Visa 2013 Annual Report Download - page 63

Factors that might indicate a fundamental change in long-term value include, but are not limited to,
changes in the regulatory environment, client portfolios, long-term growth rates or new product
innovations. A consistent methodology is applied to a group of comparable public companies used to
estimate the forward price-to-earnings multiple applicable to Visa Europe. These estimates, therefore,
are impacted by changes in stock prices and the financial market’s expectations of our future earnings
and those of comparable companies.
Other estimates of lesser significance include growth rates and foreign currency exchange rates
applied in the calculation of Visa Europe’s adjusted sustainable income. The valuation model assumes
a large range of annual growth rates, reflecting the different economic environments and
circumstances under which Visa Europe could decide to exercise its option. The lowest growth rates
assumed reflect Visa Europe’s current business model as an association, owned by its member banks,
while the highest reflect a successful shift to a for-profit model in anticipation of its exercise. The
scenarios with higher growth rates are assigned a significantly higher probability in the valuation
model, as we believe a market participant would more heavily weigh these scenarios as it is likely that,
should it choose to exercise its option, Visa Europe will seek to maximize the purchase price by
adopting a for-profit business model in advance of exercising the put option. The foreign exchange rate
used to translate Visa Europe’s results from Euros to U.S. dollars reflects a blend of forward exchange
rates observed in the marketplace. The assumed timing of exercise of the put option used in the
various modeled scenarios is not an overly significant assumption in the valuation, as obligations
calculated in later years are more heavily discounted in the calculation of present value.
Impact if actual results differ from assumptions. In the determination of the fair value of the put
option at September 30, 2013, we have assumed a 40% probability of exercise by Visa Europe at
some point in the future and an estimated long-term P/E differential at the time of exercise of
approximately 1.9x. The use of a probability of exercise that is 5% higher than our estimate would have
resulted in an increase of approximately $18 million in the value of the put option. An increase of
1.0x in the assumed P/E differential would have resulted in an increase of approximately $84 million in
the value of the put option. The put option is exercisable at any time at the sole discretion of
Visa Europe. As such, the put option liability is included in accrued liabilities in our consolidated
balance sheet at September 30, 2013. Classification in current liabilities is not an indication of
management’s expectation of exercise and simply reflects the fact that this obligation could become
payable within 12 months.
Legal and Regulatory Matters
Critical estimates. We are currently involved in various legal proceedings, the outcomes of which
are not within our complete control or may not be known for prolonged periods of time. Management is
required to assess the probability of loss and amount of such loss, if any, in preparing our financial
statements.
Assumptions and judgment. We evaluate the likelihood of a potential loss from legal or regulatory
proceedings to which we are a party. We record a liability for such claims when a loss is deemed
probable and the amount can be reasonably estimated. Significant judgment may be required in the
determination of both probability and whether an exposure is reasonably estimable. Our judgments are
subjective based on the status of the legal or regulatory proceedings, the merits of our defenses and
consultation with in-house and outside legal counsel. As additional information becomes available, we
reassess the potential liability related to pending claims and may revise our estimates.
Our retrospective responsibility plan only addresses monetary liabilities from settlements of, or
final judgments in, the covered litigation. The plan’s mechanisms include the use of the litigation
escrow account. The accrual related to the covered litigation could be either higher or lower than the
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