Visa 2012 Annual Report Download - page 52

Table of Contents
The capitalization criteria include the existence of future economic benefits to Visa, the existence of legally enforceable
recoverability clauses, such as early termination clauses, management's ability and intent to enforce the recoverability clauses and
the ability to generate future earnings from the agreement in excess of amounts deferred. Capitalized amounts are amortized over
the shorter of the period of contractual recoverability or the corresponding period of economic benefit. Incentives not yet paid are
accrued systematically and rationally based on management's estimate of each client's performance. These accruals are regularly
reviewed and estimates of performance are adjusted as appropriate, based on changes in performance expectations, actual client
performance, amendments to existing contracts or the execution of new contracts
Assumptions and Judgment. Estimation of client incentives relies on forecasts of payments volume, 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, client incentives may be materially different than initially recorded. Increases in incentive payments
are generally driven by increased payments and transaction volume, which drive our net revenue. 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, 2012 , client incentives represented 17% of gross operating revenues.
Fair Value — Visa Europe Put Option
Critical Estimates. We have granted Visa Europe a perpetual put option which, if exercised, will require us to purchase all of
the outstanding shares of capital stock of Visa Europe from its members. The put option provides a formula for determining the
purchase price of the Visa Europe shares, which, subject to certain adjustments, applies our forward price-to-earnings multiple, or
the P/E ratio (as defined in the option agreement), at the time the option is exercised to Visa Europe's projected adjusted
sustainable income for the forward 12-month period, or the adjusted sustainable income (as defined in the option agreement). 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 us 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 2—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 $145 million at September 30, 2012 . 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 potential obligation in an orderly transaction. 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, 2012
, 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 of Financial Condition and Results of Operations for further
discussion.
Assumptions and Judgment.
The most significant estimates used in the valuation of the put option are the assumed probability
that Visa Europe will elect to exercise its option and the estimated differential between the forward price-to-earnings multiple
applicable to our common stock, as defined in the put option agreement, 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.
Probability of Exercise— Exercise of the put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe
shareholders pursuant to authority granted to Visa Europe, under its Articles of Association). We estimate the assumed probability
of exercise based on reasonably available information including, but not limited to:
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