Visa 2008 Annual Report Download - page 88

Table of Contents
We believe that the following accounting estimates are the most critical to fully understand and evaluate our reported financial results, as they require
our most subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Critical Estimates Assumptions and Judgment
Impact if Actual Results
Differ from Assumptions
Revenue Recognition—Volume and Support Incentives
We enter into incentive agreements with financial
institution customers, merchants and other business
partners to build payments volume and to increase
product acceptance. Certain volume and support
incentives are based on performance targets and are
accrued based upon estimates of future performance.
Other incentives are fixed payments and are deferred and
amortized over the period of benefit.
Volume and support incentives require
significant management estimates.
Estimation of volume and support
incentives relies on forecasts of payments
volume, estimates of card issuance and
conversion. Performance is estimated
using customer reported information,
transactional information accumulated
from our systems, historical information
and discussions with our customers.
If our customers' actual performance or recoverable
cash flows are not consistent with our estimates,
volume and support incentives may be materially
different than initially recorded. The cumulative impact
of a revision in estimates is recorded in the period such
revisions become probable and estimable and is
recorded as a reduction of revenue. For the year ended
September 30, 2008 performance adjustments to
volume and support agreements were approximately
0.2% of our operating revenues.
Fair Value—Visa Europe Put Option
We have granted Visa Europe a put option under which
Visa Inc. is required to purchase all of the share capital
of Visa Europe from its members at any time after
March 25, 2009. The purchase price of the Visa Europe
shares under the put option is based upon a formula that,
subject to certain adjustments, applies the 12-month
forward price-to-earnings multiple applicable to our
common stock at the time the option is exercised to Visa
Europe's projected sustainable adjusted net operating
income for the same 12-month period. We determined
the fair value of the put option using probability
weighted models designed to estimate our liability
The determination of the fair value of the
put option requires significant estimates
and assumptions. The most significant of
these estimates are the assumed
probability that Visa Europe will elect to
exercise its option and the estimated
differential between the 12-month forward
price-to-earnings multiple applicable to
our common stock and that applicable to
Visa Europe on a stand alone basis at the
time of exercise, which we refer to as the
P/E differential.
In the determination of the fair value of the put option
at September 30, 2008, we have assumed a 40%
probability of exercise by Visa Europe at some point in
the future and a P/E differential, at the time of exercise,
of approximately 5.3x. The use of a probability of
exercise of 5% higher than our estimate would have
resulted in an increase of approximately $44 million in
the value of the put option. An increase of one in the
assumed P/E differential would have resulted in an
increase of approximately $71 million in the value of
the put option.
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