WESTERN UNION CO, 10-K filed on 2/26/2010
Annual Report
Document and Company Information (USD $)
In Billions, except Share data
Feb. 12, 2010
Year Ended
Dec. 31, 2009
Jun. 30, 2009
Document and Company Information [Abstract]
 
 
 
Company Name
 
Western Union CO 
 
Entity Central Index Key (CIK)
 
0001365135 
 
Form Type
 
10-K 
 
Report Period
 
12/31/2009 
 
Amendment
 
FALSE 
 
Company Fiscal Year End Date
 
12/31 
 
Company Well-known Seasoned Issuer (WKSI)
 
Yes 
 
Entity Voluntary Filers
 
No 
 
Current with Filings
 
Yes 
 
Accelerated Filing Status
 
Large Accelerated Filer 
 
Public Float
 
 
$ 11.5 
Entity Common Stock, Shares Outstanding
682,769,241 
 
 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Statements of Income [Abstract]
 
 
 
Revenues:
 
 
 
Transaction fees
$ 4,036.2 
$ 4,240.8 
$ 3,989.8 
Foreign exchange revenue
910.3 
896.3 
771.3 
Commission and other revenues
137.1 
144.9 
139.1 
Total revenues
5,083.6 
5,282 
4,900.2 
Expenses:
 
 
 
Cost of services
2,874.9 
3,093 
2,808.4 
Selling, general and administrative
926 
834 
769.8 
Total expenses
3,800.9 1
3,927 1
3,578.2 1
Operating income
1,282.7 
1,355 
1,322 
Other income/(expense):
 
 
 
Interest income
9.4 
45.2 
79.4 
Interest expense
(157.9)
(171.2)
(189)
Derivative (losses)/gains, net
(2.8)
(6.9)
8.3 
Other income, net
0.1 
16.6 
1.7 
Total other expense, net
(151.2)
(116.3)
(99.6)
Income before income taxes
1,131.5 
1,238.7 
1,222.4 
Provision for income taxes
282.7 
319.7 
365.1 
Net income
848.8 
919 
857.3 
Earnings per share:
 
 
 
Basic
1.21 
1.26 
1.13 
Diluted
1.21 
1.24 
1.11 
Weighted-average shares outstanding:
 
 
 
Basic
698.9 
730.1 
760.2 
Diluted
701 
738.2 
772.9 
Consolidated Statements of Income (Parenthetical) (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Expenses:
 
 
 
Related parties
$ 257.4 
$ 305.9 
$ 256.6 
Consolidated Balance Sheets (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
Assets
 
 
Cash and cash equivalents
$ 1,685.2 
$ 1,295.6 
Settlement assets
2,389.1 
1,207.5 
Property and equipment, net of accumulated depreciation of $335.4 and $284.0, respectively
204.3 
192.3 
Goodwill
2,143.4 
1,674.2 
Other intangible assets, net of accumulated amortization of $355.4 and $276.5, respectively
489.2 
350.6 
Other assets
442.2 
858.1 
Total assets
7,353.4 
5,578.3 
Liabilities and Stockholders' Equity/(Deficiency)
 
 
Liabilities:
 
 
Accounts payable and accrued liabilities
501.2 
385.7 
Settlement obligations
2,389.1 
1,207.5 
Income taxes payable
519 
381.6 
Deferred tax liability, net
268.9 
270.1 
Borrowings
3,048.5 
3,143.5 
Other liabilities
273.2 
198 
Total liabilities
6,999.9 
5,586.4 
Commitments and contingencies (Note 6)
 
 
Stockholders' equity/(deficiency):
 
 
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued
Common stock, $0.01 par value; 2,000 shares authorized; 686.5 and 709.6 shares issued and outstanding at December 31, 2009 and 2008, respectively
6.9 
7.1 
Capital surplus/(deficiency)
40.7 
(14.4)
Retained earnings
433.2 
29.2 
Accumulated other comprehensive loss
(127.3)
(30)
Total stockholders' equity/(deficiency)
353.5 
(8.1)
Total liabilities and stockholders' equity/(deficiency)
$ 7,353.4 
$ 5,578.3 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Dec. 31, 2009
Dec. 31, 2008
Assets
 
 
Accumulated depreciation
$ 335.4 
$ 284 
Accumulated amortization
355.4 
276.5 
Stockholders' equity/(deficiency):
 
 
Preferred stock, Par value
1.00 
1.00 
Preferred stock, Shares authorized
10 
10 
Preferred stock, Shares issued
Common stock, Par value
0.01 
0.01 
Common stock, Shares authorized
2,000 
2,000 
Common stock, Shares issued
686.5 
709.6 
Common stock, Shares outstanding
686.5 
709.6 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Statements of Cash Flows [Abstract]
 
 
 
Cash flows from operating activities
 
 
 
Net income
$ 848.8 
$ 919 
$ 857.3 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
55.9 
61.7 
49.1 
Amortization
98.3 
82.3 
74.8 
Deferred income tax (benefit)/provision
(20.8)
15.9 
4.2 
Stock compensation expense
31.9 
26.3 
50.2 
Other non-cash items, net
44.1 
42.9 
14.6 
Increase/(decrease) in cash, excluding the effects of acquisitions, resulting from changes in:
 
 
 
Other assets
(31.4)
6.9 
16.2 
Accounts payable and accrued liabilities
75.5 
35.2 
43.4 
Income taxes payable
138.3 
91.2 
15.3 
Other liabilities
(22.5)
(27.5)
(21.6)
Net cash provided by operating activities
1,218.1 
1,253.9 
1,103.5 
Cash flows from investing activities
 
 
 
Capitalization of contract costs
(27.3)
(82.8)
(80.9)
Capitalization of purchased and developed software
(11.9)
(17)
(27.7)
Purchases of property and equipment
(59.7)
(53.9)
(83.5)
Acquisition of businesses, net of cash acquired
(515.9)
(42.8)
Proceeds from/(increase in) receivable for securities sold
255.5 
(298.1)
Notes receivable issued to agents
(1)
(6.1)
Repayments of notes receivable issued to agents
35.2 
41.9 
32 
Purchase of equity method investments
(35.8)
Net cash used in investing activities
(324.1)
(453.7)
(202)
Cash flows from financing activities
 
 
 
Net (repayments of)/proceeds from commercial paper
(82.8)
(255.3)
13.6 
Net repayments of net borrowings under credit facilities
(3)
Net proceeds from issuance of borrowings
496.6 
500 
Principal payments on borrowings
(500)
(500)
Proceeds from exercise of options
23.2 
300.5 
216.1 
Cash dividends paid
(41.2)
(28.4)
(30)
Common stock repurchased
(400.2)
(1,314.5)
(726.8)
Net cash used in financing activities
(504.4)
(1,297.7)
(530.1)
Net change in cash and cash equivalents
389.6 
(497.5)
371.4 
Cash and cash equivalents at beginning of year
1,295.6 
1,793.1 
1,421.7 
Cash and cash equivalents at end of year
1,685.2 
1,295.6 
1,793.1 
Supplemental cash flow information :
 
 
 
Interest paid
150 
171.6 
185.8 
Income taxes paid
$ 162.8 
$ 230.3 
$ 340.9 
Consolidated Statements of Stockholders Equity (Deficiency) (USD $)
In Millions
Previously Reported
Previously Reported | Common Stock
Previously Reported | Treasury Stock
Previously Reported | Capital Surplus/(Deficiency)
Previously Reported | Retained Earnings
Previously Reported | Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss
Common Stock
Treasury Stock
Capital Surplus/(Deficiency)
Retained Earnings
Comprehensive Income/(Loss)
Total
1/1/2006 - 12/31/2006
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance, shares
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative effect of adoption of tax contingency accounting principle
 
 
 
 
 
 
 
 
 
 
(0.6)
 
(0.6)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of treasury shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of treasury shares, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchase and retirement of common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchase and retirement of common shares, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Cancellation of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Cancellation of treasury stock, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued under stock-based compensation plans
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued under stock-based compensation plans, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax adjustments from employee stock option plans
 
 
 
 
 
 
 
 
 
 
 
 
 
Effects of pension plan measurement date change
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (losses) on investment securities, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on hedging activities, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension liability adjustment, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
(314.8)
7.7 
(19.9)
(437.1)
208 
(73.5)
(73.5)
7.7 
(19.9)
(437.1)
207.4 
 
(315.4)
Ending Balance, shares
 
772 
(0.9)
 
 
 
 
772 
(0.9)
 
 
 
 
1/1/2007 - 12/31/2007
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
 
 
 
 
(73.5)
(73.5)
7.7 
(19.9)
(437.1)
207.4 
 
(315.4)
Beginning Balance, shares
 
 
 
 
 
 
 
772 
(0.9)
 
 
 
 
Cumulative effect of adoption of tax contingency accounting principle
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
857.3 
857.3 
857.3 
Stock-based compensation
 
 
 
 
 
 
 
 
 
50.2 
 
 
50.2 
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(30)
 
(30)
Purchase of treasury shares
 
 
 
 
 
 
 
 
(677.5)
 
(0.9)
 
(678.4)
Purchase of treasury shares, shares
 
 
 
 
 
 
 
 
(32.4)
 
 
 
 
Repurchase and retirement of common shares
 
 
 
 
 
 
 
 
 
 
(53.8)
 
(53.8)
Repurchase and retirement of common shares, shares
 
 
 
 
 
 
 
(2.3)
 
 
 
 
 
Cancellation of treasury stock
 
 
 
 
 
 
 
(0.2)
462 
 
(461.8)
 
 
Cancellation of treasury stock, shares
 
 
 
 
 
 
 
(22.7)
22.7 
 
 
 
 
Shares issued under stock-based compensation plans
 
 
 
 
 
 
 
 
235.4 
41.5 
(65.1)
 
211.8 
Shares issued under stock-based compensation plans, shares
 
 
 
 
 
 
 
2.8 
10.6 
 
 
 
 
Tax adjustments from employee stock option plans
 
 
 
 
 
 
 
 
 
4.3 
 
 
4.3 
Effects of pension plan measurement date change
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (losses) on investment securities, net of tax
 
 
 
 
 
(1.5)
(1.5)
 
 
 
 
(1.5)
(1.5)
Unrealized gains (losses) on hedging activities, net of tax
 
 
 
 
 
(14.4)
(14.4)
 
 
 
 
(14.4)
(14.4)
Foreign currency translation adjustment, net of tax
 
 
 
 
 
5.3 
5.3 
 
 
 
 
5.3 
5.3 
Pension liability adjustment, net of tax
 
 
 
 
 
15.3 
15.3 
 
 
 
 
15.3 
15.3 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
862 
 
Ending Balance
 
 
 
 
 
(68.8)
(68.8)
7.5 
 
(341.1)
453.1 
 
50.7 
Ending Balance, shares
 
 
 
 
 
 
 
749.8 
 
 
 
 
 
1/1/2008 - 12/31/2008
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
 
 
 
 
(68.8)
(68.8)
7.5 
 
(341.1)
453.1 
 
50.7 
Beginning Balance, shares
 
 
 
 
 
 
 
749.8 
 
 
 
 
 
Cumulative effect of adoption of tax contingency accounting principle
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
919 
919 
919 
Stock-based compensation
 
 
 
 
 
 
 
 
 
26.3 
 
 
26.3 
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(28.4)
 
(28.4)
Purchase of treasury shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of treasury shares, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchase and retirement of common shares
 
 
 
 
 
 
 
(0.6)
 
 
(1,314.6)
 
(1,315.2)
Repurchase and retirement of common shares, shares
 
 
 
 
 
 
 
(58.1)
 
 
 
 
 
Cancellation of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Cancellation of treasury stock, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued under stock-based compensation plans
 
 
 
 
 
 
 
0.2 
 
289.5 
 
 
289.7 
Shares issued under stock-based compensation plans, shares
 
 
 
 
 
 
 
17.9 
 
 
 
 
 
Tax adjustments from employee stock option plans
 
 
 
 
 
 
 
 
 
10.9 
 
 
10.9 
Effects of pension plan measurement date change
 
 
 
 
 
 
 
 
 
 
0.1 
 
0.1 
Unrealized gain (losses) on investment securities, net of tax
 
 
 
 
 
1.2 
1.2 
 
 
 
 
1.2 
1.2 
Unrealized gains (losses) on hedging activities, net of tax
 
 
 
 
 
89.2 
89.2 
 
 
 
 
89.2 
89.2 
Foreign currency translation adjustment, net of tax
 
 
 
 
 
(5.2)
(5.2)
 
 
 
 
(5.2)
(5.2)
Pension liability adjustment, net of tax
 
 
 
