First Data 2014 Annual Report Download - page 45

The maximum potential future payments under the guarantees were estimated by us to be approximately $1.2 billion as of December 31, 2014 which
represented an estimate of the total uncleared checks at that time.
 The determination of our provision for income taxes requires management’s judgment in the use of estimates and the interpretation and
application of complex tax laws. Judgment is also required in assessing the timing and amounts of deductible and taxable items. We establish contingency
reserves for material, known tax exposures relating to deductions, transactions, and other matters involving some uncertainty as to the proper tax treatment of
the item. Our reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review. Several years may elapse before a particular
matter, for which we have established a reserve, is audited and finally resolved or clarified. While we believe that our reserves are adequate to cover
reasonably expected tax risks, issues raised by a tax authority may be finally resolved at an amount different than the related reserve. Such differences could
materially increase or decrease our income tax provision in the current and/or future periods. When facts and circumstances change (including a resolution of
an issue or statute of limitations expiration), these reserves are adjusted through the provision for income taxes in the period of change. As the result of
interest and amortization expenses that we incur, we are currently in a tax net operating loss position. Judgment is required to determine whether some
portion or all of the deferred tax assets will not be realized. To the extent we determine that we will not realize the benefit of some or all of our deferred tax
assets, then these assets are adjusted through our provision for income taxes in the period in which this determination is made.
We are currently in a tax net operating loss position in several jurisdictions in which we operate, including the United States federal jurisdiction, resulting in
significant deferred tax assets. We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we
believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. We believe that a significant portion of the deferred
tax assets will be realized because of the existence of sufficient taxable income within the carryforward period available under the tax law, but have
established valuation allowances for those deferred tax assets that in our judgment will not be realized. In making this determination, we have considered the
relative impact of all of the available positive and negative evidences regarding future sources of taxable income and tax planning strategies. However, there
could be material impact to our effective tax rate if there is a significant change in our judgment. If and when our judgment changes, then the valuation
allowances are adjusted through the provision for income taxes in the period in which this determination is made. Refer to Note 15 "Income Taxes" to our
Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information regarding our income tax provision.
We have a stock incentive plan for certain employees of ours and our affiliates (stock plan). This stock plan is at the FDH level
which owns 100% of our equity interests. The stock plan provides the opportunity for certain employees to purchase shares in FDH and then receive a
number of stock options or restricted stock based on a multiple of their investment in such shares. The plan also allows for us to award shares and options to
certain employees. The expense associated with this plan is recorded by us. We use the Black-Scholes option pricing model to measure the fair value of stock
option awards. We chose the Black-Scholes model based on our experience with the model and the determination that the model could be used to provide a
reasonable estimate of the fair value of awards with terms such as those issued by FDH. Option-pricing models require estimates of a number of key valuation
inputs including expected volatility, expected dividend yield, expected term, and risk-free interest rate. Certain of these inputs are more subjective due to
FDH being privately held and thus not having objective historical or public information. The most subjective inputs are the expected term, expected
volatility and determination of share value. The expected term is determined using probability weighted expectations and expected volatility is determined
using a selected group of guideline companies as surrogates for FDH.
Periodically, we estimate the fair value of FDH common stock. We rely on the results of a discounted cash flow analysis but also consider the results of a
market approach. The discounted cash flow analysis is dependent on a number of significant management assumptions regarding the expected future
financial results of ours and FDH as well as upon estimates of an appropriate cost of capital. A sensitivity analysis is performed in order to establish a narrow
range of estimated fair values for the shares of FDH common stock. The market approach consists of identifying a set of guideline public companies.
Multiples of historical and projected EBITDA determined based on the guideline companies is applied to FDH’s EBITDA in order to establish a range of
estimated fair value for the shares of FDH common stock. We consider the results of both of these approaches, placing primary reliance on the discounted
cash flow analysis. The concluded range of fair values is also compared to the value determined by the Board of Directors for use in transactions, including
stock sales and repurchases. After considering all of these estimates of fair value, we then determine a single estimated fair value of the stock to be used in
accounting for stock-based compensation.
As of December 31, 2014, time-based options were outstanding under the stock plan. The time options have a contractual term of 10 years. Time options vest
equally over a three to five year period from the date of issuance. The options also have certain accelerated vesting provisions upon a change in control, a
qualified public offering, or certain termination events.
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