First Data 2011 Annual Report Download - page 84

Accounting for Derivative Instruments and Hedging Activities
The Company recognizes all derivatives in the "Other long-term assets", "Other current liabilities" and "Other long-term
liabilities" captions in the Consolidated Balance Sheets at their fair values. The Company has designated certain of its interest rate
swaps as cash flow hedges of forecasted interest rate payments related to its variable rate debt and a cross-currency swap as a foreign
currency hedge of its net investment in a foreign subsidiary. Other interest rate swaps and cross-currency swaps on various foreign
currencies no longer qualify or have not been designated as accounting hedges and do not receive hedge accounting treatment.
With respect to derivative 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. Changes in the fair value of a net investment hedge that qualifies for
hedge accounting are recorded as part of the cumulative translation adjustment in OCI to the extent the hedge is effective. Any
ineffectiveness associated with the aforementioned cash flow hedges, as well as any change in the fair value of a derivative that is not
designated as a hedge, is recorded immediately in "Other income (expense)" in the Consolidated Statements of Operations.
The Company formally documents all relationships between hedging instruments and the underlying hedged items, as well as its
risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that
are designated as cash flow hedges to forecasted transactions and net investment hedges to the underlying investment in a foreign
subsidiary or affiliate. The Company formally assesses, both at inception of the hedge and on an ongoing basis, whether the hedge is
highly effective in offsetting changes in cash flows or foreign currency exposure of the underlying hedged items. The Company also
performs an assessment of the probability of the forecasted transactions on a periodic basis. If it is determined that a derivative ceases
to be highly effective during the term of the hedge or if the forecasted transaction is no longer probable, the Company will discontinue
hedge accounting prospectively for such derivative.
Credit Risk
The Company monitors the financial stability of its derivative counterparties and all counterparties remain highly-rated (in the
"A" category or higher). The credit risk inherent in these agreements represents the possibility that a loss may occur from the
nonperformance of a counterparty to the agreements. The Company performs a review at inception of the hedge, as circumstances
warrant, and at least on a quarterly basis of the credit risk of these counterparties. The Company also monitors the concentration of its
contracts with individual counterparties. The Company's exposures are in liquid currencies (primarily in U.S. dollars, Euros and
Australian dollars), so there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the
future.
Derivatives Not Qualifying for Hedge Accounting
As of December 31, 2011, the Company had certain derivative instruments that functioned as economic hedges but no longer
qualified or were not designated to qualify for hedge accounting. Such instruments included cross-currency swaps held in order to
mitigate foreign currency exposure on intercompany loans and interest rate swaps held in order to mitigate the exposure on interest
payments related to variable rate debt to fluctuations in interest rates. Additionally, during 2011, the Company entered into a fixed to
floating interest rate swap in order to preserve the ratio of fixed and floating rate debt that it held prior to the 2011 debt modification
and amendments discussed in Note 8 of these Consolidated Financial Statements. The swap has a notional value of $750.0 million and
expires on June 15, 2019, but is subject to a mandatory put that will result in cash settlement on June 15, 2015.
Interest rate swaps with a combined notional value of $5.0 billion, including one that is designated as a cash flow hedge as
discussed in "Derivatives That Qualify for Hedge Accounting" below, will expire in September 2012. During the third quarter of 2011
and the first quarter of 2012, the Company entered into forward-starting interest rate swaps with a combined notional value of $3.0
billion and $2.0 billion, respectively, all of which will become effective upon expiration of the existing instruments. The forward-
starting interest rate swaps are intended to mitigate exposure to fluctuations in interest rates and will expire in September 2016. The
Company did not designate the new swaps as hedges for accounting purposes.
During the first quarter of 2011, the Company held a foreign exchange rate collar with a notional value of $1.9 million that
expired on March 31, 2011.
During 2009, the Company de-designated certain cash flow hedges with a notional value of $3.0 billion because the hedges no
longer qualified for hedge accounting. During the second quarter of 2010, two interest rate hedges with a total notional balance of $1.0
billion and one basis rate swap with a notional balance of $1.0 billion ceased to qualify for hedge accounting treatment. During the
fourth quarter of 2011, two interest rate hedges with a total notional balance of $3.0 billion also ceased to qualify for hedge accounting
treatment. The Company therefore de-designated the hedges and ceased to apply hedge accounting from the beginning of the quarter
during which the respective de-designations occurred. The amount carried in OCI as of the date of de-designation is subsequently
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