 
 
(46.4)
(46.4)
 
 
 
 
(46.4)
(46.4)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
957.8 
 
Ending Balance
 
 
 
 
 
(30)
(30)
7.1 
 
(14.4)
29.2 
 
(8.1)
Ending Balance, shares
 
 
 
 
 
 
 
709.6 
 
 
 
 
 
1/1/2009 - 12/31/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
 
 
 
 
(30)
(30)
7.1 
 
(14.4)
29.2 
 
(8.1)
Beginning Balance, shares
 
 
 
 
 
 
 
709.6 
 
 
 
 
 
Cumulative effect of adoption of tax contingency accounting principle
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
848.8 
848.8 
848.8 
Stock-based compensation
 
 
 
 
 
 
 
 
 
31.9 
 
 
31.9 
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(41.2)
 
(41.2)
Purchase of treasury shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of treasury shares, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchase and retirement of common shares
 
 
 
 
 
 
 
(0.2)
 
 
(403.6)
 
(403.8)
Repurchase and retirement of common shares, shares
 
 
 
 
 
 
 
(24.9)
 
 
 
 
 
Cancellation of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Cancellation of treasury stock, shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued under stock-based compensation plans
 
 
 
 
 
 
 
 
 
23.9 
 
 
23.9 
Shares issued under stock-based compensation plans, shares
 
 
 
 
 
 
 
1.8 
 
 
 
 
 
Tax adjustments from employee stock option plans
 
 
 
 
 
 
 
 
 
(0.7)
 
 
(0.7)
Effects of pension plan measurement date change
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (losses) on investment securities, net of tax
 
 
 
 
 
5.5 
5.5 
 
 
 
 
5.5 
5.5 
Unrealized gains (losses) on hedging activities, net of tax
 
 
 
 
 
(62.5)
(62.5)
 
 
 
 
(62.5)
(62.5)
Foreign currency translation adjustment, net of tax
 
 
 
 
 
(29)
(29)
 
 
 
 
(29)
(29)
Pension liability adjustment, net of tax
 
 
 
 
 
(11.3)
(11.3)
 
 
 
 
(11.3)
(11.3)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
751.5 
 
Ending Balance
 
 
 
 
 
(127.3)
(127.3)
6.9 
 
40.7 
433.2 
 
353.5 
Ending Balance, shares
 
 
 
 
 
 
 
686.5 
 
 
 
 
 
Formation of the Entity and Basis of Presentation
Formation of the Entity and Basis of Presentation
 
1.  Formation of the Entity and Basis of Presentation
 
The Western Union Company (“Western Union” or the “Company”) is a leader in global money transfer and payment services, providing people and businesses with fast, reliable and convenient ways to send money and make payments around the world. The Western Union® brand is globally recognized. The Company’s services are available through a network of agent locations in more than 200 countries and territories. Each location in the Company’s agent network is capable of providing one or more of the Company’s services.
 
The Western Union business consists of the following segments:
 
  •   Consumer-to-consumer—money transfer services between consumers, primarily through a global network of third-party agents using the Company’s multi-currency, real-time money transfer processing systems. This service is available for international cross-border transfers—that is, the transfer of funds from one country to another—and, in certain countries, intra-country transfers—that is, money transfers from one location to another in the same country.
 
  •   Global business payments (formerly consumer-to-business)— the processing of payments from consumers or businesses to other businesses. The Company’s business payments services allow consumers to make payments to a variety of organizations including utilities, auto finance companies, mortgage servicers, financial service providers, government agencies and other businesses. As described further in Note 3, “Acquisitions,” the Company acquired Canada-based Custom House, Ltd. (“Custom House”), a provider of international business-to-business payment services, which is included in this segment. Custom House facilitates cross-border, cross-currency payment transactions. While the Company continues to pursue further international expansion of its offerings in this segment, the segment’s revenue was primarily generated in the United States during all periods presented.
 
All businesses that have not been classified into the consumer-to-consumer or global business payments segments are reported as “Other” and primarily include the Company’s money order services business. Prior to October 1, 2009, the Company’s money orders were issued by Integrated Payment Systems Inc. (“IPS”), a subsidiary of First Data Corporation (“First Data”), to consumers at retail locations primarily in the United States and Canada. Effective October 1, 2009, the Company assumed the responsibility for issuing money orders.
 
There are legal or regulatory limitations on transferring certain assets of the Company outside of the countries where these assets are located, or which constitute undistributed earnings of affiliates of the Company accounted for under the equity method of accounting. However, there are generally no limitations on the use of these assets within those countries. As of December 31, 2009, the amount of net assets subject to these limitations totaled approximately $190 million.
 
Various aspects of the Company’s services and businesses are subject to United States federal, state and local regulation, as well as regulation by foreign jurisdictions, including certain banking and other financial services regulations.
 
Spin-off from First Data
 
On January 26, 2006, the First Data Board of Directors announced its intention to pursue the distribution of 100% of its money transfer and consumer payments business and its interest in a Western Union money transfer agent, as well as its related assets, including real estate, through a tax-free distribution to First Data shareholders (the “Separation” or “Spin-off”). Effective on September 29, 2006, First Data completed the separation and the distribution of these businesses by distributing The Western Union Company common stock to First Data shareholders (the “Distribution”). Prior to the Distribution, the Company had been a segment of First Data.
 
Basis of Presentation
 
The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
 
Consistent with industry practice, the accompanying Consolidated Balance Sheets are unclassified due to the short-term nature of Western Union’s settlement obligations contrasted with the Company’s ability to invest cash awaiting settlement in long-term investment securities.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
 
2.  Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
 
Principles of Consolidation
 
Western Union consolidates financial results when it will absorb a majority of an entity’s expected losses or residual returns or when it has the ability to exert control over the entity. Control is normally established when ownership interests exceed 50% in an entity. Western Union utilizes the equity method of accounting when it is able to exercise significant influence over the entity’s operations, which generally occurs when Western Union has an ownership interest of between 20% and 50% in an entity.
 
Earnings Per Share
 
The calculation of basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested, using the treasury stock method. The treasury stock method assumes proceeds from the exercise price of stock options, the unamortized compensation expense and assumed tax benefits of options and restricted stock are available to acquire shares at an average market price throughout the year, and therefore, reduce the dilutive effect.
 
As of December 31, 2009, 2008 and 2007, there were 37.5 million, 8.0 million and 10.4 million, respectively, of outstanding options to purchase shares of Western Union stock excluded from the diluted earnings per share calculation, as their effect was anti-dilutive. During the year ended December 31, 2009, the average market price of the Company’s common stock was lower than the exercise price for most of its outstanding options, resulting in higher anti-dilutive shares than in the comparable prior periods.
 
The following table provides the calculation of diluted weighted-average shares outstanding (in millions):
 
                         
    For the Year Ended December 31,  
    2009     2008     2007  
 
Basic weighted-average shares outstanding
    698.9       730.1       760.2  
Common stock equivalents
    2.1       8.1       12.7  
                         
Diluted weighted-average shares outstanding
    701.0       738.2       772.9  
                         
 
Fair Value Measurements
 
The Company determines the fair values of its assets and liabilities that are recognized or disclosed at fair value in accordance with the hierarchy described below. The fair values of the assets and liabilities held in the Company’s defined benefit plan trust (“Trust”) are recognized or disclosed utilizing the same hierarchy. The following three levels of inputs may be used to measure fair value:
 
  •   Level 1: Quoted prices in active markets for identical assets or liabilities.
 
  •   Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Western Union utilizes pricing services to value its Level 2 financial instruments. For most of these assets, the Company utilizes pricing services that use multiple prices as inputs to determine daily market values. In addition, the Trust has other investments that fall within Level 2 that are valued at net asset value which is not quoted on an active market, however, the unit price is based on underlying investments which are traded on an active market.
 
  •   Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination of fair value requires significant management judgment or estimation. The Company has Level 3 assets that are recognized and disclosed at fair value on a non-recurring basis related to the Company’s business combinations, where the values of the intangible assets and goodwill acquired in a purchase are derived utilizing one of the three recognized approaches: the market approach, the income approach or the cost approach.
 
Except as it pertains to an investment redemption discussed in Note 9, carrying amounts for many Western Union financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables, settlement obligations, borrowings under the commercial paper program and other short-term notes payable, approximate fair value due to their short maturities. Investment securities, included in settlement assets, and derivative financial instruments are carried at fair value and included in Note 8, “Fair Value Measurements.” Fixed rate notes are carried at their original issuance values as adjusted over time to accrete that value to par, except for portions of notes hedged by interest rate swap agreements as disclosed in Note 14. The fair values of fixed rate notes are also disclosed in Note 15 and are based on market quotations. For more information on the fair value of financial instruments see Note 8, “Fair Value Measurements.”
 
The fair values of non-financial assets and liabilities related to the Company’s business combinations are disclosed in Note 3. The fair values of financial assets and liabilities related to the Trust are disclosed in Note 11.
 
Business Combinations
 
The Company accounts for all business combinations where control over another entity is obtained using the acquisition method of accounting, which requires that most assets (both tangible and intangible), liabilities (including contingent consideration), and remaining noncontrolling interests be recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets less liabilities and noncontrolling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or noncontrolling interests made subsequent to the acquisition date, but within the measurement period, which is one year or less, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Any cost or equity method interest that the Company holds in the acquired company prior to the acquisition is remeasured to fair value at acquisition with a resulting gain or loss recognized in income for the difference between fair value and existing book value. Results of operations of the acquired company are included in the Company’s results from the date of the acquisition forward and includes amortization expense arising from acquired intangible assets. Effective January 1, 2009, the Company expenses all costs as incurred related to or involved with an acquisition in “Selling, general and administrative” expenses. Previously, such amounts were capitalized as part of the acquisition.
 
Cash and Cash Equivalents
 
Highly liquid investments (other than those included in settlement assets) with maturities of three months or less at the date of purchase (that are readily convertible to cash), are considered to be cash equivalents and are stated at cost, which approximates market value.
 
Western Union maintains cash and cash equivalent balances with various financial institutions, including a substantial portion in money market funds. Western Union limits the concentration of its cash and cash equivalents with any one institution; however, such balances often exceed United States federal deposit insurance limits. Western Union regularly reviews investment concentrations and credit worthiness of these institutions, and has relationships with a globally diversified list of banks and financial institutions.
 
Allowance for Doubtful Accounts
 
Western Union records an allowance for doubtful accounts when it is probable that the related receivable balance will not be collected based on its history of collection experience, known collection issues, such as agent suspensions and bankruptcies, and other matters the Company identifies in its routine collection monitoring. The allowance for doubtful accounts was $33.7 million and $21.6 million at December 31, 2009 and 2008, respectively, and is recorded in the same Consolidated Balance Sheet caption as the related receivable. During the years ended December 31, 2009, 2008 and 2007, the provision for doubtful accounts (bad debt expense) reflected in the Consolidated Statements of Income was $36.2 million, $26.6 million and $23.5 million, respectively.
 
Settlement Assets and Obligations
 
Settlement assets represent funds received or to be received from agents for unsettled money transfers, money orders and consumer payments. Western Union records corresponding settlement obligations relating to amounts payable under money transfers, money orders and consumer payment service arrangements. Settlement assets and obligations also include amounts receivable from and payable to businesses for the value of customer cross-currency payment transactions related to the global business payments segment.
 
Settlement assets consist of cash and cash equivalents, receivables from selling agents and business-to-business customers and investment securities. Cash received by Western Union agents generally becomes available to Western Union within one week after initial receipt by the agent. Cash equivalents consist of short-term time deposits, commercial paper and other highly liquid investments. Receivables from selling agents represent funds collected by such agents, but in transit to Western Union. Western Union has a large and diverse agent base, thereby reducing the credit risk of the Company from any one agent. In addition, Western Union performs ongoing credit evaluations of its agents’ financial condition and credit worthiness.
 
Receivables from business-to-business customers arise from cross-currency payment transactions in the global business payments segment. Receivables (for currency to be received) and payables (for the cross-currency payments to be made) are recognized at trade date for these transactions. The credit risk arising from these spot foreign currency exchange contracts is largely mitigated, as in most cases Custom House requires the receipt of funds from customers before releasing the associated cross-currency payment.
 
Settlement obligations consist of money transfer, money order and payment service payables and payables to agents. Money transfer payables represent amounts to be paid to transferees when they request their funds. Money order payables represent amounts not yet presented for payment. Most agents typically settle with transferees first and then obtain reimbursement from Western Union. Payment service payables represent amounts to be paid to utility companies, auto finance companies, mortgage servicers, financial service providers, government agencies and others. Due to the agent funding and settlement process, payables to agents represent amounts due to agents for money transfers that have been settled with transferees.
 
