First Data 2011 Annual Report Download - page 56

In a business combination, each intangible asset is recorded at its fair value. In an asset acquisition, the cost of the acquisition is
allocated among the acquired assets, generally by their relative fair values. The Company generally estimates the fair value of
acquired intangible assets using the excess earnings method, royalty savings method, or cost savings method, all of which are a form
of a discounted cash flow analysis. These estimates 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:
As of December 31,
(in millions) 2011 2010
Conversion costs $ 82.0 $ 66.5
Contract costs 101.6 107.0
Software 469.4 493.2
Customer relationships 4,425.4 5,223.7
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 fair value. This analysis requires significant assumptions regarding the future profitability of the
customer contract during its remaining term. Additionally, contracts, conversion costs 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 2011, the Company recorded immaterial asset impairment charges. In 2010, the Company recorded impairment charges
totaling $11.5 million related to software, the write-off of assets the Company determined have no future use or value, and other
intangibles. In 2009, the Company recorded impairment charges totaling $168 million related to customer contracts, software, real
property, other intangibles, and trade name impairment charges. The Company followed a discounted cash flow approach in
estimating the fair value of the reporting units, intangible assets or other affected asset groups discussed above. Discount rates were
determined on a market participant basis. In certain situations, 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 in 2009. 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. The Company's goodwill balance was $17.2 billion and $17.3 billion as of December 31, 2011 and 2010,
respectively. Goodwill represents the excess of cost over the fair value of net assets acquired, including identifiable intangible assets,
and has been allocated to reporting units. 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.
The Company tests goodwill annually for impairment, as well as upon an indicator of impairment, using a fair value approach at
the reporting unit level. In 2011, the Company adopted new accounting guidance that provides the option of first assessing qualitative
factors to determine whether events and circumstances indicate that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If it is determined that the fair value is more likely than not greater than the carrying amount then the
two-step impairment test is unnecessary. After performing a qualitative assessment, the Company proceeded to step one of its 2011
impairment test. In step one of the impairment test, the Company estimates the fair value of each reporting unit using a discounted
cash flow analysis. The Company believes that this methodology provides the Company with a reasonable estimate of each reporting
unit's fair value. The estimate of fair value requires various assumptions about a reporting unit's future financial results and cost of
capital. The Company determines the cost of capital for each reporting unit giving consideration to a number of factors including the
discount rate used by the third-party valuation firm in their calculations of the fair value of Holding's common stock. All key
assumptions and valuations are determined by and are the responsibility of management. If it is determined that the fair value of the
reporting unit is less than its carrying value, the Company proceeds to step two of the impairment test which requires the Company to
estimate the fair value of all of the reporting unit's assets and liabilities and calculate an implied fair value of goodwill, which is the
difference between the reporting unit's fair value and the fair value of all its other assets and liabilities. If the implied fair value of
goodwill is less than its carrying value, the shortfall is recognized as an impairment. The methodology for estimating fair value in step
two varies by asset; however, the most significant assets are intangible assets. The Company estimates the fair value of the intangible
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