 to the Company's Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding transactions
with related parties.
New Accounting Guidance
In October 2009, the FASB revised its guidance on Revenue Recognition for Multiple-Deliverable Revenue Arrangements. The amendments in this
update enable companies to separately account for multiple revenue-generating activities (deliverables) that they perform for their customers. Existing U.S.
GAAP requires a company to use vendor-specific objective evidence ("VSOE") or third-party evidence of selling price to separate deliverables in a multiple-
deliverable arrangement. The update does allow for the use of an estimated selling price if neither VSOE nor third-party evidence is available. The update
requires additional disclosures of information about an entity's multiple-deliverable arrangements. The requirements of the update apply prospectively for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted. The
Company adopted the new guidance on January 1, 2010 and has no arrangements for which this adoption will have a material impact on its financial position
and results of operations.
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