In 2009, the Company’s settlement assets and obligations include assets and obligations transferred as a result of the Company assuming the money order assets and obligations previously held by IPS. See Note 7 for information concerning the Company’s investment securities.
 
Settlement assets and obligations consisted of the following (in millions):
 
                 
    December 31,  
    2009     2008  
 
Settlement assets:
               
Cash and cash equivalents
  $ 161.9     $ 42.3  
Receivables from selling agents and business-to-business customers
    1,004.4       759.6  
Investment securities
    1,222.8       405.6  
                 
    $ 2,389.1     $ 1,207.5  
                 
Settlement obligations:
               
Money transfer, money order and payment service payables
  $ 1,954.8     $ 799.5  
Payables to agents
    434.3       408.0  
                 
    $ 2,389.1     $ 1,207.5  
                 
 
Property and Equipment
 
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the lesser of the estimated life of the related assets (generally three to 10 years for equipment, furniture and fixtures, and 30 years for buildings) or the lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred.
 
Property and equipment consisted of the following (in millions):
 
                 
    December 31,  
    2009     2008  
 
Equipment
  $ 368.5     $ 319.2  
Leasehold improvements
    50.0       38.9  
Furniture and fixtures
    28.1       25.2  
Land and improvements
    16.9       16.9  
Buildings
    75.2       74.8  
Projects in process
    1.0       1.3  
                 
      539.7       476.3  
Less accumulated depreciation
    (335.4 )     (284.0 )
                 
Property and equipment, net
  $ 204.3     $ 192.3  
                 
 
Amounts charged to expense for depreciation of property and equipment were $55.9 million, $61.7 million and $49.1 million during the years ended December 31, 2009, 2008 and 2007, respectively.
 
Deferred Customer Set Up Costs
 
The Company capitalizes direct incremental costs not to exceed related deferred revenues associated with the enrollment of customers in the Equity Accelerator program, a service that allows consumers to make mortgage payments based on a customized payment program. Deferred customer set up costs, included in “Other assets” in the Consolidated Balance Sheets, are amortized to “Cost of services” in the Consolidated Statements of Income over the length of the customer’s expected participation in the program, generally five to seven years. Actual customer attrition data is assessed at least annually and the amortization period is adjusted prospectively.
 
Goodwill
 
Goodwill represents the excess of purchase price over the fair value of tangible and other intangible assets acquired, less liabilities assumed arising from business combinations. The Company’s annual goodwill impairment test did not identify any goodwill impairment during the years ended December 31, 2009, 2008 and 2007.
 
Other Intangible Assets
 
Other intangible assets primarily consist of contract costs (primarily amounts paid to agents in connection with establishing and renewing long-term contracts), acquired contracts and software. Other intangible assets are amortized on a straight-line basis over the length of the contract or benefit periods. Included in “Cost of services” in the Consolidated Statements of Income is amortization expense of approximately $98.3 million, $82.3 million and $74.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.
 
The Company capitalizes initial payments for new and renewed agent contracts to the extent recoverable through future operations or penalties in the case of early termination. The Company’s accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract.
 
Acquired contracts include customer and contractual relationships and networks of subagents that are recognized in connection with our acquisitions.
 
The Company develops software that is used in providing services. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all planning and designing activities that are necessary to determine that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general use. Software development costs and purchased software are generally amortized over a term of three to five years.
 
The following table provides the components of other intangible assets (in millions):
 
                                         
    December 31, 2009     December 31, 2008  
    Weighted-
                         
    Average
                         
    Amortization
          Net of
          Net of
 
    Period
    Initial
    Accumulated
    Initial
    Accumulated
 
    (in years)     Cost     Amortization     Cost     Amortization  
 
Capitalized contract costs
    6.6     $ 331.0     $ 189.7     $ 316.2     $ 213.2  
Acquired contracts
    11.2       250.0       205.5       78.1       49.4  
Purchased or acquired software
    3.4       102.7       35.5       74.8       22.2  
Developed software
    4.3       78.1       11.0       77.1       14.1  
Acquired trademarks
    24.5       42.7       35.6       43.7       38.2  
Projects in process
    3.3       6.0       6.0       8.6       8.6  
Other intangibles
    5.9       34.1       5.9       28.6       4.9  
                                         
Total other intangible assets
    8.2     $ 844.6     $ 489.2     $ 627.1     $ 350.6  
                                         
 
The estimated future aggregate amortization expense for existing other intangible assets as of December 31, 2009 is expected to be $107.6 million in 2010, $89.1 million in 2011, $61.6 million in 2012, $44.7 million in 2013, $38.1 million in 2014 and $148.1 million thereafter.
 
Other intangible assets are reviewed for impairment on an annual basis and whenever events indicate that their carrying amount may not be recoverable. In such reviews, estimated undiscounted cash flows associated with these assets or operations are compared with their carrying values to determine if a write-down to fair value (normally measured by the present value technique) is required. Western Union did not record any impairment related to other intangible assets during the years ended December 31, 2009, 2008 and 2007.
 
Revenue Recognition
 
The Company’s revenues are primarily derived from consumer money transfer transaction fees that are based on the principal amount of the money transfer and the locations from and to which funds are transferred. The Company also offers several global business payments services, including payments from consumers or businesses to other businesses. Transaction fees are set by the Company and recorded as revenue at the time of sale.
 
In certain consumer money transfer and global business payments transactions involving different currencies, the Company generates revenue based on the difference between the exchange rate set by the Company to the customer and the rate at which the Company or its agents are able to acquire currency. This foreign exchange revenue is recorded at the time the related consumer money transfer transaction fee revenue is recognized or at the time a customer initiates a transaction through the Company’s cross-border, cross-currency international business-to-business payment service operations.
 
The Company’s Equity Accelerator service generally requires a consumer to pay an upfront enrollment fee to participate in this mortgage payment service. These enrollment fees are deferred and recognized into income over the length of the customer’s expected participation in the program, generally five to seven years. Actual customer attrition data is assessed at least annually and the period over which revenue is recognized is adjusted prospectively. Many factors impact the duration of the expected customer relationship, including interest rates, refinance activity and trends in consumer behavior.
 
Cost of Services
 
Cost of services primarily consists of agent commissions and expenses for call centers, settlement operations, and related information technology costs. Expenses within these functions include personnel, software, equipment, telecommunications, bank fees, depreciation and amortization and other expenses incurred in connection with providing money transfer and other payment services.
 
Advertising Costs
 
Advertising costs are charged to operating expenses as incurred or at the time the advertising first takes place. Advertising costs for the years ended December 31, 2009, 2008 and 2007 were $201.4 million, $247.1 million and $264.2 million, respectively.
 
Income Taxes
 
Western Union accounts for income taxes under the liability method, which requires that deferred tax assets and liabilities be determined based on the expected future income tax consequences of events that have been recognized in the consolidated financial statements. Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse.
 
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
 
Foreign Currency Translation
 
The United States dollar is the functional currency for all of Western Union’s businesses except global business payments subsidiaries located primarily in Canada and South America. Revenues and expenses are translated at average exchange rates prevailing during the period. Foreign currency denominated assets and liabilities for those entities for which the local currency is the functional currency are translated into United States dollars based on exchange rates at the end of the period. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of these entities are included as a component of “Accumulated other comprehensive loss.” Foreign currency denominated monetary assets and liabilities of operations in which the United States dollar is the functional currency are remeasured based on exchange rates at the end of the period and are recognized in operations. Non-monetary assets and liabilities of these operations are remeasured at historical rates in effect when the asset was recognized or the liability was incurred.
 
Derivatives
 
Western Union utilizes derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency business-to-business payments by writing derivatives to customers and entering into offsetting derivatives with established financial institution counterparties, or by holding sufficient foreign currency cash balances to cover those transactions. The Company recognizes all derivatives in the “Other assets” and “Other liabilities” captions in the accompanying Consolidated Balance Sheets at their fair value. All cash flows associated with derivatives are included in cash flows from operating activities in the Consolidated Statements of Cash Flows.
 
  •   Cash Flow hedges—Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in “Accumulated other comprehensive loss.” Cash flow hedges consist of foreign currency hedging of forecasted revenues, as well as, from time to time, hedges of anticipated fixed rate debt issuances. Derivative fair value changes that are captured in “Accumulated other comprehensive loss” are reclassified to earnings in the same period or periods the hedged item affects earnings. The portion of the change in fair value that is excluded from the measure of effectiveness is recognized immediately in “Derivative (losses)/gains, net.”
 
  •   Fair Value hedges—Changes in the fair value of derivatives that are designated as fair value hedges of fixed rate debt are recorded in interest expense. The offsetting change in value of the related debt instrument attributable to changes in the benchmark interest rate is also recorded in interest expense.
 
  •   Undesignated—Derivative contracts entered into to reduce the variability related to (a) money transfer settlement assets and obligations, generally with maturities of a few days up to one month, and (b) certain money transfer related foreign currency denominated cash positions and intercompany loans, generally with maturities of less than one year, are not designated as hedges for accounting purposes and changes in their fair value are included in “Selling, general and administrative.” Subsequent to the acquisition of Custom House, the Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency business-to-business payments operations. These contracts have durations generally of nine months or less. The Company aggregates its foreign exchange exposures in its Custom House business, including the exposure generated by the derivative contracts it writes to its customers as part of its cross-currency payments business, and typically hedges the net exposure through offsetting contracts with established financial institution counterparties. To mitigate credit risk, the Company performs credit reviews of the customer on an ongoing basis. The changes in fair value related to these contracts are recorded in “Foreign exchange revenue.”
 
The fair value of the Company’s derivatives is derived from standardized models that use market based inputs (e.g., forward prices for foreign currency).
 
The details of each designated hedging relationship are formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks being hedged, the derivative instrument, how effectiveness is being assessed and how ineffectiveness, if any, will be measured. The derivative must be highly effective in offsetting the changes in cash flows or fair value of the hedged item, and effectiveness is evaluated quarterly on a retrospective and prospective basis.
 
Stock-Based Compensation
 
The Company currently has a stock-based compensation plan that provides for the granting of Western Union stock options, restricted stock awards and restricted stock units to employees who perform services for the Company. In addition, the Company has a stock-based compensation plan that provides for grants of Western Union stock options and stock unit awards to non-employee directors of the Company. Prior to the Spin-off, employees of Western Union participated in First Data’s stock-based compensation plans.
 
All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period and also requires an estimate of forfeitures when calculating compensation expense. The Company recognizes compensation expense on awards on a straight-line basis over the requisite service period for the entire award. Refer to Note 16 for additional discussion regarding details of the Company’s stock-based compensation plans.
 
Restructuring and Related Expenses
 
The Company records severance-related expenses once they are both probable and estimable related to severance provided under an ongoing benefit arrangement. One-time, involuntary benefit arrangements and other exit costs are generally recognized when the liability is incurred. Costs arising under the Company’s defined benefit pension plans from curtailing future service of employees participating in the plans and providing enhanced benefits are recognized in earnings when it is probable and reasonably estimable. The Company also evaluates impairment issues associated with restructuring activities when the carrying amount of the assets may not be fully recoverable. Restructuring and related expenses consist of direct and incremental costs associated with restructuring and related activities, including severance, outplacement and other employee related benefits; facility closure and migration of the Company’s IT infrastructure; other expenses related to relocation of various operations to existing Company facilities and third-party providers, including hiring, training, relocation, travel and professional fees. Also included in facility closure expenses are non-cash expenses related to fixed asset and leasehold improvement write-offs and acceleration of depreciation and amortization. For more information on the Company’s restructuring and related expenses see Note 4, “Restructuring and Related Expenses.”
 
New Accounting Pronouncements
 
On January 1, 2010, the Company adopted new accounting requirements for the consolidation of variable interest entities. Variable interest entities are those entities that require additional financial support beyond that provided by traditional equity holders. The new consolidation guidance will require consideration of whether the Company has the power to direct the activities that most significantly impact each entities’ economic performance. The Company has not yet completed its assessment of this guidance; however, the impact of adopting these new requirements is not expected to have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.
Acquisitions
Acquisitions
 
3.  Acquisitions
 
Custom House, Ltd.
 
