Visa 2015 Annual Report Download - page 70

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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, 2015, client
incentives represented 17% of gross operating revenues.
Fair Value—Visa Europe Put Option
Critical estimates. On November 2, 2015, the Visa Europe put option was amended in conjunction
with our agreement to acquire Visa Europe. At September 30, 2015, the fair value of the put option
liability was based on the unamended terms. If the acquisition of Visa Europe, described in Note 2—
Visa Europe, is not completed, the put option will revert to its original, unamended form. If the put
option is exercised under its unamended terms, we will be required to purchase all of the outstanding
shares of capital stock of Visa Europe from its members. The unamended 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 (as defined in the unamended option
agreement), or the P/E ratio, at the time the option is exercised to Visa Europe’s projected adjusted net
income for the forward 12-month period (as defined in the unamended option agreement), or the
adjusted sustainable income. The calculation of Visa Europe’s adjusted sustainable income under the
terms of the unamended put option agreement includes potentially material adjustments for cost
synergies and other negotiated items.
Upon exercise of the unamended put option, the key inputs to this formula, including Visa
Europe’s adjusted sustainable income, would be the result of negotiation between us and Visa Europe.
The unamended 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 unamended
agreement.
The fair value of Visa Europe’s unamended option was estimated to be approximately $255 million
at September 30, 2015. While the unamended 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 unamended put option is computed by comparing the estimated strike price, under the
terms of the unamended put agreement, to the estimated fair value of Visa Europe. The fair value of
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