First Data 2013 Annual Report Download - page 64

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First Data Corporation (“FDC” or “the Company”) operates electronic commerce businesses providing a variety of services to financial institutions,
commercial establishments and consumers. Such services include merchant transaction processing and acquiring; credit, retail and debit card issuing and
processing; prepaid services and check verification, settlement and guarantee services.
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The accompanying Consolidated Financial Statements of FDC include the accounts of FDC and its controlled subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Investments in unconsolidated affiliated companies are accounted for under the equity method
and are included in “Investment in affiliates” in the accompanying Consolidated Balance Sheets. The Company generally utilizes the equity method of
accounting when it has an ownership interest of between 20% and 50% in an entity, provided the Company is able to exercise significant influence over the
investee’s operations.
The Company consolidates an entity’s financial statements when the Company either will absorb a majority of the entity’s expected losses or residual
returns, in the case of a variable interest entity, or has the ability to exert control over a subsidiary. Control is normally established when ownership interests
exceed 50% in an entity; however, when the Company does not exercise control over a majority-owned entity as a result of other investors having rights over
the management and operations of the entity, the Company accounts for the entity under the equity method. As of December 31, 2013 and 2012, there were no
greater-than-50%-owned affiliates whose financial statements were not consolidated.
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ
from those estimates.
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Depreciation and amortization presented as a separate line item on the Company’s Consolidated Statements of Operations does not include amortization
of initial payments for new contracts which is recorded as a contra-revenue within “Transaction and processing service fees.” Also not included is
amortization related to equity method investments which is netted within the “Equity earnings in affiliates” line. The following table presents the amounts
associated with such amortization:
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   
Amortization of initial payments for new contracts $ 41.5 $ 44.5 $ 42.5
Amortization related to equity method investments $79.1 $ 94.8 $ 56.7
In 2011, the Company recorded a net $58.5 million pretax ($35.2 million after tax) benefit in the Consolidated Statement of Operations to correct
cumulative depreciation and amortization errors related to purchase accounting associated with the Company’s 2007 merger with an affiliate of Kohlberg
Kravis Roberts & Co. The corrections impacted “Costs of services” ($10.2 million expense), “Depreciation and amortization” ($57.7 million benefit) and
amortization of equity method investments within “Equity earnings in affiliates” ($11.0 million benefit). The errors and the cumulative correction, which
totaled $58.5 million in aggregate and occurred over a four year period, were deemed immaterial to prior years and 2011, respectively.
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The majority of the Company’s revenues are comprised of transaction-based fees, which typically constitute a percentage of dollar volume processed, or
a fee per transaction processed, or account on file or some combination thereof. In limited circumstances, revenue is allocated to the separate units of
accounting in a multiple element transaction based on relative selling prices, provided each element has stand alone value to the customer, and delivery of any
undelivered items is probable and substantially within the Company’s control.
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