On September 1, 2009, the Company acquired Canada-based Custom House, a provider of international business-to-business payment services, for $371.0 million. The acquisition of Custom House has allowed the Company to enter the international business-to-business payments market. Custom House facilitates cross-border, cross-currency payment transactions. These payment transactions are conducted through various channels including the telephone and internet. The significant majority of Custom House’s revenue is from exchanges of currency at the spot rate enabling customers to make cross-currency payments. In addition, this business writes foreign currency forward and option contracts for their customers to facilitate future payments. The duration of these derivatives contracts is generally nine months or less. The results of operations for Custom House have been included in the Company’s consolidated financial statements from the date of acquisition, September 1, 2009.
 
The Company recorded the assets and liabilities of Custom House at fair value, excluding the deferred tax liability. The following table summarizes the preliminary allocation of purchase price:
 
         
Assets:
       
Cash acquired
  $ 2.5  
Settlement assets
    152.5  
Property and equipment
    6.7  
Goodwill
    272.2  
Other intangible assets
    118.1  
Other assets
    78.1  
         
Total assets
  $ 630.1  
         
Liabilities:
       
Accounts payable and accrued liabilities
  $ 23.5  
Settlement obligations
    152.5  
Deferred tax liability, net
    31.9  
Other liabilities
    51.2  
         
Total liabilities
    259.1  
         
Total consideration, including cash acquired
  $ 371.0  
         
 
The valuation of assets acquired resulted in $118.1 million of identifiable intangible assets, $99.8 million of which were attributable to customer and other contractual relationships and were valued using an income approach and $18.3 million of other intangibles, which were valued using both income and cost approaches. These fair values were derived using primarily unobservable Level 3 inputs which require significant management judgment and estimation. For the remaining assets and liabilities, fair value approximated carrying value. The intangible assets related to customer and other contractual relationships are being amortized over 10 to 12 years. The remaining intangibles are being amortized over three to five years. The goodwill recognized of $272.2 million is attributable to the projected long-term business growth in current and new markets and an assembled workforce. All goodwill relates entirely to the global business payments segment. The preliminary assessment of goodwill expected to be deductible for United States income tax purposes is approximately $225.1 million. The net deferred tax liability of $31.9 million and the resulting impacts on goodwill are preliminary and will be completed once the Company finalizes its tax review for this acquisition. In addition, the Company is finalizing its analysis of the accounts associated with working capital and settlement, which may also result in an adjustment to goodwill.
 
FEXCO
 
On February 24, 2009, the Company acquired the money transfer business of European-based FEXCO, one of the Company’s largest agents providing services in a number of European countries, primarily the United Kingdom, Spain, Sweden and Ireland. The acquisition of FEXCO’s money transfer business has assisted the Company in the implementation of the Payment Services Directive (“PSD”) in the European Union by providing an initial operating infrastructure. The PSD has allowed the Company to operate under a single license in the 27 European Union countries and, in those European Union countries where the Company has been limited to working with banks, post-banks and foreign exchange houses, to expand its network to additional types of businesses. The acquisition does not impact the Company’s revenue, because the Company was already recording 100% of the revenue arising from money transfers originating at FEXCO’s locations. As of the acquisition date, the Company no longer incurs commission costs for transactions related to FEXCO; rather, the Company now pays commissions directly to former FEXCO subagents, resulting in lower overall commission expense. The Company’s operating expenses include costs attributable to FEXCO’s operations subsequent to the acquisition date.
 
Prior to the acquisition, the Company held a 24.65% interest in FEXCO Group Holdings (“FEXCO Group”), which was a holding company for both the money transfer business as well as various unrelated businesses. The Company surrendered its 24.65% interest in FEXCO Group as non-cash consideration, which had an estimated fair value of $86.2 million on the acquisition date, and paid €123.1 million ($157.4 million) as additional consideration for 100% of the common shares of the money transfer business, resulting in a total purchase price of $243.6 million. The Company recognized no gain or loss in connection with the disposition of its equity interest in the FEXCO Group, because its estimated fair value approximated its carrying value. The Company recorded the assets and liabilities of FEXCO at fair value, excluding the deferred tax liability. The following table summarizes the allocation of purchase price for this acquisition:
 
         
Assets:
       
Cash acquired
  $ 11.8  
Settlement assets
    43.0  
Property and equipment
    3.1  
Goodwill
    190.6  
Other intangible assets
    74.9  
Other assets
    2.3  
         
Total assets
  $ 325.7  
         
Liabilities:
       
Accounts payable and accrued liabilities
  $ 2.7  
Settlement obligations
    43.0  
Income taxes payable
    0.2  
Deferred tax liability, net
    19.2  
Other liabilities
    17.0  
         
Total liabilities
    82.1  
         
Total consideration, including cash acquired
  $ 243.6  
         
 
The valuation of assets acquired resulted in $74.9 million of identifiable intangible assets, $64.8 million of which were attributable to the network of subagents, which were valued using an income approach, and $10.1 million relating to other intangibles, which were valued using both income and cost approaches. These fair values, along with the fair value of the Company’s 24.65% interest in FEXCO Group, were derived using primarily unobservable Level 3 inputs which require significant management judgment and estimation. For the remaining assets and liabilities, fair value approximated carrying value. The subagent network intangible assets are being amortized over 10 to 15 years. The remaining intangibles are being amortized over two to three years. The goodwill recognized of $190.6 million is attributable to growth opportunities that will arise from the Company directly managing its agent relationships through a dedicated sales force, expected synergies, projected long-term business growth and an assembled workforce. All goodwill relates entirely to the consumer-to-consumer segment and $91.1 million is expected to be deductible for income tax purposes.
 
Other acquisitions
 
In December 2008, the Company acquired 80% of its existing money transfer agent in Peru for a purchase price of $35.0 million. The aggregate consideration paid was $29.7 million, net of a holdback reserve of $3.0 million. The Company acquired cash of $2.3 million as part of the acquisition. In 2009, $1.0 million of the holdback reserve was paid and the remainder is scheduled to be paid in annual $1.0 million increments in December 2010 and 2011, subject to the terms of the agreement. The results of operations of the acquiree have been included in the Company’s consolidated financial statements since the acquisition date. The purchase price allocation resulted in $10.1 million of identifiable intangible assets, a significant portion of which were attributable to the network of subagents acquired by the Company. The identifiable intangible assets are being amortized over three to 10 years and goodwill of $27.1 million was recorded, most of which is expected to be deductible for income tax purposes. In addition, the Company has the option to acquire the remaining 20% of the money transfer agent and the money transfer agent has the option to sell the remaining 20% to the Company within 12 months after December 2013 at fair value.
 
In August 2008, the Company acquired the money transfer assets from its then-existing money transfer agent in Panama for a purchase price of $18.3 million. The consideration paid was $14.3 million, net of a holdback reserve of $4.0 million. In 2009, $1.7 million of the holdback reserve was paid and the remainder is scheduled to be paid in approximately equal installments in August 2010 and 2011, subject to the terms of the agreement. The results of operations of the acquiree have been included in the Company’s consolidated financial statements since the acquisition date. The purchase price allocation resulted in $5.6 million of identifiable intangible assets, a significant portion of which were attributable to the network of subagents acquired by the Company. The identifiable intangible assets are being amortized over three to seven years and goodwill of $14.2 million was recorded, which is not expected to be deductible for income tax purposes.
 
In October 2007, the Company entered into agreements totaling $18.3 million to convert its non-participating interest in an agent in Singapore to a fully participating 49% equity interest and to extend the agent relationship at more favorable commission rates to Western Union. As a result, the Company earns a pro-rata share of profits and has enhanced voting rights. The Company also has the right to add additional agent relationships in Singapore. In addition, in October 2007, the Company completed an agreement to acquire a 25% ownership interest in an agent in Jamaica and to extend the term of the agent relationship for $29.0 million. The aggregate consideration paid resulted in $20.2 million of identifiable intangible assets for these two investments, including capitalized contract costs, which are being amortized over seven to 10 years. Western Union’s investments in these agents are accounted for under the equity method of accounting.
 
The following table presents changes to goodwill for the years ended December 31, 2009 and 2008 (in millions):
 
                                 
    Consumer-to-
    Global Business
             
    Consumer     Payments     Other     Total  
 
January 1, 2008 balance
  $ 1,389.0     $ 235.9     $ 14.6     $ 1,639.5  
Acquisitions
    39.0                   39.0  
Purchase price adjustments
    (1.0 )                 (1.0 )
Currency translation
          (3.2 )     (0.1 )     (3.3 )
                                 
December 31, 2008 balance
  $ 1,427.0     $ 232.7     $ 14.5     $ 1,674.2  
Acquisitions
    190.6       272.2             462.8  
Purchase price adjustments
    2.3                   2.3  
Currency translation
          4.3       (0.2 )     4.1  
                                 
December 31, 2009 balance
  $ 1,619.9     $ 509.2     $ 14.3     $ 2,143.4  
                                 
Related Party Transactions
Related Party Transactions
 
5.  Related Party Transactions
 
The Company has ownership interests in certain of its agents accounted for under the equity method of accounting. The Company pays these agents, as it does its other agents, commissions for money transfer and other services provided on the Company’s behalf. Commission expense recognized for these agents for the years ended December 31, 2009, 2008 and 2007 totaled $203.2 million, $305.9 million and $256.6 million, respectively. For those agents where an ownership interest was acquired during 2007, only amounts paid subsequent to the investment date have been reflected as a related party transaction. Commission expense recognized for FEXCO prior to February 24, 2009, the date of the acquisition (see Note 3), was considered a related party transaction.
 
In July 2009, the Company appointed a director who is also a director for a company holding significant investments in two of the Company’s existing agents. These agents had been agents of the Company prior to the director being appointed to the board. The Company recognized commission expense of $54.2 million for the year ended December 31, 2009 related to these agents.
Commitments and Contingencies
Commitments and Contingencies
 
6.  Commitments and Contingencies
 
Letters of Credit and Bank Guarantees
 
The Company had $88.0 million in outstanding letters of credit and bank guarantees at December 31, 2009 with expiration dates through 2015, certain of which contain a one-year renewal option. The letters of credit and bank guarantees are primarily held in connection with lease arrangements and certain agent agreements. The Company expects to renew the letters of credit and bank guarantees prior to expiration in most circumstances.
 
Litigation and Related Contingencies
 
During the year ended December 31, 2009, the Company recorded an accrual of $71.0 million for an anticipated agreement and settlement with the State of Arizona. On February 11, 2010, the Company signed this agreement and settlement, which resolved all outstanding legal issues and claims with the State and requires the Company to fund a multi-state not-for-profit organization promoting safety and security along the United States and Mexico border, in which California, Texas and New Mexico will participate with Arizona. The accrual includes amounts for reimbursement to the State of Arizona for its costs associated with this matter. In addition, as part of the agreement and settlement, the Company expects to make certain investments in its compliance programs along the United States and Mexico border and to engage a monitor of that program, which are expected to cost up to $23 million over the next two to four years. While the $71.0 million in charges were identifiable to the Company’s consumer-to-consumer segment, they were not included in the measurement of segment operating profit provided to the CODM for purposes of assessing segment performance and decision making with respect to resource allocation.
 
The United States Department of Justice served one of our subsidiaries with a grand jury subpoena requesting documents in connection with an investigation into money transfers from the United States to the Dominican Republic during the last several years. The Company is cooperating fully with the DOJ investigation. Due to the stage of the DOJ investigation, the Company is unable to predict the outcome of the investigation or the possible loss or range of loss, if any, associated with the resolution of any charges that may be brought against the Company.
 
In the normal course of business, Western Union is subject to claims and litigation. Management of Western Union believes such matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on Western Union’s financial position, results of operations and cash flows. Western Union accrues for loss contingencies as they become probable and estimable.
 
In May 2007, the Company initiated litigation against MoneyGram Payment Systems, Inc. (“MoneyGram”) for infringement of the Company’s Money Transfer by Phone patents by MoneyGram’s FormFree service. On September 24, 2009, a jury found that MoneyGram was liable for patent infringement and awarded the Company $16.5 million in damages. This case is on appeal to the United States Court of Appeals for the Federal Circuit. In accordance with its policies, the Company does not recognize gain contingencies in earnings until realization and collectability are assured and, therefore, due to MoneyGram’s challenges to the verdict, the Company has not recognized any amounts in its Consolidated Statement of Income through December 31, 2009.
 
