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FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2013
FINANCIAL INSTRUMENTS  
FINANCIAL INSTRUMENTS
16. 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.
 
Fair Value of Financial Instruments—The estimated fair values of the Company’s financial instruments are as follows:
 
   
December 31,
 
   
2013
 
2012
 
   
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
   
(In thousands)
 
Financial assets
                         
Cash and cash equivalents
 
$
969,822
 
$
969,822
 
$
893,352
 
$
893,352
 
Trade receivables, net
   
394,822
   
394,822
   
370,110
   
370,110
 
Credit card and loan receivables, net
   
8,131,795
   
8,131,795
   
6,967,674
   
6,967,674
 
Redemption settlement assets, restricted
   
510,349
   
510,349
   
492,690
   
492,690
 
Cash collateral, restricted
   
34,124
   
34,124
   
65,160
   
65,160
 
Other investments
   
99,221
   
99,221
   
91,972
   
91,972
 
Derivative instruments
   
   
   
4
   
4
 
Financial liabilities
                         
Accounts payable
   
210,019
   
210,019
   
215,470
   
215,470
 
Deposits
   
2,816,361
   
2,836,352
   
2,228,411
   
2,255,089
 
Non-recourse borrowings of consolidated securitization entities
   
4,591,916
   
4,618,205
   
4,130,970
   
4,225,745
 
Long-term and other debt
   
2,800,281
   
4,404,500
   
2,854,839
   
4,358,379
 
Derivative instruments
   
   
   
8,515
   
8,515
 
 
Fair Value of Assets and Liabilities Held at December 31, 2013 and 2012
 
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 and the relatively liquid nature of these assets and liabilities.
 
Credit card and loan receivables, net — Credit card and loan receivables, net includes both receivables issued or purchased by the Company in the normal course of business and loan receivables held for sale as described in Note 4, “Credit Card and Loan Receivables.” The carrying amount of credit card and loan receivables, net approximates fair value due to the short maturity and average interest rates that approximate current market origination rates. Loan receivables held for sale, which were $62.1 million at December 31, 2013, are carried at the lower of cost or fair value, and their carrying amount approximates fair value due to the short duration between origination and sale.
 
Redemption settlement assets, restricted — Redemption settlement assets, restricted consists of cash and cash equivalents and marketable securities. The 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 term 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 investments — Other investments consist of restricted cash and marketable securities. The fair value is based on quoted market prices for the same or similar securities.
 
Deposits — The fair value is estimated based on the current observable market rates available to the Company for similar deposits with similar remaining maturities.
 
Non-recourse borrowings of consolidated securitization entities — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.
 
Long-term and other debt — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.
 
Derivative instruments —The valuation of these instruments was determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and option volatility.
 
Other Investments
 
Other investments consist of restricted cash and marketable securities. As of December 31, 2013 and 2012, other investments are comprised as follows:
 
   
December 31, 2013
 
December 31, 2012
 
   
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
   
(In thousands)
 
Restricted cash
 
$
25,988
 
$
 
$
 
$
25,988
 
$
47,120
 
$
 
$
 
$
47,120
 
Marketable securities
   
77,351
   
62
   
(4,180
)
 
73,233
   
45,119
   
202
   
(469
)
 
44,852
 
Total
 
$
103,339
 
$
62
 
$
(4,180
)
$
99,221
 
$
92,239
 
$
202
 
$
(469
)
$
91,972
 
 
The following tables show the gross unrealized losses and fair value for those investments that were in an unrealized loss position as of December 31, 2013 and 2012, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
 
   
December 31, 2013
 
   
Less than 12 months
 
12 Months or Greater
 
Total
 
   
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
   
(In thousands)
 
Marketable securities
 
$
39,954
 
$
(2,206
)
$
25,785
 
$
(1,974
)
$
65,739
 
$
(4,180
)
 
 
   
December 31, 2012
 
   
Less than 12 months
 
12 Months or Greater
 
Total
 
   
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
   
(In thousands)
 
Marketable securities
 
$
28,886
 
$
(292
)
$
4,913
 
$
(177
)
$
33,799
 
$
(469
)
 
The amortized cost and estimated fair value of the marketable securities at December 31, 2013 by contractual maturity are as follows:
 
   
Amortized
Cost
   
Estimated Fair Value
 
   
(In thousands)
 
Due in one year or less
 
$
6,571
   
$
6,503
 
Due after five years through ten years
   
4,580
     
4,611
 
Due after ten years
   
66,200
     
62,119
 
Total
 
$
77,351
   
$
73,233
 
 
Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security’s issuer, and the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the ability to hold the investments until maturity. Realized gains and losses from the sale of investment securities were not material.
 
As of December 31, 2013, the Company does not consider the investments to be other-than-temporarily impaired.
 
