First Data 2011 Annual Report Download - page 72

any such reversed charges. The Company's risk in this area primarily relates to situations where the cardholder has purchased goods or
services to be delivered in the future such as airline tickets.
The Company's obligation to stand ready to perform is minimal in relation to the total dollar volume processed. The Company
requires cash deposits, guarantees, letters of credit or other types of collateral from certain merchants to minimize this obligation.
Collateral held by the Company is classified within "Settlement assets" and the obligation to repay the collateral if it is not needed is
classified within "Settlement obligations" on the Company's Consolidated Balance Sheets. The Company also utilizes a number of
systems and procedures to manage merchant risk. Despite these efforts, the Company historically has experienced some level of losses
due to merchant defaults.
The Company's contingent obligation relates to imprecision in its estimates of required collateral. A provision for this obligation
is recorded based primarily on historical experience of credit losses and other relevant factors such as economic downturns or
increases in merchant fraud. Merchant credit losses are included in "Cost of services" in the Company's Consolidated Statements of
Operations. The amount of the reserves attributable to entities consolidated by the Company was $31.6 million and $39.9 million as of
December 31, 2011 and 2010, respectively.
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 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 Company and its domestic subsidiaries file a consolidated U.S. income tax return with their parent, First Data Holdings,
Inc. ("Holdings"). The Company's foreign operations file income tax returns in their local jurisdictions. Income taxes are computed in
accordance with current accounting guidance and reflect the net tax effects of temporary differences between the financial reporting
carrying amounts of assets and liabilities and the corresponding income tax amounts. The Company has deferred tax assets and
liabilities and maintains valuation allowances where it is more likely than not that all or a portion of 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
deferred tax assets will be adjusted through the Company's provision for income taxes in the period in which this determination is
made.
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the
technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related
appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the
largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Cash and Cash Equivalents
Investments (other than those included in settlement assets) with original maturities of three months or less (that are readily
convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates market value. Cash and cash
equivalents that were restricted from use due to regulatory requirements are included in "Other long-term assets" in the Consolidated
Balance Sheets and were immaterial as of December 31, 2011 and 2010.
Accounts Receivable and Leasing Receivables
Accounts receivable balances are stated net of allowance for doubtful accounts. Historically, the Company has not incurred
significant write-offs. The Company records allowances for doubtful accounts when it is probable that the accounts receivable balance
will not be collected. Long-term accounts receivable balances are included in "Other long-term assets" in the Consolidated Balance
Sheets.
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