Pursuant to the separation and distribution agreement with First Data in connection with the Spin-off, First Data and the Company are each liable for, and agreed to perform, all liabilities with respect to their respective businesses. In addition, the separation and distribution agreement also provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of the Company’s business with the Company and financial responsibility for the obligations and liabilities of First Data’s retained businesses with First Data. The Company also entered into a tax allocation agreement that sets forth the rights and obligations of First Data and the Company with respect to taxes imposed on their respective businesses both prior to and after the Spin-off as well as potential tax obligations for which the Company may be liable in conjunction with the Spin-off (see Note 10).
Investment Securities
Investment Securities
 
7.  Investment Securities
 
Investment securities, classified within “Settlement assets” in the Consolidated Balance Sheets, consist primarily of high-quality state and municipal debt obligations. Substantially all of the Company’s investment securities were marketable securities during the periods presented. The Company is required to maintain specific high-quality, investment grade securities and such investments are restricted to satisfy outstanding settlement obligations in accordance with applicable state and foreign country requirements. Western Union does not hold investment securities for trading purposes. All investment securities are classified as available-for-sale and recorded at fair value. Investment securities are exposed to market risk due to changes in interest rates and credit risk. Western Union regularly monitors credit risk and attempts to mitigate its exposure by making high-quality investments and through investment diversification. At December 31, 2009, the majority of the Company’s investment securities had credit ratings of “AA-” or better from a major credit rating agency.
 
Effective October 1, 2009 (the “Transition Date”), in accordance with the agreement signed on July 18, 2008, IPS, a subsidiary of First Data, assigned and transferred to the Company certain operating assets used by IPS to issue Western Union branded money orders and approximately $860 million of cash sufficient to satisfy all outstanding money order liabilities. On the Transition Date, the Company assumed IPS’s role as issuer of the money orders, including its obligation to pay outstanding money orders, and terminated the existing agreement whereby IPS paid Western Union a fixed return of 5.5% on the outstanding money order balances. Following the Transition Date, Western Union invested the cash received from IPS in high-quality, investment grade securities, primarily tax exempt United States state and municipal securities, in accordance with applicable regulations, which are the same as those currently governing the investment of the Company’s United States originated money transfer principal. Prior to the Transition Date, the Company had entered into interest rate swaps on certain of its fixed rate notes to reduce its exposure to fluctuations in interest rates. Through a combination of the revenue generated from these investment securities and the anticipated interest expense savings resulting from the interest rate swaps, the Company estimates that it should be able to retain, subsequent to the Transition Date, a materially comparable after-tax rate of return through 2011 as it was receiving under its agreement with IPS. Refer to Note 14 for additional information on the interest rate swaps.
 
Subsequent to the Transition Date, all revenue generated from the investment portfolio is being retained by the Company. IPS continues to provide the Company with clearing services necessary for payment of the money orders in exchange for the payment by the Company to IPS of a per-item processing fee. The Company no longer provides to IPS the services required under the original money order agreement or receives from IPS the fee for such services.
 
In 2008, the Company began increasing its investment levels in various state and municipal variable rate demand note securities which can be put (sold at par) typically on a daily basis with settlement periods ranging from the same day to one week, but that have varying maturities through 2048. Generally, these securities are used by the Company for short-term liquidity needs and are held for short periods of time, typically less than 30 days. As a result, this has increased the frequency of purchases and proceeds received by the Company.
 
Unrealized gains and losses on available-for-sale securities are excluded from earnings and presented as a component of accumulated other comprehensive income or loss, net of related deferred taxes. Proceeds from the sale and maturity of available-for-sale securities during the years ended December 31, 2009, 2008 and 2007 were $8.4 billion, $2.8 billion and $0.2 billion, respectively.
 
Gains and losses on investments are calculated using the specific-identification method and are recognized during the period in which the investment is sold or when an investment experiences an other-than-temporary decline in value. Factors that could indicate an impairment exists include, but are not limited to: earnings performance, changes in credit rating or adverse changes in the regulatory or economic environment of the asset. If potential impairment exists, the Company assesses whether it has the intent to sell the debt security, more likely than not will be required to sell the debt security before its anticipated recovery or expects that some of the contractual cash flows will not be received. The Company had no material other-than-temporary impairments during the periods presented.
 
The components of investment securities, all of which are classified as available-for-sale, are as follows (in millions):
 
                                         
                Gross
    Gross
    Net
 
    Amortized
    Fair
    Unrealized
    Unrealized
    Unrealized
 
December 31, 2009
  Cost     Value     Gains     Losses     Gains/(Losses)  
 
State and municipal obligations (a)
  $ 686.4     $ 696.4     $ 10.6     $ (0.6 )   $ 10.0  
State and municipal variable rate demand notes
    513.8       513.8                    
Corporate debt securities
    12.2       12.4       0.2             0.2  
Other
    0.1       0.2       0.1             0.1  
                                         
    $ 1,212.5     $ 1,222.8     $ 10.9     $ (0.6 )   $ 10.3  
                                         
 
                                         
                Gross
    Gross
    Net
 
    Amortized
    Fair
    Unrealized
    Unrealized
    Unrealized
 
December 31, 2008
  Cost     Value     Gains     Losses     Gains/(Losses)  
 
State and municipal obligations (a)
  $ 192.4     $ 194.0     $ 2.5     $ (0.9 )   $ 1.6  
State and municipal variable rate demand notes
    207.7       207.7                    
Other
    4.0       3.9             (0.1 )     (0.1 )
                                         
    $ 404.1     $ 405.6     $ 2.5     $ (1.0 )   $ 1.5  
                                         
 
 
(a) The majority of these securities are fixed rate instruments.
 
There were no investments with a single issuer or individual securities representing greater than 10% of total investment securities as of December 31, 2009 and 2008.
 
The following summarizes contractual maturities of investment securities as of December 31, 2009 (in millions):
 
                 
    Amortized
    Fair
 
    Cost     Value  
 
Due within 1 year
  $ 76.5     $ 76.6  
Due after 1 year through 5 years
    597.9       605.9  
Due after 5 years through 10 years
    68.8       70.8  
Due after 10 years
    469.3       469.5  
                 
    $ 1,212.5     $ 1,222.8  
                 
 
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligations or the Company may have the right to put the obligation prior to its contractual maturity, as with variable rate demand notes. Variable rate demand notes, having a fair value of $22.1 million, $27.4 million and $452.4 million are included in the “Due after 1 year through 5 years,” “Due after 5 years through 10 years” and “Due after 10 years” categories, respectively, in the table above.
Fair Value Measurements
Fair Value Measurements
 
8.  Fair Value Measurements
 
Fair value, as defined by the relevant accounting standards, represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For additional information on how Western Union measures fair value, refer to Note 2, “Summary of Significant Accounting Policies.”
 
The following table reflects assets and liabilities that were measured and carried at fair value on a recurring basis as of December 31, 2009 (in millions):
 
                                 
    Fair Value Measurement Using     Assets/Liabilities
 
    Level 1     Level 2     Level 3     at Fair Value  
 
Assets:
                               
State and municipal obligations
  $     $ 696.4     $     $ 696.4  
State and municipal variable rate demand notes
          513.8             513.8  
Corporate debt securities
          12.4             12.4  
Other
    0.2                   0.2  
Derivatives
          109.4       0.5       109.9  
                                 
Total assets
  $ 0.2     $ 1,332.0     $ 0.5     $ 1,332.7  
                                 
Liabilities:
                               
Derivatives
  $     $ 80.6     $     $ 80.6  
                                 
Total liabilities
  $     $ 80.6     $     $ 80.6  
                                 
 
The Level 3 assets above represent an immaterial portion of the derivatives portfolio related to the Custom House acquisition for which credit judgments are deemed to be a significant input to the determination of fair value.
 
No non-recurring fair value adjustments were recorded during the year ended December 31, 2009, except those associated with the acquisitions as disclosed in Note 3, “Acquisitions.”
 
Other Fair Value Measurements
 
The carrying amounts for Western Union financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables and settlement obligations approximate fair value due to their short maturities. The Company’s borrowings had a carrying value and fair value of $3,048.5 million and $3,211.3 million, respectively, at December 31, 2009 and had a carrying value and fair value of $3,143.5 million and $2,846.7 million, respectively, at December 31, 2008 (see Note 15).
 
The fair value of the assets in the Trust, which holds the assets for the Company’s defined benefit plans, are disclosed in Note 11, “Employee Benefit Plans.”
Other Assets and Other Liabilities
Other Assets and Other Liabilities
 
9.  Other Assets and Other Liabilities
 
The following table summarizes the components of other assets and other liabilities (in millions):
 
                 
    December 31,  
    2009     2008  
 
Other assets:
               
Derivatives
  $ 109.9     $ 116.8  
Equity method investments
    87.4       213.1  
Other receivables
    63.4       33.2  
Amounts advanced to agents, net of discounts
    37.5       69.3  
Receivable for securities sold
    30.6       298.1  
Deferred customer set up costs
    26.1       34.6  
Receivables from First Data
    24.8       26.3  
Prepaid expenses
    21.7       23.6  
Debt issue costs
    12.3       14.0  
Accounts receivable, net
    12.1       19.8  
Other
    16.4       9.3  
                 
Total other assets
  $ 442.2     $ 858.1  
                 
Other liabilities:
               
Pension obligations
  $ 124.2     $ 107.1  
Derivatives
    80.6       10.8  
Deferred revenue
    45.4       59.4  
Other
    23.0       20.7  
                 
Total other liabilities
  $ 273.2     $ 198.0  
                 
 
Receivable for securities sold
 
On September 15, 2008, Western Union requested redemption of its shares in the Reserve International Liquidity Fund, Ltd. (the “Fund”), a money market fund, totaling $298.1 million. Western Union included the value of the receivable in “Other assets” in the Consolidated Balance Sheets. At the time the redemption request was made, the Company was informed by the Reserve Management Company, the Fund’s investment advisor (the “Manager”), that the Company’s redemption trades would be honored at a $1.00 per share net asset value. In 2009, the Company received partial distributions totaling $255.5 million from the Fund. The Company continues to vigorously pursue collection of the remaining balance and believes it has a right to full payment of the remaining amount based on the written and verbal representations from the Manager and the Company’s legal position. However, given the increased uncertainty surrounding the numerous third-party legal claims associated with the Fund, the Company reserved $12 million representing the estimated impact of a pro-rata distribution of the Fund during 2009. As of December 31, 2009, the Company had a remaining receivable balance of $30.6 million, net of the related reserve. If further deterioration occurs in the underlying assets in the Fund, or if the Fund incurs significant legal and/or administrative costs during the distribution process, the Company may record additional reserves related to the remaining receivable balance, which could negatively affect its financial position, results of operations and cash flows.
 
Amounts advanced to agents, net of discounts
 
From time to time, the Company makes advances and loans to agents. In 2006, the Company signed a six year agreement with one of its existing agents which included a four year loan of $140.0 million to the agent. The remaining loan receivable balance at December 31, 2009 was $16.9 million, which was fully repaid in January 2010. At December 31, 2008, the note had a receivable balance of $47.0 million, net of a discount of $3.0 million, which represented imputed interest on this below-market rate note receivable. Other advances and loans outstanding as of December 31, 2009 and 2008 were $20.6 million and $22.3 million, respectively.
Income Taxes
Income Taxes
 
10.  Income Taxes
 
The components of pretax income, generally based on the jurisdiction of the legal entity, were as follows (in millions):
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Components of pretax income:
                       
Domestic
  $ 249.7     $ 416.3     $ 529.3  
Foreign
    881.8       822.4       693.1  
                         
    $ 1,131.5     $ 1,238.7     $ 1,222.4  
                         
 
The provision for income taxes was as follows (in millions):
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Federal
  $ 217.3     $ 234.8     $ 287.7  
State and local
    28.0       30.3       26.3  
Foreign
    37.4       54.6       51.1  
                         
    $ 282.7     $ 319.7     $ 365.1  
                         
 
Domestic taxes have been incurred on certain pre-tax income amounts that were generated by the Company’s foreign operations. Accordingly, the percentage obtained by dividing the total federal, state and local tax provision by the domestic pretax income, all as shown in the preceding tables, may be higher than the statutory tax rates in the United States.
 
The Company’s effective tax rates differed from statutory rates as follows:
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Federal statutory rate
    35.0 %     35.0 %     35.0 %
State income taxes, net of federal income tax benefits
    1.5 %     1.3 %     1.7 %
Foreign rate differential
    (12.5 )%     (11.4 )%     (7.7 )%
Other
    1.0 %     0.9 %     0.9 %
                         
Effective tax rate
    25.0 %     25.8 %     29.9 %
                         
 
The Company continues to benefit from an increasing proportion of profits being foreign-derived and therefore taxed at lower rates than its combined federal and state tax rates in the United States. In addition, in the second quarter of 2008, the Company implemented additional foreign tax efficient strategies consistent with its overall tax planning which impacted its effective tax rate for all subsequent periods.
 
