First Data 2012 Annual Report Download - page 50

income taxes in the period in which this determination is made. Refer to Note 17 to the Company’ s Consolidated Financial
Statements in Item 8 of this Form 10-K for additional information regarding the Company’ s income tax provision.
Estimating fair value. The Company has investment securities and derivative financial instruments that are carried at fair
value.
Fair value is defined by accounting guidance as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The Company’ s approach to estimating the fair value of
its financial instruments varies depending upon the nature of the instrument. In estimating fair values for investment securities and
derivative financial instruments, the Company believes that third-party market prices are the best evidence of exit price and where
available, bases its estimates on such prices. If such prices are unavailable for the instruments held by the Company, fair values are
estimated using market prices of similar instruments, third-party broker quotes or a probability weighted discounted cash flow
analysis. Where observable market data is unavailable or impracticable to obtain, the valuation involves substantial judgment by the
Company. All key assumptions and valuations are the responsibility of management. Refer to Note 7 to the Company’ s Consolidated
Financial Statements in Item 8 of this Form 10-K for additional information regarding the Company’ s Fair Value Measurements.
Investment securities. Due to the lack of observable market activity for the SLARS held by the Company, the valuation of the
SLARS is highly judgmental. The Company, with the assistance of a third-party valuation firm upon which the Company in part
relied, made certain assumptions, primarily relating to estimating probabilities of certain outcomes for the securities held by the
Company and assessing the risk factors inherent in each. All key assumptions and valuations were determined by and are the
responsibility of management. The securities were valued using an income approach based on a probability weighted discounted cash
flow analysis. The Company considered each security’ s key terms including date of issuance, date of maturity, auction intervals,
scheduled auction dates, maximum auction rates, as well as underlying collateral, ratings, and guarantees or insurance. Substantially
all SLARS held by the Company have collateral backed by the Federal Family Education Loan Program (“FFELP”). The probabilities
of auction failure, a successful auction or repurchase at par, or default by the issuer for each future period were forecasted. Default
recovery rates were forecasted. The Company assumed that the issuers will continue to pay maximum interest rates on the securities
until the event of either a successful auction or repurchase by the issuer, at par. To determine the fair value of each security, the
weighted average cash flows for each period were discounted back to present value at the determined discount rate for each security.
The discount rates used in the valuation were a combination of the liquidity risk premium assigned to the security (which ranged from
3.5% to 4.5%) plus the treasury strip yield (zero coupon treasury bond) for the individual period for which a cash flow was being
discounted. The liquidity risk premiums on the SLARS have decreased by 50 basis points from December 31, 2011 due to decreasing
spreads on asset backed and municipal securities and successful auction rate security transactions. A 50 basis point change in liquidity
risk premium, as well as slight changes in other unobservable inputs including default probability and default recovery rate
assumptions and the probability of an issuer call prior to maturity, would impact the value of the SLARS by approximately $1 million.
As of December 31, 2012 and 2011, the Company also held investments in short-term debt securities. Many of these securities
are considered cash equivalents. Prices for these securities are not quoted on active exchanges but are priced through an independent
third-party pricing service based on quotations from market-makers in the specific instruments or, where appropriate, other market
inputs including interest rates, benchmark yields, reported trades, issuer spreads, two sided markets, benchmark securities, bids, offers,
and reference data. In certain instances, amortized cost is considered an appropriate approximation of market value. Other investments
are valued based upon either quoted prices from active exchanges or available third-party broker quotes.
Changes in fair value of investment securities are recorded through the “Other comprehensive income” (“OCI”) component of
equity with the exception of investment partnerships which are recorded through “Investment income” in the Consolidated Statements
of Operations. Regardless of investment type, declines in the fair value of the investments are reviewed to determine whether they are
other than temporary in nature. Absent any other indications of a decline in value being temporary in nature, the Company’ s policy is
to treat a decline in an equity investment’ s quoted market price that has lasted for more than six months as an other-than-temporary
decline in value. For equity securities, declines in value that are judged to be other than temporary in nature are recognized in the
Consolidated Statements of Operations. For debt securities, when the Company intends to sell an impaired debt security or it is more
likely than not it will be required to sell prior to recovery of its amortized cost basis, an other-than-temporary-impairment (“OTTI”)
has occurred. The impairment is recognized in earnings equal to the entire difference between the debt security’ s amortized cost basis
and its fair value. When the Company does not intend to sell an impaired debt security and it is not more likely than not it will be
required to sell prior to recovery of its amortized cost basis, the Company assesses whether it will recover its amortized cost basis. If
the entire amortized cost will not be recovered, a credit loss exists resulting in the credit loss portion of the OTTI being recognized in
earnings and the amount related to all other factors recognized in OCI. Refer to Note 7 to the Company’ s Consolidated Financial
Statements in Item 8 of this Form 10-K for additional information regarding the Company’ s Fair Value Measurements.
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