Visa 2012 Annual Report Download - page 74

Table of Contents VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2012
historically been deducted to reduce federal income taxes payable. The Company intends to elect to claim foreign tax credits in any
given year if such election is beneficial to the Company.
Pension and other postretirement benefit plans . The Company’s defined benefit pension and other postretirement benefit
plans are actuarially evaluated, incorporating various critical assumptions including the discount rate and the expected rate of
return on plan assets (for qualified pension plans). The discount rate is based on a "bond duration matching" methodology, which
reflects the matching of projected plan obligation cash flows to an average of high-quality corporate bond yield curves whose
duration matches the projected cash flows. The expected rate of return on pension plan assets considers the current and expected
asset allocation, as well as historical and expected returns on each plan asset class. Any difference between actual and expected
plan experience, including asset return experience, in excess of a 10% corridor is recognized in net periodic pension cost over the
expected average employee future service period, approximately 8 years for United States plans. Other assumptions involve
demographic factors such as retirement age, mortality, attrition and the rate of compensation increases. The Company evaluates
assumptions annually and modifies them as appropriate.
The Company recognizes the funded status of its benefit plans in its consolidated balance sheets as other assets, accrued
liabilities, and other liabilities. The Company recognizes settlement losses when it settles pension benefit obligations, including
making lump-sum cash payments to plan participants in exchange for their rights to receive specified pension benefits, when
certain thresholds are met. See Note 11—Pension, Postretirement and Other Benefits .
Foreign currency remeasurement and translation . The Company's functional currency is the U.S. dollar for the majority of its
foreign operations. Transactions denominated in currencies other than the applicable functional currency are converted to the
functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to
the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are
remeasured at historical exchange rates. Gains and losses related to conversion and remeasurement are recorded in general and
administrative expense in the consolidated statements of operations.
For certain foreign operations, the Company's functional currency may be the local currency in which a foreign subsidiary
executes its business transactions. Translation from the local currency to the U.S. dollar is performed for balance sheet accounts
using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate
for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss)
on the consolidated balance sheets.
Derivative financial instruments . The Company uses forward foreign exchange contracts to reduce its exposure to foreign
currency rate changes on non-functional currency denominated forecasted operational cash flows. Derivatives are carried at fair
value on a gross basis in either prepaid and other current assets or accrued liabilities on the consolidated balance sheets. Gains
and losses resulting from changes in fair value of derivative instruments are accounted for either in accumulated other
comprehensive income (loss) on the consolidated balance sheets, or in the consolidated statements of operations (in the
corresponding account where revenue or expense is hedged, or to general and administrative for hedge amounts determined to be
ineffective) depending on whether they are designated and qualify for hedge accounting. Fair value represents the difference in the
value of the derivative financial instruments at the contractual rate and the value at current market rates, and generally reflects the
estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date based on broker quotes
for the same or similar instruments.
Additional disclosures that demonstrate how derivative instruments and related hedged items affect an entity's financial
position, financial performance and cash flows have not been presented because the impact of derivative instruments is immaterial
to the overall consolidated financial statements. See Note 13—Derivative Financial Instruments .
Guarantees and indemnifications . The Company recognizes an obligation at inception for guarantees and indemnifications
that qualify for recognition, regardless of the probability of occurrence. The Company indemnifies issuing and acquiring clients from
settlement losses suffered by the failure of any other customer to honor drafts, travelers cheques, or other instruments processed in
accordance with Visa's operating regulations. The estimated fair value of the liability for settlement indemnification is included in
accrued liabilities on the consolidated balance
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