Western Union’s provision for income taxes consisted of the following components (in millions):
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Current:
                       
Federal
  $ 235.8     $ 219.6     $ 284.9  
State and local
    26.0       34.5       25.5  
Foreign
    41.8       49.7       50.5  
                         
Total current taxes
    303.6       303.8       360.9  
Deferred:
                       
Federal
    (18.5 )     15.2       2.8  
State and local
    2.0       (4.2 )     0.8  
Foreign
    (4.4 )     4.9       0.6  
                         
Total deferred taxes
    (20.9 )     15.9       4.2  
                         
    $ 282.7     $ 319.7     $ 365.1  
                         
 
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of Western Union’s assets and liabilities. The following table outlines the principal components of deferred tax items (in millions):
 
                 
    December 31,  
    2009     2008  
 
Deferred tax assets related to:
               
Reserves, accrued expenses and employee-related items
  $ 91.0     $ 45.4  
Pension obligations
    43.5       39.5  
Deferred revenue
    3.6       3.1  
Other
    10.7       6.8  
                 
Total deferred tax assets
    148.8       94.8  
                 
Deferred tax liabilities related to:
               
Intangibles, property and equipment
    416.7       349.0  
Other
    1.0       15.9  
                 
Total deferred tax liabilities
    417.7       364.9  
                 
Net deferred tax liability
  $ 268.9     $ 270.1  
                 
 
Uncertain Tax Positions
 
The Company has established contingency reserves for material, known tax exposures, including potential tax audit adjustments with respect to its international operations, which were restructured in 2003. The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances (i.e., new information) surrounding a tax issue and (ii) any difference from the Company’s tax position as recorded in the financial statements and the final resolution of a tax issue during the period.
 
The Company adopted an accounting standard relating to the accounting for and disclosure of uncertain tax positions on January 1, 2007. The cumulative effect of applying this standard resulted in a reduction of $0.6 million to the January 1, 2007 balance of retained earnings.
 
Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the Company’s financial statements, and are reflected in “Income taxes payable” in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
 
                 
    2009     2008  
 
Balance at January 1,
  $ 361.2     $ 251.4  
Increases—positions taken in current period (a)
    124.3       93.8  
Increases—positions taken in prior periods (b)
    0.4       28.4  
Decreases—positions taken in prior periods
          (7.9 )
Decreases—settlements with taxing authorities
    (4.4 )     (0.2 )
Decreases—lapse of applicable statute of limitations
    (4.3 )     (4.3 )
                 
Balance at December 31,
  $ 477.2     $ 361.2  
                 
 
 
(a) Includes recurring accruals for issues which initially arose in previous periods.
 
(b) Changes to positions taken in prior periods relate to changes in estimates used to calculate prior period unrecognized tax benefits.
 
A substantial portion of the Company’s unrecognized tax benefits relate to the 2003 restructuring of the Company’s international operations whereby the Company’s income from certain foreign-to-foreign money transfer transactions has been taxed at relatively low foreign tax rates compared to the Company’s combined federal and state tax rates in the United States. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $468.6 million and $352.4 million as of December 31, 2009 and 2008, respectively, excluding interest and penalties.
 
The Company recognizes interest and penalties with respect to unrecognized tax benefits in “Provision for income taxes” in its Consolidated Statements of Income, and records the associated liability in “Income taxes payable” in its Consolidated Balance Sheets. The Company recognized $11.0 million, $11.6 million and $13.5 million in interest and penalties during the years ended December 31, 2009, 2008 and 2007, respectively. The Company has accrued $45.5 million and $35.8 million for the payment of interest and penalties at December 31, 2009 and 2008, respectively.
 
Subject to the matter referenced in the paragraph below, the Company has identified no other uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months, except for recurring accruals on existing uncertain tax positions. The change in unrecognized tax benefits during the years ended December 31, 2009 and 2008 is substantially attributable to such recurring accruals.
 
The Company and its subsidiaries file tax returns for the United States, for multiple states and localities, and for various non-United States jurisdictions, and the Company has identified the United States and Ireland as its two major tax jurisdictions. The United States federal income tax returns of First Data, which include the Company, are eligible to be examined for the years 2002 through 2006. The Company’s United States federal income tax returns since the Spin-off are also eligible to be examined. The United States Internal Revenue Service (“IRS”) has issued a report of the results of its examination of the United States federal consolidated income tax return of First Data for 2002, and the Company believes that the resolution of the adjustments that affect the Company proposed in the report will not result in a material change to the Company’s financial position. In addition, the IRS completed its examination of the United States federal consolidated income tax returns of First Data for 2003 and 2004, which included the Company, and issued a Notice of Deficiency in December 2008. The Notice of Deficiency alleges significant additional taxes, interest and penalties owed with respect to a variety of adjustments involving the Company and its subsidiaries, and the Company generally has responsibility for taxes associated with these potential Company-related adjustments under the tax allocation agreement with First Data executed at the time of the Spin-off. The Company agrees with a number of the adjustments in the Notice of Deficiency; however, the Company does not agree with the Notice of Deficiency regarding several substantial adjustments representing total alleged additional tax and penalties due of approximately $114 million. As of December 31, 2009, interest on the alleged amounts due for unagreed adjustments would be approximately $30 million. A substantial part of the alleged amounts due for these unagreed adjustments relates to the Company’s international restructuring, which took effect in the fourth quarter 2003, and, accordingly, the alleged amounts due related to such restructuring largely are attributable to 2004. On March 20, 2009, the Company filed a petition in the United States Tax Court contesting those adjustments with which it does not agree. The Company believes its overall reserves are adequate, including those associated with the adjustments alleged in the Notice of Deficiency. If the IRS’ position in the Notice of Deficiency is sustained, the Company’s tax provision related to 2003 and later years would materially increase. The IRS has now commenced an examination of the United States federal consolidated income tax returns of First Data that cover the Company’s 2005 and pre-spin-off 2006 taxable periods and also has commenced an examination of the Company’s federal consolidated income tax return for the post-spin-off 2006 period. The Irish income tax returns of certain subsidiaries for the years 2005 and forward are eligible to be examined by the Irish tax authorities, although no examinations have commenced.
 
At December 31, 2009, no provision had been made for United States federal and state income taxes on foreign earnings of approximately $2.0 billion, which are expected to be reinvested outside the United States indefinitely. Upon distribution of those earnings to the United States in the form of actual or constructive dividends, the Company would be subject to United States income taxes (subject to an adjustment for foreign tax credits), state income taxes and possible withholding taxes payable to various foreign countries. Determination of this amount of unrecognized deferred United States tax liability is not practicable because of the complexities associated with its hypothetical calculation.
 
Tax Allocation Agreement with First Data
 
The Company and First Data each are liable for taxes imposed on their respective businesses both prior to and after the Spin-off. If such taxes have not been appropriately apportioned between First Data and the Company, subsequent adjustments may occur that may impact the Company’s financial position or results of operations.
 
Also under the tax allocation agreement, with respect to taxes and other liabilities that result from a final determination that is inconsistent with the anticipated tax consequences of the Spin-off (as set forth in the private letter ruling and relevant tax opinion), (“Spin-off Related Taxes”), the Company will be liable to First Data for any such Spin-off Related Taxes attributable solely to actions taken by or with respect to the Company. In addition, the Company will also be liable for 50% of any Spin-off Related Taxes (i) that would not have been imposed but for the existence of both an action by the Company and an action by First Data or (ii) where the Company and First Data each take actions that, standing alone, would have resulted in the imposition of such Spin-off Related Taxes. The Company may be similarly liable if it breaches certain representations or covenants set forth in the tax allocation agreement. If the Company is required to indemnify First Data for taxes incurred as a result of the Spin-off being taxable to First Data, it likely would have a material adverse effect on the Company’s business, financial position and results of operations. First Data generally will be liable for all Spin-off Related Taxes, other than those described above.
Employee Benefit Plans
Employee Benefit Plans
 
11.  Employee Benefit Plans
 
Defined Contribution Plans
 
The Western Union Company Incentive Savings Plan (“401(k)”) covers eligible employees on the United States payroll of Western Union. Employees who make voluntary contributions to this plan receive up to a 4% Western Union matching contribution. All matching contributions are immediately 100% vested.
 
On September 30, 2009, the Company merged its defined contribution plan covering its former union employees and transferred the plan assets into the 401(k).
 
The Company administers more than 20 defined contribution plans in various countries globally on behalf of approximately 1,000 employee participants as of December 31, 2009. Such plans have vesting and employer contribution provisions that vary by country.
 
In addition, Western Union sponsors a non-qualified deferred compensation plan for a select group of highly compensated employees. The plan provides tax-deferred contributions, matching and the restoration of Company matching contributions otherwise limited under the 401(k).
 
The aggregate amount charged to expense in connection with all of the above plans was $11.2 million, $12.5 million and $11.6 million during the years ended December 31, 2009, 2008 and 2007, respectively.
 
Defined Benefit Plans
 
The Company has two frozen defined benefit pension plans (“Plans”) for which it had a recorded unfunded pension obligation of $124.2 million as of December 31, 2009, included in “Other liabilities” in the Consolidated Balance Sheets. Due to the closure of one of its facilities in Missouri (see Note 4) and a recent agreement with the Pension Benefit Guaranty Corporation, the Company funded $4.1 million into one of its subsidiary’s pension plans during 2009. No contributions were made to these plans by Western Union during the years ended December 31, 2008 and 2007. Pursuant to final guidance issued by the IRS in September 2009, the Company made certain interest rate elections under the Pension Protection Act which will require it to fund approximately $15 million to the plans in 2010, which is less than was previously anticipated. In addition, the Company may make a discretionary contribution of up to approximately $10 million for a total contribution of $25 million to the plans in 2010.
 
In connection with the adoption of an accounting standard, effective January 1, 2008, the Company changed its plan measurement date to December 31. In connection with the Company’s change in measurement date, the Company prepared a 15-month projection of net periodic benefit income for the period from October 1, 2007 through December 31, 2008. The pro-rated portion of net periodic benefit income of $0.1 million for the period from October 1, 2007 through December 31, 2007 was reflected as an increase to “Retained earnings” on January 1, 2008.
 
The Company recognizes the funded status of its pension plans in its Consolidated Balance Sheets with a corresponding adjustment to “Accumulated other comprehensive loss,” net of tax.
 
The following table provides a reconciliation of the changes in the pension plans’ projected benefit obligations, fair value of assets and the funded status (in millions):
 
                 
    2009     2008  
 
Change in projected benefit obligation
               
Projected benefit obligation at January 1, 2009 and October 1, 2007
  $ 398.8     $ 426.0  
Measurement date adjustment (a)
          6.1  
Interest costs
    23.6       24.4  
Actuarial loss/(gain)
    21.1       (5.6 )
Benefits paid
    (43.4 )     (54.9 )
Employee termination benefits
          2.8  
                 
Projected benefit obligation at December 31,
  $ 400.1     $ 398.8  
                 
Change in plan assets
               
Fair value of plan assets at January 1,
  $ 291.7     $ 398.4  
Actual return on plan assets
    23.5       (51.8 )
Benefits paid
    (43.4 )     (54.9 )
Company contributions
    4.1        
                 
Fair value of plan assets at December 31,
    275.9       291.7  
                 
Funded status of the plan at December 31,
  $ (124.2 )   $ (107.1 )
                 
Accumulated benefit obligation at December 31,
  $ 400.1     $ 398.8  
                 
 
 
(a) Represents the adjustment to retained earnings of $0.1 million for the period from October 1, 2007 through December 31, 2007. This adjustment consists of interest costs of $6.1 million, offset by $6.2 million which represents the expected return on plan assets less amortization of the actuarial loss.
 
Differences in expected returns on plan assets estimated at the beginning of the year versus actual returns, and assumptions used to estimate the beginning of year projected benefit obligation versus the end of year obligation (principally discount rate and mortality assumptions) are, on a combined basis, considered actuarial gains and losses. Such actuarial gains and losses are recognized as a component of “Comprehensive income” and amortized to income over the average remaining life expectancy of the plan participants. Included in “Accumulated other comprehensive loss” at December 31, 2009 is $6.2 million ($3.9 million, net of tax) of actuarial losses that are expected to be recognized in net periodic pension cost during the year ended December 31, 2010.
 
