Visa 2013 Annual Report Download - page 61

consistently from period to period. However, actual results could differ from our assumptions and
estimates, and such differences could be material.
We believe that the following accounting estimates are the most critical to fully understand and
evaluate our reported financial results, as they require our most subjective or complex management
judgments, resulting from the need to make estimates about the effect of matters that are inherently
uncertain and unpredictable.
Revenue Recognition—Client Incentives
Critical estimates. We enter into incentive agreements with financial institution clients and other
business partners for various programs designed to build payments volume, increase Visa-branded
card and product acceptance and win merchant routing transactions over our network. These
incentives are primarily accounted for as reductions to operating revenues; however, if a separate
identifiable benefit at fair value can be established, they are accounted for as operating expenses. We
generally capitalize advance incentive payments under these agreements if select criteria are met. The
capitalization criteria include the existence of future economic benefits to Visa, the existence of legally
enforceable recoverability language (e.g., early termination clauses), management’s ability and intent
to enforce the recoverability language 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 revenues. 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, 2013, client
incentives represented 16% 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.
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