First Data 2012 Annual Report Download - page 48

Multiples of historical and projected EBITDA determined based on the guideline companies is applied to Holdings’ EBITDA in order
to establish a range of estimated fair value for the shares of Holdings common stock. The Company considers the results of both of
these approaches, placing primary reliance on the discounted cash flow analysis. The concluded range of fair values is also compared
to the value determined by the Board of Directors for use in transactions, including stock sales and repurchases. After considering all
of these estimates of fair value, the Company then determines a single estimated fair value of the stock to be used in accounting for
stock-based compensation.
During the years ended December 31, 2012, 2011 and 2010, time-based options were granted under the stock plan and during
the years ended December 31, 2011 and 2010, performance-based options were granted under the stock plan. The time options and
performance options have a contractual term of 10 years. Time options vest equally over a three to five year period from the date of
issuance and performance options vest based upon the Company achieving certain EBITDA targets. The options also have certain
accelerated vesting provisions upon a change in control, a qualified public offering, or certain termination events.
The assumptions used in estimating the fair value of share-based payment awards represent management’ s best estimates, but
these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the
Company uses different assumptions, stock-based compensation expense could be different in the future.
Refer to Note 13 to the Consolidated Financial Statements included in Item 8 of this Form 10-K for details regarding the
Company’ s stock-based compensation plan.
Reserve for merchant credit losses and check guarantees. With respect to the merchant acquiring business, the Company’ s
merchant customers (or those of its unconsolidated alliances) have the liability for any charges properly reversed by the cardholder. In
the event, however, that the Company is not able to collect such amounts from the merchants due to merchant fraud, insolvency,
bankruptcy or another reason, the Company may be liable for 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 amounts of collateral held by the
Company and its unconsolidated alliances are as follows:
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 o
f
Operations. The following table presents the aggregate merchant credit losses incurred compared to total dollar volumes processed:
The reserve recorded on the Company’ s Consolidated Balance Sheets only relates to the business conducted by its consolidated
subsidiaries. The reserve for unconsolidated alliances is recorded only in the alliances’ respective financial statements. The Company
has not recorded any reserve for estimated losses in excess of reserves recorded by the unconsolidated alliances nor has the Company
identified needs to do so. The following table presents the aggregate merchant credit loss reserves:
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As of December 31,
(in millions) 2012 2011
Cash and cash equivalents collateral $470.0 $473.2
Collateral in the form of letters of credit 120.9 112.5
Total collateral
$590.9 $585.7
Year ended December 31,
2012 2011 2010
FDC and consolidated and unconsolidated alliances credit losses (in millions) $50.0 $63.6 $78.2
FDC and consolidated alliances credit losses (in millions) $ 43.3 $ 54.3 $ 71.3
Total dollar volume acquired (in billions) $1,725.4 $1,643.2 $1,520.4