First Data 2012 Annual Report Download - page 75

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’ s policy is to manage its cash flow and net investment exposures related to adverse changes in interest rates and
foreign currency exchange rates. The Company’ s objective is to engage in risk management strategies that provide adequate downside
protection.
Accounting for Derivative Instruments and Hedging Activities
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 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 designated 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
have been 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 discontinues 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.
Summary of Derivative Instruments
The Company’ s derivative instruments portfolio was comprised of the following:
In January of 2013, the Company’ s cross-currency swap with an aggregate notional value of 69.6 million euro expired. In
January and February of 2013, the Company entered into cross-currency swaps with aggregate notional values of 100.0 million
Australian dollars and 200.0 million euro that were designated as hedges of net investments in foreign operations.
Derivatives Not Qualifying For Hedge Accounting. During the twelve months ended December 31, 2012 and 2011, the
Company held 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 a portion of the Company’ s net investment in its European operations, interest rate swaps held in order to
mitigate the exposure to interest rate fluctuations on interest payments related to variable rate debt and a fixed to floating interest rate
swap held to maintain a desired ratio of fixed and variable rate debt.
Interest rate swaps with a combined notional value of $5.0 billion expired 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
b
illion and $2.0 billion, respectively, all of which became effective upon expiration of the existing instruments. The 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 swaps as hedges for accounting purposes.
75
Notional value (in millions) As of December 31,
2012
As of December 31,
2011
Interest rate contracts USD 5,750 USD 5,750
Foreign exchange contracts EU
R
91.1 EU
R
91.1
Foreign exchange contracts AUD 115 AUD 115
Forwar
d
-starting interest rate contracts USD
—
USD 3,000