First Data 2012 Annual Report Download - page 52

The Company develops software that is used in providing processing services to customers. To a lesser extent, the Company
also develops software to be sold or licensed to customers. Capitalization of internally developed software, primarily associated with
operating platforms, occurs only upon management’ s estimation that the likelihood of successful development and implementation
reaches a probable level. Currently unforeseen circumstances in software development could require the Company to implement
alternative plans with respect to a particular effort, which could result in the impairment of previously capitalized software
development costs.
In addition to the internally generated intangible assets discussed above, the Company also acquires intangible assets through
business combinations and asset acquisitions. In these transactions, the Company typically acquires and recognizes intangible assets
such as customer relationships, software, and trade names. Acquired customer relationships consist of customer contracts that are
within their initial terms as well as those in renewal status. The amounts recorded for these relationships include both the value of
remaining contractual terms and the value of potential future renewals. These relationships are with customers such as merchants and
financial institutions.
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 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.
Goodwill. 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
and 2012 impairment tests. 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 rates estimated by a third-party valuation firm. 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 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. An impairment
charge of a reporting unit’ s goodwill could have a material adverse effect on the Company’ s financial results. Changes in the
underlying business and economic conditions could affect these estimates used in the analysis discussed above, which in turn could
affect the fair value of the reporting unit. Thus, it is possible for reporting units that record impairments to record additional
impairments in the future.
52