The following table provides the amounts recognized in the Consolidated Balance Sheets (in millions):
 
                 
    December 31,  
    2009     2008  
 
Accrued benefit liability
  $ (124.2 )   $ (107.1 )
Accumulated other comprehensive loss (pre-tax)
    169.0       150.3  
                 
Net amount recognized
  $ 44.8     $ 43.2  
                 
 
The following table provides the components of net periodic benefit cost/(income) for the plans (in millions):
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Interest cost
  $ 23.6     $ 24.4     $ 24.6  
Expected return on plan assets
    (24.7 )     (27.5 )     (28.4 )
Amortization of actuarial loss
    3.6       2.7       3.6  
Employee termination costs
          2.8        
                         
Net periodic benefit cost/(income)
  $ 2.5     $ 2.4     $ (0.2 )
                         
 
During 2008, the Company recorded $2.8 million of expense relating to the termination of certain retirement eligible union and management plan participants in connection with the restructuring and related activities disclosed in Note 4.
 
The accrued loss related to the pension liability included in accumulated other comprehensive loss, net of tax, increased/(decreased) $11.3 million, $46.4 million and ($15.3) million in 2009, 2008 and 2007, respectively. The significant comprehensive loss in 2008 was caused by a decline in the fair value of plan assets, which was primarily attributable to a decrease in the value of the equity securities within the plan asset portfolio.
 
The weighted-average rate assumptions used in the measurement of the Company’s benefit obligation were as follows:
 
                 
    2009     2008  
 
Discount rate
    5.30 %     6.26 %
 
The weighted-average rate assumptions used in the measurement of the Company’s net cost/(income) were as follows:
 
                         
    2009     2008     2007  
 
Discount rate
    6.26 %     6.02 %     5.62 %
Expected long-term return on plan assets
    7.50 %     7.50 %     7.50 %
 
Western Union measures the Plan’s obligations and annual expense using assumptions that reflect best estimates and are consistent to the extent that each assumption reflects expectations of future economic conditions. As the bulk of the pension benefits will not be paid for many years, the computation of pension expenses and benefits is based on assumptions about future interest rates and expected rates of return on plan assets. In general, pension obligations are most sensitive to the discount rate assumption, and it is set based on the rate at which the pension benefits could be settled effectively. The discount rate is determined by matching the timing and amount of anticipated payouts under the plans to the rates from an AA spot rate yield curve. The curve is derived from AA bonds of varying maturities.
 
Western Union employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed-income securities are considered consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Consideration is given to diversification, re-balancing and yields anticipated on fixed income securities held. Peer data and historical returns are reviewed to check for reasonableness and appropriateness. The Company then applies this rate against a calculated value for its plan assets. The calculated value recognizes changes in the fair value of plan assets over a five-year period.
 
Pension plan asset allocation at December 31, 2009 and 2008, and target allocations based on investment policies, were as follows:
 
                 
    Percentage of Plan Assets
 
    at Measurement Date  
Asset Category
  2009     2008  
 
Equity investments
    32 %     24 %
Debt securities
    68 %     75 %
Other
    0 %     1 %
                 
      100 %     100 %
                 
 
         
    Target Allocation  
 
Equity investments
    25-35 %
Debt securities
    65-75 %
 
The assets of the Company’s defined benefit plans are managed in a third-party Trust. The investment policy and allocation of the assets in the Trust are overseen by the Company’s Investment Council. Western Union employs a total return investment approach whereby a mix of equities and fixed income investments are used in an effort to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and plan funded status. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across United States and non-United States stocks, as well as securities deemed to be growth, value, and small and large capitalizations. Other assets, primarily private equity, are used judiciously in an effort to enhance long-term returns while improving portfolio diversification. The Company’s defined benefit plans also include certain derivatives. On behalf of the Plans, investment advisors may enter into futures contracts to manage interest rate risks. These contracts are contractual obligations to buy or sell a United States treasury bond or note at predetermined future dates and prices. Futures are transacted in standardized amounts on regulated exchanges. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset and liability studies.
 
The following table reflects investments of the Trust that were measured and carried at fair value as of December 31, 2009 (in millions). For information on how Western Union measures fair value, refer to Note 2, “Summary of Significant Accounting Policies.”
 
                                 
    Fair Value Measurement Using     Total Assets
 
Asset Category
  Level 1     Level 2     Level 3     at Fair Value  
 
Equity investments (a)
                               
Domestic
  $ 5.7     $ 35.4     $     $ 41.1  
International
          43.1             43.1  
Private equity
                2.0       2.0  
Debt securities
                               
Corporate debt (b)
          119.3             119.3  
U.S. treasury bonds
    46.6                   46.6  
U.S. government agencies
          9.6             9.6  
Asset-backed
          8.7             8.7  
Other bonds
          2.9             2.9  
                                 
Total investments of the Trust at fair value
  $ 52.3     $ 219.0     $ 2.0     $ 273.3  
Other assets (c)
                            2.6  
                                 
Total investments of the Trust
  $ 52.3     $ 219.0     $ 2.0     $ 275.9  
                                 
 
(a) Equity investments include 6% of securities that participate in securities lending.
(b) Substantially all corporate debt securities are investment grade securities.
(c) Other assets primarily includes investment related receivables and futures contracts.
 
The maturities of debt securities at December 31, 2009 range from less than one year to approximately 57 years with a weighted-average maturity of 22 years.
 
The following table provides a summary of changes in the fair value of the Trust’s Level 3 financial assets for the year ended December 31, 2009, (in millions).
 
                         
    Asset-backed
    Private equity
       
    securities     securities     Total  
 
Beginning balance, January 1, 2009
  $ 9.8     $ 2.8     $ 12.6  
Actual return on plan assets:
                       
Relating to assets still held at the reporting date
    1.0       (0.8 )     0.2  
Relating to assets sold during the period
    0.2             0.2  
Net issuances and repayments
    (2.3 )           (2.3 )
Transfers out of Level 3 (a)
    (8.7 )           (8.7 )
                         
Ending balance, December 31, 2009
  $     $ 2.0     $ 2.0  
                         
 
 
(a) Market liquidity for these assets has significantly improved since 2008 resulting in improved price transparency.
 
The estimated future benefit payments are expected to be $42.3 million in 2010, $41.0 million in 2011, $39.7 million in 2012, $38.3 million in 2013, $36.8 million in 2014 and $159.7 million in 2015 through 2019.
Operating Lease Commitments
Operating Lease Commitments
 
12.  Operating Lease Commitments
 
Western Union leases certain real properties for use as customer service centers and administrative and sales offices. Western Union also leases data communications terminals, computers and office equipment. Certain of these leases contain renewal options and escalation provisions. Total rent expense under operating leases, net of sublease income, was $34.0 million, $39.7 million and $31.6 million during the years ended December 31, 2009, 2008 and 2007, respectively.
 
As of December 31, 2009, the minimum aggregate rental commitments under all noncancelable operating leases, net of sublease income commitments aggregating $3.4 million through 2014, were as follows (in millions):
 
         
Year Ending December 31,
     
 
2010
  $ 28.3  
2011
    21.5  
2012
    15.8  
2013
    12.0  
2014
    10.6  
Thereafter
    19.5  
         
Total future minimum lease payments
  $ 107.7  
         
Stockholders Equity
Stockholders' Equity
 
13.  Stockholders’ Equity
 
Accumulated other comprehensive loss
 
Accumulated other comprehensive loss includes all changes in equity during a period that have yet to be recognized in income, except those resulting from transactions with shareholders. The major components include foreign currency translation adjustments, pension liability adjustments, unrealized gains and losses on investment securities and gains or losses from cash flow hedging activities.
 
Unrealized gains and losses on investment securities that are available for sale, primarily municipal securities, are included in accumulated other comprehensive loss until the investment is either sold or deemed other-than-temporarily impaired. See Note 7 for further discussion.
 
The effective portion of the change in fair value of derivatives that qualify as cash flow hedges are recorded in accumulated other comprehensive loss. Generally, amounts are recognized in income when the related forecasted transaction affects earnings. See Note 14 for further discussion.
 
The assets and liabilities of foreign subsidiaries whose functional currency is not the United States dollar are translated using the appropriate exchange rate as of the end of the year. Foreign currency translation adjustments represent unrealized gains and losses on assets and liabilities arising from the difference in the foreign country currency compared to the United States dollar. These gains and losses are accumulated in comprehensive income. When a foreign subsidiary is substantially liquidated, the cumulative translation gain or loss is removed from “Accumulated other comprehensive loss” and is recognized as a component of the gain or loss on the sale of the subsidiary.
 
A pension liability adjustment associated with our defined benefit pension plans is recognized for the difference between estimated assumptions (e.g., asset returns, discount rates, mortality) and actual results. The amount in “Accumulated other comprehensive loss” is amortized to income over the remaining life expectancy of the plan participants. Details of the pension plans’ assets and obligations are explained further in Note 11.
 
The income tax effects allocated to and the cumulative balance of each component of accumulated other comprehensive loss were as follows (in millions):
 
                         
    2009     2008     2007  
 
Beginning balance, January 1
  $ (30.0 )   $ (68.8 )   $ (73.5 )
Unrealized gains/(losses) on investments securities:
                       
Unrealized gains/(losses)
    11.5       (2.4 )     (2.1 )
Tax (expense)/benefit
    (4.3 )     0.9       0.7  
Reclassification adjustment for (gains)/losses
    (2.7 )     4.3       (0.2 )
Tax expense/(benefit)
    1.0       (1.6 )     0.1  
                         
Net unrealized gains/(losses) on investment securities
    5.5       1.2       (1.5 )
Unrealized (losses)/gains on hedging activities:
                       
Unrealized (losses)/gains
    (43.6 )     82.6       (55.9 )
Tax benefit/(expense)
    8.9       (15.0 )     14.6  
Reclassification adjustment for (gains)/losses
    (32.9 )     25.1       31.3  
Tax expense/(benefit)
    5.1       (3.5 )     (4.4 )
                         
Net unrealized (losses)/gains on hedging activities
    (62.5 )     89.2       (14.4 )
Foreign currency translation adjustments:
                       
Foreign currency translation adjustments
    (21.6 )     (8.0 )     8.1  
Tax benefit/(expense)
    7.6       2.8       (2.8 )
Reclassification adjustment for disposal of investment (a)
    (23.1 )            
Tax expense (a)
    8.1              
                         
Net foreign currency translation adjustments
    (29.0 )     (5.2 )     5.3  
Unrealized (losses)/gains on pension liability:
                       
Unrealized (losses)/gains
    (22.2 )     (76.1 )     20.9  
Tax benefit/(expense)
    8.7       28.0       (7.9 )
Reclassification adjustment for losses
    3.6       2.7       3.6  
Tax benefit
    (1.4 )     (1.0 )     (1.3 )
                         
Net unrealized (losses)/gains on pension liability
    (11.3 )     (46.4 )     15.3  
                         
Other comprehensive (loss)/income
    (97.3 )     38.8       4.7  
                         
Ending balance, December 31
  $ (127.3 )   $ (30.0 )   $ (68.8 )
                         
 
 
(a) The year ended December 31, 2009 includes the impact to the foreign currency translation account of the surrender of the Company’s interest in FEXCO Group. See Note 3, “Acquisitions.”
 
The components of accumulated other comprehensive loss, net of tax, were as follows (in millions):
 
                         
    2009     2008     2007  
 
Unrealized gains/(losses) on investment securities
  $ 6.4     $ 0.9     $ (0.3 )
Unrealized (losses)/gains on hedging activities
    (17.0 )     45.5       (43.7 )
Foreign currency translation adjustment
    (10.9 )     18.1       23.3  
Pension liability adjustment
    (105.8 )     (94.5 )     (48.1 )
                         
    $ (127.3 )   $ (30.0 )   $ (68.8 )
                         
 
Cash Dividends Paid
 
During the fourth quarter of 2009, the Company’s Board of Directors declared a quarterly cash dividend of $0.06 per common share representing $41.2 million in total dividends. During the fourth quarter of 2008 and 2007, the Company’s Board of Directors declared an annual dividend of $0.04 per common share representing $28.4 million and $30.0 million, respectively, in total dividends. These amounts were paid to shareholders of record in December of each respective year.
 
On February 25, 2010, our Board of Directors declared a quarterly cash dividend of $0.06 per share payable on March 31, 2010 to shareholders of record on March 19, 2010.
 
Share Repurchases
 
During the years ended December 31, 2009, 2008 and 2007, 24.8 million, 58.1 million and 34.7 million shares, respectively, have been repurchased for $400.0 million, $1,313.9 million and $726.5 million, respectively, excluding commissions, at an average cost of $16.10, $22.60 and $20.93 per share, respectively. At December 31, 2009, common stock repurchases of up to $1.0 billion have been authorized by the Board of Directors through December 31, 2012.
 
