First Data 2014 Annual Report Download - page 43

In addition to the internally generated intangible assets discussed above, we also record intangible assets as a result of business combinations and asset
acquisitions. In these transactions, we typically acquire and recognize intangible assets such as customer relationships, software, and trade names. 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. We generally estimate 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.
We test contract and conversion costs 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.
The carrying value of the First Data trade name is $604 million as of December 31, 2014. Upon consideration of many factors, including the determination
that there are no legal, regulatory or contractual provisions that limit the useful life of the First Data trade name, we determined that the First Data trade name
had an indefinite useful life. As an indefinite lived asset, the First Data trade name is not amortized but is reviewed annually for impairment until such time as
it is determined to have a finite life. For 2014, we elected not to begin the process with a qualitative assessment due to the significance of the First Data trade
name to our financial statements. In step one of the impairment test, we estimate the fair value of the First Data trade name using a relief from royalty
methodology in which a royalty rate is applied to our revenue streams to be reliant upon the First Data trade name in order to estimate the rent that we save by
owning rather than leasing the asset. As of October 1, 2014, the most recent impairment analysis date, the fair value of the First Data trade name exceeded its
carrying value.
With respect to the merchant acquiring business, our merchant customers (or those of our
unconsolidated alliances) have the liability for any charges properly reversed by the cardholder. In the event, however, that we are not able to collect such
amounts from the merchants due to merchant fraud, insolvency, bankruptcy or another reason, we may be liable for any such reversed charges. Our 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.
Our obligation to stand ready to perform is minimal in relation to the total dollar volume processed. We require cash deposits, guarantees, letters of credit or
other types of collateral from certain merchants to minimize this obligation. The amounts of collateral held by us and our unconsolidated alliances are as
follows:

  
Cash and cash equivalents collateral $ 440.3 $ 479.4
Collateral in the form of letters of credit 92.6 106.0
Total collateral $ 532.9 $ 585.4
We also utilize a number of systems and procedures to manage merchant risk. Despite these efforts, we historically have experienced some level of losses due
to merchant defaults.
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