FDC 2017 Annual Report

FI R S T D A T A C O R P O R A TI O N N O T E S T O T H E C O N S O LI D A T E D FI N A N CI A L S T A T E M E N T S ( C o nti n u e d) 7 2 R es e r v e f o r M e r c h a nt C r e dit L oss es a n d C h e c k G u a r a nt e es Wit h r es p e ct t o t h e m er c h a nt a c q uiri n g b usi n ess, t h e C o m p a n y’s m er c h a nt c ust o m ers ( or t h os e of its u n c o ns oli d at e d alli a n c es) h a v e t h e l e g al o bli g ati o n t o r ef u n d a n y c h ar g es pr o p erl y r e v ers e d b y t h e c ar d h ol d er. I n t h e e v e nt, h o w e v er, t h at t h e C o m p a n y is n ot a bl e t o c oll e ct s u c h a m o u nts fr o m t h e m er c h a nts, t h e C o m p a n y m a y b e li a bl e f or a n y s u c h r e v ers e d c h ar g es. T h e C o m p a n y’s ris k i n t his ar e a pri m aril y r el at es t o sit u ati o ns w h er e t h e c ar d h ol d er h as p ur c h as e d g o o ds or s er vi c es t o b e d eli v er e d i n t h e f ut ur e. T h e C o m p a n y’s o bli g ati o n t o p erf or m is mi ni m al i n r el ati o n t o t h e t ot al d oll ar v ol u m e pr o c ess e d. T h e C o m p a n y r e q uir es c as h d e p osits, g u ar a nt e es, l ett ers of cr e dit or ot h er t y p es of c oll at er al fr o m c ert ai n m er c h a nts t o mi ni mi z e t his o bli g ati o n. C oll at er al h el d b y t h e C o m p a n y is cl assifi e d wit hi n “ S ettl e m e nt ass ets ” a n d t h e o bli g ati o n t o r e p a y t h e c oll at er al if it is n ot n e e d e d is cl assifi e d wit hi n “ S ettl e m e nt o bli g ati o ns ” o n t h e C o m p a n y’s c o ns oli d at e d b al a n c e s h e ets. T h e C o m p a n y als o utili z es a n u m b er of s yst e ms a n d pr o c e d ur es t o m a n a g e m er c h a nt ris k. D es pit e t h es e eff orts, t h e C o m p a n y hist ori c all y h as e x p eri e n c e d s o m e l e v el of l oss es d u e t o m er c h a nt d ef a ults. T h e a m o u nt of d e p osits a n d l ett ers of cr e dit h el d b y t h e C o m p a n y w as $ 6 3 2 milli o n a n d $ 6 2 8 milli o n as of D e c e m b er 3 1, 2 0 1 7 a n d 2 0 1 6, r es p e cti v el y. T h e C o m p a n y’s c o nti n g e nt o bli g ati o n r el at es t o i m pr e cisi o n i n its esti m at es of r e q uir e d c oll at er al. A pr o visi o n f or t his o bli g a ti o n is r e c or d e d b as e d pri m aril y o n hist ori c al e x p eri e n c e of cr e dit l oss es a n d ot h er r el e v a nt f a ct ors s u c h as e c o n o mi c d o w nt ur ns or i n cr e as es i n m er c h a nt fr a u d. M er c h a nt cr e dit l oss es ar e i n cl u d e d i n “ C ost of s er vi c es ” i n t h e C o m p a n y’s c o ns oli d at e d st at e m e nts of o p er ati o ns. T h e a m o u nt of t h e r es er v es attri b ut a bl e t o e ntiti es c o ns oli d at e d b y t h e C o m p a n y w as $ 2 9 milli o n a n d $ 2 3 milli o n as of D e c e m b er 3 1, 2 0 1 7 a n d 2 0 1 6, r es p e cti v el y. T h e m aj orit y of t h e Tel e C h e c k b usi n ess i n v ol v es t h e g u ar a nt e e of c h e c ks r e c ei v e d b y m er c h a nts. If t h e c h e c k is r et ur n e d, Tel e C h e c k is r e q uir e d t o p ur c h as e t h e c h e c k fr o m t h e m er c h a nt at its f a c e v al u e a n d p urs u e c oll e cti o n fr o m t h e c h e c k writ er. A pr o visi o n f or esti m at e d c h e c k r et ur ns, n et of a nti ci p at e d r e c o v eri es, is r e c or d e d at t h e tr a ns a cti o n i n c e pti o n b as e d o n r e c e nt hist or y. T h e f oll o