First Data 2012 Annual Report Download - page 65

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Translation
The U.S. dollar is the functional currency for most of the Company’s U.S. based businesses and certain foreign based
businesses. Significant operations with a local currency as their functional currency include operations in the United Kingdom,
Australia, Germany, Ireland, Greece and Argentina. Foreign currency denominated assets and liabilities for these units and other less
significant operations are translated into U.S. dollars based on exchange rates prevailing at the end of the period, and revenues and
expenses are translated at average exchange rates during each monthly period. The effects of foreign exchange gains and losses arising
from the translation of assets and liabilities of those entities where the functional currency is not the U.S. dollar are included as a
component of Other Comprehensive Income (“OCI”). Intercompany loans are generally not considered invested on a long-term basis
and such foreign currency gains and losses are recorded in income. Transaction gains and losses related to operating assets and
liabilities are included in the “Cost of services” and “Selling, general and administrative” lines of the Consolidated Statements of
Operations and were immaterial. Non-operating transaction gains and losses derived from non-operating assets and liabilities are
included in the “Other income (expense)” line of the Consolidated Statements of Operations and are separately disclosed in Note 9 of
these Consolidated Financial Statements.
Derivative Financial Instruments
The Company utilizes derivative instruments to enhance its ability to manage interest rate risk and foreign exchange risk. The
Company recognizes all derivative financial instruments in the Consolidated Balance Sheets as assets or liabilities at fair value. Such
amounts are recorded in either the “Other current assets”, “Other long-term assets”, “Other current liabilities” or “Other long-term
liabilities” captions in the Consolidated Balance Sheets. The Company’s policy is to present all derivative balances on a gross basis,
without regard to counterparty master netting agreements or similar arrangements. Changes in fair value of derivative instruments are
recognized immediately in earnings unless the derivative is designated and qualifies as a hedge of future cash flows or a hedge of a net
investment in a foreign operation. For derivatives that qualify as hedges of future cash flows, the effective portion of changes in fair
value is recorded temporarily in equity as a component of OCI and then recognized in earnings in the same period or periods during
which the hedged item affects earnings. For derivatives that qualify as a hedge of a net investment in a foreign operation, the gain or
loss is reported in OCI as part of the cumulative translation adjustment to the extent the hedge is effective. Any ineffective portions of
cash flow hedges and net investment hedges are recognized in the “Other income (expense)” line in the Consolidated Statements of
Operations during the period of change. Additional discussion of derivative instruments is provided in Note 6 of these Consolidated
Financial Statements.
Noncontrolling and Redeemable Noncontrolling Interests
Noncontrolling interests represent the minority shareholders’ share of the net income or loss and equity in consolidated
subsidiaries. Substantially all of the Company’s noncontrolling interests are presented pretax in the Consolidated Statements of
Operations as “Net income attributable to noncontrolling interests” since the majority of the Company’s non-wholly owned
consolidated subsidiaries are flow through entities for tax purposes. Noncontrolling interests are presented as a component of equity in
the Consolidated Balance Sheets and reflect the original investments by these noncontrolling shareholders in the consolidated
subsidiaries, along with their proportionate share of the earnings or losses of the subsidiaries, net of dividends or distributions.
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oncontrolling interests that are redeemable at the option of the holder are presented outside of equity and are carried at their
estimated redemption value. A noncontrolling interest is recorded on the date of acquisition based on the total fair value of the
acquired entity and the noncontrolling interest’s share of that value.
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 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
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