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.
|