Visa 2010 Annual Report Download - page 60

Table of Contents
on fixed payments and are generally deferred, if certain criteria are met. The deferability criteria include the existence of future benefits to Visa, the existence
of legally enforceable recoverability clauses, management's ability and intent to enforce the recoverability clauses and the ability to generate future earnings
from the agreement in excess of the deferred amounts. Capitalized amounts are amortized over the period of contractual recoverability.
Assumptions and Judgment. Estimation of volume and support incentives relies on forecasts of payments volume, estimates of card issuance and card
conversion. Performance is estimated using customer reported information, transactional information accumulated from our systems, historical information
and discussions with our clients.
Impact if Actual Results Differ from Assumptions. If our clients' actual performance or recoverable cash flows are not consistent with our estimates,
volume and support incentives may be materially different than initially recorded. Increases in incentive payments are generally driven by increased payment
and transaction volume. As a result, in the event incentive payments exceed estimates, such payments are not expected to have a material effect on our
financial condition, results of operations or cash flows. The cumulative impact of a revision in estimates is recorded in the period such revisions become
probable and estimable. For the year ended September 30, 2010, performance adjustments to volume and support agreements were less than 1% of our total
operating revenues.
Fair Value—Visa Europe Put Option
Critical Estimates. We have granted Visa Europe a perpetual put option under which, if exercised, we are required to purchase all of the share capital of
Visa Europe from its members at any time. The put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to
certain adjustments, applies Visa Inc.'s forward price-to-earnings multiple, as defined in the agreement, at the time the option is exercised to Visa Europe's
adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income. The calculation of Visa Europe's adjusted sustainable
income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items.
Upon exercise, the key inputs to this formula, including Visa Europe's adjusted sustainable income, will be the result of negotiation between the
Company and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase
price. See Note 3—Visa Europe to our consolidated financial statements for further detail regarding the calculation of the put exercise price under the
agreement.
The fair value of Visa Europe's option was estimated to be approximately $267 million at September 30, 2010. While the put option is in fact non-
transferable, this amount, recorded in our financial statements represents our estimate of the amount we would be required to pay a third party market
participant to transfer the put option in an orderly transaction at the measurement date. The fair value of the put option is computed by comparing the
estimated strike price, under the terms of the Put agreement, to the estimated fair value of Visa Europe. The fair value of Visa Europe is defined as the
estimated amount a third party market participant might pay in an arm's length transaction under normal business conditions. A probability of exercise
assumption is applied to reflect the possibility that Visa Europe will never exercise its option.
While this amount represents the fair value of the put option at September 30, 2010, it does not represent the actual purchase price that we may be
required to pay if the option is exercised, which could be several billion dollars or more. See the Liquidity and Capital Resources section of Management's
Discussion and Analysis for further discussion.
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