First Data 2012 Annual Report Download - page 81

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(a) Includes impairments of $5.2 million for the year ended December 31, 2011.
Settlement assets - other available-for-sale securities. Prices for the municipal, corporate, and U.S. Government 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, from other market inputs. Bonds were valued under a market approach using
observable inputs including reported trades, benchmark yields, broker/dealer quotes, issuer spreads and other standard inputs.
Municipal paper was valued under a market approach using observable inputs including maturity date, issue date, credit rating, current
commercial paper rates and settlement date.
The Company’ s experience with these types of investments and the expectations of the current investments held is that they will
be satisfied at the current carrying amount. These securities were classified as Level 2.
Derivative financial instruments. The Company uses derivative instruments to mitigate certain risks. The Company’ s
derivatives are not exchange listed and therefore the fair value is estimated under an income approach using Bloomberg analytics
models that are based on readily observable market inputs. These models reflect the contractual terms of the derivatives, such as
notional value and expiration date, as well as market-based observables including interest and foreign currency exchange rates, yield
curves and the credit quality of the counterparties. The models also incorporate the Company’ s creditworthiness in order to
appropriately reflect non-performance risk. Inputs to the derivative pricing models are generally observable and do not contain a high
level of subjectivity and, accordingly, the Company’ s derivatives were classified within Level 2 of the fair value hierarchy. While the
Company believes its estimates result in a reasonable reflection of the fair value of these instruments, the estimated values may not be
representative of actual values that could have been realized or that will be realized in the near future. Refer to Note 6 of these
Consolidated Financial Statements for additional information regarding the Company’ s derivative financial instruments.
Contingent liabilities. As discussed in Note 3 of these Consolidated Financial Statements, during the year ended December 31,
2012, contingent consideration was recorded related to the acquisition of Clover Network, Inc. The transaction called for cash
consideration as well as a series of contingent payments based on the achievement of specified sales targets. These contingent
payments are classified as purchase consideration if made to outside investors and compensation if made to current and future
employees. As part of the purchase price, the Company recorded a $20 million liability for the contingent consideration due to outside
investors based upon the net present value of the Company’ s estimate of the future payments. This fair value measurement represents
a Level 3 measurement as it is based on significant inputs not observable in the market. Significant judgment is employed in
determining the appropriateness of these assumptions as of the acquisition date. The primary assumption is the estimated number of
merchant locations that will be using the software in the next four years.
81
(in millions)
Fair Value Measurement
Using Significant
Unobservable Inputs
(Level 3)
Student loan auction rate
securities
Beginning balance as of January 1, 2011 $341.1
Total gains or losses (realized or unrealized):
Included in other comprehensive income 1.2
Included in product sales and other (a) (4.5)
Sales (158.4)
Settlements (8.9)
Transfers in (out) of Level 3
—
Ending balance as of December 31, 2011 170.5
Total realized gains included in product sales and othe
r
4.4
Sales (135.6)
Settlements (0.5)
Transfers in (out) of Level 3
—
Ending balance as of December 31, 2012
$38.8