Visa 2010 Annual Report Download - page 108

Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2010
(in millions, except as noted)
Cash equivalents collateral is reflected in customer collateral on the consolidated balance sheets as it is held in escrow in the Company's name. All other
collateral is excluded from the consolidated balance sheets. Pledged securities are held by third parties in trust for the Company and clients. Guarantees are
provided primarily by parent financial institutions to secure the obligations of their subsidiaries, and the Company routinely evaluates the financial viability of
institutions providing the guarantees.
The fair value of the settlement risk guarantee is estimated using a proprietary model which considers statistically derived loss factors based on
historical experience, estimated settlement exposures at period end and a standardized grading process for clients (using, where available, third-party
estimates of the probability of customer failure). The estimated probability-weighted value of the guarantee was less than $1 million at September 30, 2010
and 2009 and is reflected in accrued liabilities on the consolidated balance sheets.
Note 14—Derivative Financial Instruments
The functional currency for the Company is the U.S. dollar ("USD") for the majority of its foreign operations. 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 derivative contracts to manage the variability in expected future cash flows attributable to changes in foreign
exchange rates. At September 30, 2010, all derivative instruments outstanding mature within 12 months or less. The Company does not use foreign exchange
forward contracts for speculative or trading purposes. All derivatives are recorded on the consolidated balance sheet at fair value in prepaid expenses and
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.
The Company enters into forward 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. In
fiscal 2009, the Company implemented a rolling hedge strategy program. Under this strategy, the Company seeks to reduce the exchange rate risk from
forecasted net exposure of revenues derived from and payments made in foreign currencies during the immediately following 12 months. The aggregate
notional amount of the Company's foreign currency forward contracts outstanding in its exchange rate risk management program was $627 million and
$742 million at September 30, 2010 and 2009, respectively. The aggregate notional amount of $627 million outstanding at September 30, 2010 is fully
consistent with the Company's strategy and treasury policy aimed at reducing foreign exchange risk below a predetermined and approved threshold. However,
actual results for this period could materially differ from the Company's forecast. As of September 30, 2010, the Company's cash flow hedges in an asset
position totaled $5 million and are classified in prepaid expenses and other current assets on the consolidated balance sheet, while cash flow hedges in a
liability position totaled $56 million and are classified in accrued liabilities on the consolidated balance sheet. See Note 5—Investments and Fair Value
Measurements.
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
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