First Data 2011 Annual Report Download - page 55

for hedge accounting, they are entered into for economic hedge purposes and are not considered speculative. The Company is
monitoring the financial stability of its derivative counterparties.
The Company designated interest rate swaps as cash flow hedges of forecasted interest rate payments related to its variable rate
borrowings and certain of the cross-currency swaps as foreign currency hedges of its net investment in a foreign subsidiary. During
2011, 2010 and 2009, certain of the Company's interest rate swaps ceased to be highly effective and the Company discontinued hedge
accounting for the affected derivatives. Additionally, certain other interest rate swaps, cross-currency swaps and forward contracts on
various foreign currencies did not qualify or were not designated as accounting hedges and did not receive hedge accounting
treatment.
As required, derivative financial instruments are recognized in the Company's Consolidated Balance Sheets at their fair value.
The Company's derivatives are not exchange listed and therefore the estimated fair value of derivative financial instruments is
modeled in Bloomberg using the Bloomberg reported market data and the actual terms of the derivative contracts. These models
reflect the contractual terms of the derivatives, such as notional value and expiration date, as well as market-based observable inputs
including interest and foreign currency exchange rates, yield curves and the credit quality of the counterparties along with the
Company's creditworthiness in order to appropriately reflect non-performance risk. The Company's counterparties also provide it with
the indicative fair values of its derivative instruments which it compares to the results obtained using Bloomberg software.
Considering Bloomberg software is a widely accepted financial modeling tool and there is limited visibility to the preparation of the
third-party quotes, the Company chooses to rely on the Bloomberg software in estimating the fair value of its derivative financial
instruments. Inputs to the derivative pricing models are generally observable and do not contain a high level of subjectivity. While the
Company 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, 2011 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. Refer to Note 6 to the Company's Consolidated Financial Statements in Item 8 of this Form 10-K for
additional information regarding the Company's derivatives.
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'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.
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.
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.
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