First Data 2011 Annual Report Download - page 53

The majority of the TeleCheck Services, Inc. ("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. The following table presents the accrued warranty and recovery balances:
As of December 31,
(in millions) 2011 2010
Accrued warranty balances $ 11.4 $ 13.4
Accrued recovery balances 26.8 29.8
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 $1.1 million and $0.9 million as of
December 31, 2011 and 2010, respectively. The following table details the check guarantees of TeleCheck.
Year ended December 31,
2011 2010 2009
Aggregate face value of guaranteed checks (in billions) $ 45.6 $ 47.6 $ 42.7
Aggregate amount of checks presented for warranty (in millions) 351.8 405.3 366.2
Warranty losses net of recoveries (in millions) 85.1 110.8 115.8
The maximum potential future payments under the guarantees were estimated by the Company to be approximately $1.3 billion
as of December 31, 2011 which represented an estimate of the total uncleared checks at that time.
Income taxes. The determination of the Company's provision for income taxes requires management's judgment in the use of
estimates and the interpretation and application of complex tax laws. Judgment is also required in assessing the timing and amounts of
deductible and taxable items. The Company establishes contingency reserves for material, known tax exposures relating to deductions,
transactions and other matters involving some uncertainty as to the proper tax treatment of the item. The Company's reserves reflect its
judgment as to the resolution of the issues involved if subject to judicial review. Several years may elapse before a particular matter,
for which the Company has established a reserve, is audited and finally resolved or clarified. While the Company believes that its
reserves are adequate to cover reasonably expected tax risks, issues raised by a tax authority may be finally resolved at an amount
different than the related reserve. Such differences could materially increase or decrease the Company's income tax provision in the
current and/or future periods. When facts and circumstances change (including a resolution of an issue or statute of limitations
expiration), these reserves are adjusted through the provision for income taxes in the period of change. As the result of interest and
amortization expenses that the Company incurs, the Company is currently in a tax net operating loss position. Judgment is required to
determine whether some portion or all of the deferred tax assets will not be realized. To the extent the Company determines that it will
not realize the benefit of some or all of its deferred tax assets, then these assets will be adjusted through the Company's provision for
income taxes in the period in which this determination is made.
Estimating fair value. The Company has investment securities and derivative financial instruments that are carried at fair
value.
Fair value is defined by accounting guidance as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The Company's approach to estimating the fair value of
its financial instruments varies depending upon the nature of the instrument. In estimating fair values for investment securities and
derivative financial instruments, the Company believes that third-party market prices are the best evidence of exit price and where
available, bases its estimates on such prices. If such prices are unavailable for the instruments held by the Company, fair values are
estimated using market prices of similar instruments, third-party broker quotes or a probability weighted discounted cash flow
analysis. Where observable market data is unavailable or impracticable to obtain, the valuation involves substantial judgment by the
Company. All key assumptions and valuations are the responsibility of management. Refer to Note 7 to the Company's Consolidated
Financial Statements in Item 8 of this Form 10-K for additional information regarding the Company's Fair Value Measurements.
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