wi n g t a bl e pr es e nts t h e esti m at e of l oss es o n r et ur n e d c h e c k a n d t h e f air v al u e of c h e c k g u ar a nt e es: As of D e c e m b e r 3 1, (i n milli o ns) 2 0 1 7 2 0 1 6 Esti m at e of l oss es o n r et ur n e d c h e c ks $ 4 $ 5 F air v al u e of c h e c ks g u ar a nt e e d 1 4 1 7 T h e esti m at e of l oss es o n r et ur n e d c h e c ks is i n cl u d e d i n “ A c c o u nts p a y a bl e a n d a c cr u e d li a biliti es ” a n d t h e f air v al u e of c h e c k s g u ar a nt e e d is i n cl u d e d i n “ A c c o u nts r e c ei v a bl e, n et ” i n t h e c o ns oli d at e d b al a n c e s h e ets. T h e m a xi m u m p ot e nti al f ut ur e p a y m e nts u n d er t h e g u ar a nt e es w er e a p pr o xi m at el y $ 4 5 6 milli o n as of D e c e m b er 3 1, 2 0 1 7 w hi c h r e pr es e nt e d a n esti m at e of t h e t ot al u n cl e ar e d c h e c ks at t h at ti m e. I n c o m e T a x es T h e C o m p a n y a n d its d o m esti c s u bsi di ari es fil e a c o ns oli d at e d U. S. i n c o m e t a x r et ur n. T h e C o m p a n y’s f or ei g n o p er ati o ns fil e i n c o m e t a x r et ur ns i n t h eir l o c al j uris di cti o ns. I n c o m e t a x es r efl e ct t h e n et t a x eff e cts of t e m p or ar y diff er e n c es b et w e e n t h e fi n a n ci al r e p orti n g c arr yi n g a m o u nts of ass ets a n d li a biliti es a n d t h e c orr es p o n di n g i n c o m e t a x a m o u nts. T h e C o m p a n y h as d ef err e d t a x ass ets a n d li a biliti es a n d m ai nt ai ns v al u ati o n all o w a n c es w h er e it is m or e li k el y t h a n n ot t h at all or a p orti o n of d ef err e d t a x ass ets will n ot b e r e ali z e d. T o t h e e xt e nt t h e C o m p a n y d et er mi n es t h at it will n ot r e ali z e t h e b e n efit of s o m e or all of its d ef err e d t a x ass ets, t h es e d ef err e d t a x ass ets will b e a dj ust e d t hr o u g h t h e C o m p a n y’s pr o visi o n f or i n c o m e t a x es i n t h e p eri o d i n w hi c h t his d et er mi n ati o n is m a d e. T h e C o m p a n y r e c o g ni z es t h e t a x b e n efits fr o m u n c ert ai n t a x p ositi o ns o nl y w h e n it is m or e li k el y t h a n n ot, b as e d o n t h e t e c h ni c al m erits of t h e p ositi o n, t h at t h e t a x p ositi o n will b e s ust ai n e d u p o n e x a mi n ati o n, i n cl u di n g t h e r es ol uti o n of a n y r el at e d a p p e a ls or liti g ati o n. T h e t a x b e n efits r e c o g ni z e d i n t h e c o ns oli d at e d fi n a n ci al st at e m e nts fr o m s u c h a p ositi o n ar e m e as ur e d as t h e l ar g est b e n efit t h at h as a gr e at er t h a n fift y p er c e nt li k eli h o o d of b ei n g r e ali z e d u p o n ulti m at e r es ol uti o n. C as h a n d C as h E q ui v al e nts I n v est m e nts ( ot h er t h a n t h os e i n cl u d e d i n s ettl e m e nt ass ets) wit h ori gi n al m at uriti es of t hr e e m o nt hs or l ess (t h at ar e r e a dil y c o n v erti bl e t o c as h) ar e c o nsi d er e d t o b e c as h e q ui v al e nts a n d ar e st at e d at c ost, w hi c h a p pr o xi m at es m ar k et v al u e. C as h a n d c a s h e q ui v al e nts t h at w er e r estri ct e d fr o m us e d u e t o r e g ul at or y r e q uir e m e nts ar e i n cl u d e d i n “ Ot h er l o n g-t er m ass ets ” i n t h e c o ns ol i d at e d b al a n c e s h e ets a n d w as $ 2 7 milli o n a n d $ 3 0 milli o n as of D e c e m b er 3 1, 2 0 1 7 a n d 2 0 1 6, r es p e cti v el y.