Visa 2012 Annual Report Download - page 93

Table of Contents VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2012
The Company maintained collateral as follows:
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. Letters of credit are provided primarily by client financial institutions to serve as irrevocable
guarantees of payment. Guarantees are provided primarily by parent financial institutions to secure the obligations of their
subsidiaries. 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). Historically, the Company experienced
minimum losses, which has contributed to an estimated probability-weighted value of the guarantee of approximately $1 million at
September 30, 2012 and 2011 . These amounts were reflected in accrued liabilities on the consolidated balance sheets.
Note 13—Derivative Financial Instruments
The Company enters 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, 2012 , all derivative instruments outstanding mature
within 12 months or less. The Company does not use foreign exchange forward contracts for speculative or trading purposes.
Cash Flow Hedges
The Company maintains a rolling hedge program with the objective of reducing exchange rate risk from forecasted net
exposures of revenues derived from and payments made in foreign currencies during the following 12 months. The aggregate
notional amounts of the Company's derivative contracts outstanding in its hedge program were $690 million and $651 million at
September 30, 2012 and 2011 , respectively. As of September 30, 2012 , the Company’s cash flow hedges in an asset position
totaled $12 million and were classified in prepaid expenses and other current assets on the consolidated balance sheet, while cash
flow hedges in a liability position totaled $11 million
and were classified in accrued liabilities on the consolidated balance sheet. See
Note 4—Fair Value Measurements and Investments .
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 also formally assesses whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives may be
expected to remain highly effective in future periods.
The Company uses regression analysis to assess effectiveness prospectively and retrospectively. The effectiveness tests are
performed on the foreign exchange forward contracts based on changes in the spot rate of the derivative instrument compared to
changes in the spot rate of the forecasted hedged transaction. Forward points are excluded for effectiveness testing and
measurement purposes. The excluded forward points are reported in earnings. For fiscal 2012 , 2011 and 2010 , the amounts by
which earnings were reduced relating to excluded forward points was
$16 million , $20 million and $17 million , respectively.
90
September 30,
2012
September 30,
2011
(in millions)
Cash equivalents
$
823
$
931
Pledged securities at market value
307
296
Letters of credit
1,084
902
Guarantees
2,022
1,845
Total
$
4,236
$
3,974