First Data 2014 Annual Report Download - page 57




The U.S. dollar is the functional currency for most of the Company’s U.S.-based businesses and certain foreign-based businesses. Significant operations with a
local currency as their functional currency include operations in the United Kingdom, Australia, Germany, Ireland, Greece, and Argentina. Foreign currency-
denominated assets and liabilities for these units and other less significant operations are translated into U.S. dollars based on exchange rates prevailing at
the end of the period, and revenues and expenses are translated at average exchange rates during each monthly period. The effects of foreign exchange gains
and losses arising from the translation of assets and liabilities of those entities where the functional currency is not the U.S. dollar are included as a
component of Other Comprehensive Income (OCI). Intercompany loans are generally not considered invested on a long-term basis and such foreign currency
gains and losses are recorded in income. Transaction gains and losses related to operating assets and liabilities are included in the “Cost of services” and
“Selling, general, and administrative” lines of the Consolidated Statements of Operations and were immaterial. Non-operating transaction gains and losses
derived from non-operating assets and liabilities are included in the “Other income (expense)” line of the Consolidated Statements of Operations and are
separately disclosed in Note 7 "Supplemental Financial Information" of these Consolidated Financial Statements.

The Company is exposed to various financial and market risks, including those related to changes in interest rates and foreign currency exchange rates, that
exist as part of its ongoing business operations. The Company uses derivative instruments (i) to mitigate cash flow risks with respect to changes in interest
rates (forecasted interest payments on variable rate debt), (ii) to maintain a desired ratio of fixed rate and floating rate debt, and (iii) to protect the net
investment in certain foreign subsidiaries and/or affiliates with respect to changes in foreign currency exchange rates. The Company’s objective is to engage
in risk management strategies that provide adequate downside protection.
Derivative instruments are entered into for periods consistent with related underlying exposures. The Company applies strict policies to manage each of these
risks, including prohibition against derivatives trading, derivatives market-making or any other speculative activities. Although most of the Company’s
derivatives either do not qualify or are not designated for hedge accounting, they are maintained for economic hedge purposes and are not considered
speculative.
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. For designated hedges, 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.
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, Australian dollars, British pounds, and Canadian dollars), so there is minimal risk that appropriate derivatives to maintain the hedging program
would not be available in the future.
The Company recognizes all derivative financial instruments in the Consolidated Balance Sheets as assets or liabilities at fair value. Such amounts are
recorded in “Other current assets”, “Other long-term assets”, “Other current liabilities” or “Other long-term liabilities” in the Consolidated Balance Sheets.
The Company’s policy is to present all derivative balances on a gross basis, without regard to counterparty master netting agreements or similar
arrangements. Changes in fair value of derivative instruments are recognized immediately in earnings unless the derivative is designated and qualifies as a
hedge of future cash flows or a hedge of a net investment in a foreign operation. For derivatives that qualify as hedges of future cash flows, the effective
portion of changes in fair value is recorded temporarily in equity as a component of OCI and then recognized in earnings in the same period or periods during
which the hedged item affects earnings. For derivatives that qualify as a hedge of a net investment in a foreign operation, the gain or loss is reported in OCI as
part of the cumulative translation adjustment to the extent the hedge is effective. Any ineffective portions of cash flow hedges and net investment hedges are
recognized in the
57