Visa 2008 Annual Report Download - page 150

Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2008
(in millions, except as noted)
Settlement Risk Guarantee
The fair value of the settlement risk guarantee is estimated using a proprietary model. Key inputs to the model include statistically derived loss factors
based on historical experience, estimated settlement exposures at period end and a standardized grading process for customers (utilizing, where available,
third-party estimates of the probability of customer failure). The model is updated on a periodic basis to capture recent characteristics of the customer base,
historical loss experience, and changes in Visa's global risk policies and procedures. The resulting probability-weighted value of the guarantee, after
consideration of collateral held, was $0.9 million and $0.4 million at September 30, 2008 and September 30, 2007, respectively. These amounts are reflected
in accrued liabilities on the respective consolidated balance sheets.
Note 14—Derivative Financial Instruments
The functional currency for the Company is the U.S. dollar ("USD") for each of its foreign operations except Canada, which uses the Canadian dollar as
its functional currency. The Company transacts business in USD and in various foreign currencies. This activity subjects the Company to exposure from
movements in foreign currency exchange rates. The Company's policy is to enter into foreign exchange forward and option derivative contracts to manage the
variability in expected future cash flows attributable to changes in foreign exchange rates. At September 30, 2008, all derivative instruments outstanding have
maturities of less than 4 months. Visa U.S.A. did not have material transactions in foreign currencies or any material derivative instruments outstanding at
September 30, 2007. The Company does not use foreign currency option or foreign exchange forward contracts for speculative or trading purposes. All
derivatives are recorded on the consolidated balance sheet at fair value in other current assets or accrued liabilities and the resulting gains or losses from
changes in fair value are accounted for depending on whether they are designated and qualify for hedge accounting.
Cash Flow Hedges
The Company enters into forward and option contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency
exchange rates. Such cash flow exposures result from portions of forecasted revenues and expenses being denominated in or based on currencies other than
USD.
To qualify for cash flow hedge accounting treatment, the Company formally documents, at inception of the hedge, all relationships between hedging
transactions and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also formally
assesses (at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in the cash flows of the hedged items and whether those derivatives may be expected to remain highly effective in future periods.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of accumulated other
comprehensive income on the consolidated balance sheet. When the forecasted transaction occurs and is recognized in earnings, the amount in other
comprehensive income, related to that hedge, is reclassified to operating revenue or expense. The balance accumulated in other comprehensive income was
not significant at September 30, 2008
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