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FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2011
FINANCIAL INSTRUMENTS  
FINANCIAL INSTRUMENTS

18. FINANCIAL INSTRUMENTS

 

In accordance with ASC 825, “Financial Instruments,” the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

 

 

(In thousands)

 

Financial assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

216,213

 

$

216,213

 

$

139,114

 

$

139,114

 

Trade receivables, net

 

300,895

 

300,895

 

260,945

 

260,945

 

Credit card receivables, net

 

5,197,690

 

5,197,690

 

4,838,354

 

4,838,354

 

Redemption settlement assets, restricted

 

515,838

 

515,838

 

472,428

 

472,428

 

Cash collateral, restricted

 

158,727

 

158,727

 

185,754

 

185,754

 

Other investment securities

 

26,772

 

26,772

 

104,916

 

104,916

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

149,812

 

149,812

 

121,856

 

121,856

 

Certificates of deposit

 

1,353,775

 

1,372,670

 

859,100

 

883,405

 

Asset-backed securities debt – owed to securitization investors

 

3,260,287

 

3,302,687

 

3,660,142

 

3,711,263

 

Long-term and other debt

 

2,183,474

 

3,071,661

 

1,869,772

 

2,393,124

 

Derivative financial instruments

 

38,103

 

38,103

 

69,831

 

69,831

 

 

Fair Value of Assets and Liabilities Held at December 31, 2011 and 2010

 

The following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

 

Cash and cash equivalents, trade receivables, net and accounts payable The carrying amount approximates fair value due to the short maturity.

 

Credit card receivables, net — The carrying amount of credit card receivables, net approximates fair value due to the short maturity, and the average interest rates approximate current market origination rates.

 

Redemption settlement assets, restricted — Fair value for securities is based on quoted market prices for the same or similar securities.

 

Cash collateral, restricted — The spread deposits are recorded at their fair value based on discounted cash flow models. The Company uses a valuation model that calculates the present value of estimated cash flows for each asset. The fair value is based on the weighted average life of the underlying securities and a discount rate. The carrying amount of excess funding deposits approximates its fair value due to the relatively short maturity period and average interest rates, which approximate current market rates.

 

Other investment securities — Other investment securities consist primarily of U.S. Treasury and government securities. The fair value is based on quoted market prices for the same or similar securities.

 

Certificates of deposit — The fair value is estimated based on the current rates available to the Company for similar certificates of deposit with similar remaining maturities.

 

Asset-backed securities debt — owed to securitization investors — The fair value is estimated based on the current rates available to the Company for similar debt instruments with similar remaining maturities.

 

Long-term and other debt — The fair value is estimated based on the current rates available to the Company for similar debt instruments with similar remaining maturities.

 

Derivative financial instruments —The valuation of these instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and option volatility.

 

Assets and Liabilities Measured on a Recurring Basis

 

ASC 825 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

·                  Level 1, defined as observable inputs such as quoted prices in active markets;

 

·                  Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

·                  Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The use of different techniques to determine fair value of these financial instruments could result in different estimates of fair value at the reporting date.

 

The following tables provide the assets carried at fair value measured on a recurring basis as of December 31, 2011 and 2010:

 

 

 

 

 

Fair Value Measurements at
December 31, 2011 Using

 

 

 

Balance at
December 31,
2011

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Government bonds (1)

 

$

5,100

 

$

 

$

5,100

 

$

 

Corporate bonds (1)

 

475,273

 

21,346

 

453,927

 

 

Cash collateral, restricted

 

158,727

 

 

 

158,727

 

Other investment securities (2)

 

26,772

 

3,043

 

23,729

 

 

Total assets measured at fair value

 

$

665,872

 

$

24,389

 

$

482,756

 

$

158,727

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments (3)

 

$

38,103

 

$

 

$

38,103

 

 

Total liabilities measured at fair value

 

$

38,103

 

$

 

$

38,103

 

$

 

 

 

 

 

 

Fair Value Measurements at
December 31, 2010 Using

 

 

 

Balance at
December 31,
2010

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Government bonds (1)

 

$

15,362

 

$

 

$

15,362

 

$

 

Corporate bonds (1)

 

382,454

 

164,706

 

217,748

 

 

Cash collateral, restricted

 

185,754

 

 

 

185,754

 

Other investment securities (2)

 

104,916

 

86,881

 

18,035

 

 

Total assets measured at fair value

 

$

688,486

 

$

251,587

 

$

251,145

 

$

185,754

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments (3)

 

$

69,831

 

$

 

$

69,831

 

 

Total liabilities measured at fair value

 

$

69,831

 

$

 

$

69,831

 

$

 

 

(1)         Amounts are included in redemption settlement assets in the consolidated balance sheets.

(2)         Amounts are included in other current and non-current assets in the consolidated balance sheets.

(3)         Amounts are included in other current liabilities and other liabilities in the consolidated balance sheets.

 

The following tables summarize the changes in fair value of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in ASC 825 as of December 31, 2011 and 2010:

 

 

 

Cash
Collateral,
Restricted

 

 

 

(In thousands)

 

December 31, 2010

 

$

185,754

 

Total losses (realized or unrealized):

 

 

 

Included in earnings

 

(5,227

)

Purchases

 

55,148

 

Issuances

 

17,722

 

Settlements

 

(94,670

)

Transfers in or out of Level 3

 

 

December 31, 2011

 

$

158,727

 

 

 

 

 

Losses for the period included in earnings related to assets still held at December 31, 2011

 

$

(5,227

)

 

 

 

Corporate
Bonds

 

Seller’s
Interest

 

Due from
Securitizations

 

Cash
Collateral,
Restricted

 

 

 

(In thousands)

 

December 31, 2009

 

$

73,866

 

$

297,108

 

$

775,570

 

$

206,678

 

Adoption of ASC 860 and ASC 810

 

(73,866

)

(297,108

)

(775,570

)

 

Total losses (realized or unrealized)

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

 

(238

)

Purchases, sales, issuances and settlements

 

 

 

 

(20,686

)

Transfers in or out of Level 3

 

 

 

 

 

December 31, 2010

 

$

 

$

 

$

 

$

185,754

 

 

 

 

 

 

 

 

 

 

 

Losses for the period included in earnings related to assets still held at December 31, 2010

 

$

 

$

 

$

 

$

(238

)

 

Corporate bonds, seller’s interest and due from securitizations were subsequently reclassified, derecognized or eliminated upon consolidation of the WFN Trusts and the WFC Trust as a result of the adoption of ASC 860 and ASC 810 on January 1, 2010. Gains and losses included in earnings attributable to cash collateral, restricted are included in interest in the consolidated statements of income.

 

Assets and Liabilities Measured on a Non-Recurring Basis

 

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired. During the years ended December 31, 2011 and 2010, the Company had no impairments related to these assets.