Financial Assets and Financial Liabilities Fair Value Hierarchy
 
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 table provides information for the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2013 and 2012:
 
       
Fair Value Measurements at
December 31, 2013 Using
 
   
Balance at
December 31,
2013
 
Level 1
 
Level 2
 
Level 3
 
   
(In thousands)
 
Corporate bonds (1) 
 
$
436,365
 
$
 
$
436,365
 
$
 
Cash collateral, restricted
   
34,124
   
   
   
34,124
 
Other investments (2) 
   
99,221
   
30,888
   
68,333
   
 
Total assets measured at fair value
 
$
569,710
 
$
30,888
 
$
504,698
 
$
34,124
 
 
 
       
Fair Value Measurements at
December 31, 2012 Using
 
   
Balance at
December 31,
2012
 
Level 1
 
Level 2
 
Level 3
 
   
(In thousands)
 
Government bonds (1) 
 
$
5,117
 
$
 
$
5,117
 
$
 
Corporate bonds (1) 
   
447,307
   
6,165
   
441,142
   
 
Cash collateral, restricted
   
65,160
   
2,500
   
   
62,660
 
Other investments (2) 
   
91,972
   
51,951
   
40,021
   
 
Derivative instruments (3) 
   
4
   
   
4
   
 
Total assets measured at fair value
 
$
609,560
 
$
60,616
 
$
486,284
 
$
62,660
 
                           
Derivative instruments (4) 
 
$
8,515
 
$
 
$
8,515
 
 
Total liabilities measured at fair value
 
$
8,515
 
$
 
$
8,515
 
$
 
                             
 
(1)
Amounts are included in redemption settlement assets in the consolidated balance sheets.
 
(2)
Amounts are included in other current assets and other assets in the consolidated balance sheets.
 
(3)
Amount is included in other assets in the consolidated balance sheets.
 
(4)
Amount is included in other current liabilities in the consolidated balance sheets.
 
 
The following table summarizes 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, 2013 and 2012:
 
   
Cash Collateral, Restricted
 
   
Years Ended December 31,
 
   
2013
   
2012
 
   
(In thousands)
 
Balance at beginning of period
 
$
62,660
   
$
158,727
 
Total gains (realized or unrealized):
               
Included in earnings
   
1,369
     
5,469
 
Purchases
   
     
1,287
 
Sales
   
     
 
Issuances
   
     
 
Settlements
   
(29,905
)
   
(102,823
)
Transfers in or out of Level 3
   
     
 
Balance at end of period
 
$
34,124
   
$
62,660
 
                 
Gains for the period included in earnings related to assets still held at end of period
 
$
971
   
$
5,469
 
 
There were no transfers between Levels 1 and 2 within the fair value hierarchy for the years ended December 31, 2013 and 2012.
 
The spread deposits included in cash collateral, restricted are recorded at their fair value based on discounted cash flow models, utilizing the respective term of each instrument which ranged from 10 to 34 months, with a weighted average term of 17 months. The unobservable input used to calculate the fair value was the discount rate of 3.2%, which was based on an interest rate curve that is observable in the market as adjusted for a credit spread. Significant increases (decreases) in the term or the discount rate would result in a lower (higher) fair value.
 
For the years ended December 31, 2013 and 2012, gains and losses included in earnings attributable to cash collateral, restricted are included in interest in the consolidated statements of income.
 
Financial Instruments Disclosed but Not Carried at Fair Value
 
The following tables provide assets and liabilities disclosed but not carried at fair value as of December 31, 2013 and 2012:
 
   
Fair Value Measurements at
December 31, 2013
 
   
Total
 
Level 1
 
Level 2
 
Level 3
 
   
(In thousands)
 
Cash and cash equivalents
 
$
969,822
 
$
969,822
 
$
 
$
 
Credit card and loan receivables, net
   
8,131,795
   
   
   
8,131,795
 
Total assets
 
$
9,101,617
 
$
969,822
 
$
 
$
8,131,795
 
                           
Deposits
 
$
2,836,352
 
$
 
$
2,836,352
 
$
 
Non-recourse borrowings of consolidated securitization entities
   
4,618,205
   
   
4,618,205
   
 
Long-term and other debt
   
4,404,500
   
   
4,404,500
   
 
Total liabilities
 
$
11,859,057
 
$
 
$
11,859,057
 
$
 
 
 
   
Fair Value Measurements at
December 31, 2012
 
   
Total
 
Level 1
 
Level 2
 
Level 3
 
   
(In thousands)
 
Cash and cash equivalents
 
$
893,352
 
$
893,352
 
$
 
$
 
Credit card and loan receivables, net
   
6,967,674
   
   
   
6,967,674
 
Total assets
 
$
7,861,026
 
$
893,352
 
$
 
$
6,967,674
 
                           
Deposits 
 
$
2,255,089
 
$
 
$
2,255,089
 
$
 
Non-recourse borrowings of consolidated securitization entities 
   
4,225,745
   
   
4,225,745
   
 
Long-term and other debt 
   
4,358,379
   
   
4,358,379
   
 
Total liabilities
 
$
10,839,213
 
$
 
$
10,839,213
 
$