During December 2007, the Company’s Board of Directors adopted resolutions to retire all of its existing treasury stock, thereby restoring the status of the Company’s common stock held in treasury as “authorized but unissued”. The resulting impact to the Company’s Consolidated Balance Sheet was the elimination of $462.0 million held in “Treasury stock” and a decrease in “Common stock” of $0.2 million and “Retained earnings” of $461.8 million. There is no change to the Company’s overall equity position as a result of this retirement. All shares repurchased by the Company subsequent to this resolution have been and will continue to be retired at the time such shares are reacquired.
Derivatives
Derivatives
 
14.  Derivatives
 
The Company is exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the euro, and to a lesser degree the British pound, Canadian dollar and other currencies, related to forecasted money transfer revenues and on money transfer settlement assets and obligations. Subsequent to the acquisition of Custom House, the Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency business-to-business payments operations. Additionally, the Company is exposed to interest rate risk related to changes in market rates both prior to and subsequent to the issuance of debt. The Company uses derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency business-to-business payments by writing derivatives to customers and entering into offsetting derivatives with established financial institution counterparties, or by holding sufficient foreign currency cash balances to cover those transactions. Foreign currency forward and option contracts and interest rate swaps of varying maturities are used in these activities.
 
The Company executes the consumer-to-consumer derivatives with established financial institutions, with the substantial majority of these financial institutions having credit ratings of “A-” or better from a major credit rating agency. The Company executes global business payments derivatives mostly with small and medium size enterprises. The credit risk inherent in both the consumer-to-consumer and global business payments agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review of the credit risk of these counterparties at the inception of the contract and on an ongoing basis. The Company also monitors the concentration of its contracts with any individual counterparty. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements, but takes action (including termination of contracts) when doubt arises about the counterparties’ ability to perform. The Company’s hedged foreign currency exposures are in liquid currencies, consequently there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.
 
Foreign Currency—Consumer-to-Consumer
 
The Company’s policy is to use longer-term foreign currency forward contracts, with maturities of up to 36 months at inception and a targeted weighted-average maturity of approximately one year, to mitigate some of the risk that changes in foreign currency exchange rates compared to the United States dollar could have on forecasted revenues denominated in other currencies related to its business. At December 31, 2009, the Company’s longer-term foreign currency forward contracts had maturities of a maximum of 24 months with a weighted-average maturity of approximately one year. The Company assesses the effectiveness of these foreign currency forward contracts based on changes in the spot rate of the affected currencies during the period of designation. Accordingly, all changes in the fair value of the hedges not considered effective or portions of the hedge that are excluded from the measure of effectiveness are recognized immediately in “Derivative (losses)/gains, net” within the Company’s Consolidated Statements of Income.
 
The Company also uses short duration foreign currency forward contracts, generally with maturities from a few days up to one month, to offset foreign exchange rate fluctuations on settlement assets and obligations between initiation and settlement. In addition, forward contracts, typically with maturities of less than one year, are utilized to offset foreign exchange rate fluctuations on certain foreign currency denominated cash positions. None of these contracts are designated as accounting hedges.
 
The aggregate United States dollar notional amounts of foreign currency forward contracts as of December 31, 2009 were as follows (in millions):
 
         
Contracts not designated as hedges:
       
Euro
  $ 273.8  
British pound
    37.8  
Other
    73.4  
Contracts designated as hedges:
       
Euro
  $ 527.3  
Canadian dollar
    98.3  
British pound
    84.8  
Other
    89.8  
 
Foreign Currency—Global Business Payments
 
As a result of the acquisition of Custom House, the Company writes derivatives, primarily foreign currency forward contracts and, to a much smaller degree, option contracts, mostly with small and medium size enterprises (customer contracts) and derives a currency spread from this activity as part of its global business payments operations. In this capacity, the Company facilitates cross-currency payment transactions for its customers but aggregates its Custom House foreign currency exposures arising from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties (economic hedge contracts). The derivatives written are part of the broader portfolio of foreign currency positions arising from its cross-currency business-to-business payments operation, which includes significant spot exchanges of currency in addition to forwards and options. None of these contracts are designated as accounting hedges. The duration of these derivative contracts is generally nine months or less.
 
The aggregate United States dollar notional amounts of foreign currency derivative customer contracts held by the Company as of December 31, 2009 were approximately $1.0 billion. The significant majority of customer contracts are written in major currencies such as the Canadian dollar, euro, Australian dollar and the British pound.
 
The Company also entered into a forward contract, with a notional amount of approximately 230 million Canadian dollars ($220 million), to offset foreign exchange rate fluctuations on a Canadian dollar denominated position in connection with the purchase of Custom House. This contract is not designated as an accounting hedge.
 
Interest Rate Hedging—Corporate
 
The Company utilizes interest rate swaps to effectively change the interest rate payments on a portion of its notes from fixed-rate payments to short-term LIBOR-based variable rate payments in order to manage its overall exposure to interest rates. The Company designates these derivatives as fair value hedges utilizing the short-cut method, which permits an assumption of no ineffectiveness if certain criteria are met. The change in fair value of the interest rate swaps is offset by a change in the balance of the debt being hedged within the Company’s “Borrowings” in the Consolidated Balance Sheets and “Interest expense” in the Consolidated Statements of Income has been adjusted to include the effects of interest accrued on the swaps.
 
At December 31, 2009 and 2008, the Company held interest rate swaps in an aggregate notional amount of $750 million and $660 million, respectively.
 
Balance Sheet
 
The following table summarizes the fair value of derivatives reported in the Consolidated Balance Sheets as of December 31, 2009 and 2008 (in millions).
 
                                                 
    Derivative Assets     Derivative Liabilities  
    Balance Sheet
    Fair Value     Balance Sheet
    Fair Value  
    Location     2009     2008     Location     2009     2008  
 
Derivatives—hedges:
                                               
Interest rate fair value hedges—Corporate
    Other assets     $ 31.0     $ 48.9       Other liabilities     $     $  
Foreign currency cash flow hedges—Consumer-to-consumer
    Other assets       15.1       65.0       Other liabilities       31.0       6.7  
                                                 
Total
          $ 46.1     $ 113.9             $ 31.0     $ 6.7  
                                                 
Derivatives—undesignated:
                                               
Foreign currency—Global business payments
    Other assets     $ 58.9     $       Other liabilities     $ 48.2     $  
Foreign currency—Consumer-to-consumer
    Other assets       4.9       2.9       Other liabilities       1.4       4.1  
                                                 
Total
          $ 63.8     $ 2.9             $ 49.6     $ 4.1  
                                                 
Total derivatives
          $ 109.9     $ 116.8             $ 80.6     $ 10.8  
                                                 
 
The following table summarizes the fair value of derivatives held at December 31, 2009 and their expected maturities (in millions):
 
                                 
    Total     2010     2011     Thereafter  
 
Foreign currency cash flow hedges—Consumer-to-consumer
  $ (15.9 )   $ (8.4 )   $ (7.5 )   $  
Foreign currency undesignated hedges—Consumer-to-consumer
    3.5       3.5              
Foreign currency undesignated hedges—Global business payments
    10.7       10.9       (0.2 )      
Interest rate fair value hedges—Corporate
    31.0       20.5       10.5        
                                 
Total
  $ 29.3     $ 26.5     $ 2.8     $  
                                 
 
Income Statement
 
The following tables summarize the location and amount of gains and losses of derivatives in the Consolidated Statements of Income segregated by designated, qualifying hedging instruments and those that are not, for the years ended December 31, 2009, 2008 and 2007 (in millions):
 
Fair Value Hedges
 
The following table presents the location and amount of gains/(losses) from fair value hedges for the years ended December 31, 2009, 2008 and 2007 (in millions):
 
                                                                         
    Gain Recognized in Income on Derivatives       Gain/(Loss) Recognized in Income on Related Hedged Item (b)
    Income Statement
  Amount       Income Statement
  Amount
Derivatives
  Location   2009   2008   2007   Hedged Items   Location   2009   2008   2007
 
Interest rate contracts
    Interest expense     $ 12.9     $ 58.5     $ 3.6       Fixed-rate debt       Interest expense     $ 11.1     $ (54.6 )   $ (3.6 )
                                                                         
Total gain/(loss)
          $ 12.9     $ 58.5     $ 3.6                     $ 11.1     $ (54.6 )   $ (3.6 )
                                                                         
 
Cash Flow Hedges
 
The following table presents the location and amount of gains/(losses) from cash value hedges for the years ended December 31, 2009, 2008 and 2007 (in millions):
 
                                                                                 
                                            (Loss)/Gain Recognized in Income on
 
                      Gain/(Loss) Reclassified from
    Derivative (Ineffective Portion and Amount
 
    Amount of (Loss)/Gain
    Accumulated OCI into Income (Effective Portion)     Excluded from Effectiveness Testing) (c)  
    Recognized in OCI on Derivatives (Effective Portion)     Income Statement
  Amount     Income Statement
  Amount  
Derivatives
  2009     2008     2007     Location   2009     2008     2007     Location   2009     2008     2007  
 
Foreign currency contracts
  $ (43.6 )   $ 82.6     $ (55.9 )   Revenue   $ 34.6     $ (23.4 )   $ (29.6 )   Derivative (losses)/gains, net   $ (1.2 )   $ (9.9 )   $ 8.7  
Interest rate contracts (d)
                    Interest expense     (1.7 )     (1.7 )     (1.7 )   Derivative (losses)/gains, net                  
                                                                                 
Total gain/(loss)
  $ (43.6 )   $ 82.6     $ (55.9 )       $ 32.9     $ (25.1 )   $ (31.3 )       $ (1.2 )   $ (9.9 )   $ 8.7  
                                                                                 
 
Undesignated Hedges
 
The following table presents the location and amount of net gains/(losses) from undesignated hedges for the years ended December 31, 2009, 2008 and 2007 (in millions):
 
                             
    Income Statement Location                  
    (Loss)/Gain Recognized in Income on Derivatives  
        Amount  
Derivatives
      2009     2008     2007  
 
Foreign currency contracts (e)
  Foreign exchange revenue   $ 4.5     $     $  
Foreign currency contracts (a)
  Selling, general and administrative     (7.4 )     13.0       (21.1 )
Foreign currency contracts (f)
  Derivative (losses)/gains, net     (2.8 )     3.9       (2.9 )
                             
Total gain/(loss)
      $ (5.7 )   $ 16.9     $ (24.0 )
                             
 
 
(a) The Company uses foreign currency forward contracts to offset foreign exchange rate fluctuations on settlement assets and obligations as well as certain foreign currency denominated positions. The (loss)/gain of ($7.4) million, $13.0 million, and ($21.1) million generated by the undesignated foreign currency contracts in 2009, 2008 and 2007, respectively, was offset by a foreign exchange gain/(loss) on settlement assets and obligations and cash balances of $2.8 million, ($24.9) million and $39.1 million, respectively.
 
(b) The 2009 gain of $11.1 million is comprised of a loss in value on the debt of $12.9 million and amortization of hedge accounting adjustments of $24.0 million. The 2008 loss of $54.6 million is comprised of a loss in value on the debt of $58.5 million and amortization of hedge accounting adjustments of $3.9 million.
 
(c) The portion of the change in fair value of a derivative excluded from the effectiveness assessment for foreign currency forward contracts designated as cash flow hedges represents the difference between changes in forward rates and spot rates.
 
(d) The Company incurred an $18.0 million loss on the termination of these swaps in 2006 which is included in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets and is reclassified as an increase to “Interest expense” over the life of the related notes.
 
(e) The Company uses foreign currency forward and option contracts as part of its international business-to-business payments operation. The derivative contracts are managed as part of a broader currency portfolio that includes non-derivative currency exposures.
 
(f) The derivative contracts used in the Company’s revenue hedging program are not designated as hedges in the final month of the contract.
 
An accumulated other comprehensive pre-tax loss of ($3.9) million related to the foreign currency forward contracts is expected to be reclassified into revenue within the next 12 months as of December 31, 2009. Approximately $1.7 million of losses on the forecasted debt issuance hedges are expected to be recognized in interest expense within the next 12 months as of December 31, 2009. No amounts have been reclassified into earnings as a result of the underlying transaction being considered probable of not occurring within the specified time period.
Borrowings
Borrowings
 
15.  Borrowings
 
The Company’s outstanding borrowings at December 31, 2009 and 2008 consisted of the following (in millions):
 
                                 
    December 31, 2009     December 31, 2008  
    Carrying Value     Fair Value (e)     Carrying Value     Fair Value (e)  
 
Due in less than one year:
                               
Commercial paper
  $     $     $ 82.9     $ 82.9  
Term loan (a)
                500.0       500.0  
Due in greater than one year:
                               
5.400% notes, net of discount, due 2011 (b)
    1,033.9       1,066.4       1,042.8       962.9  
6.500% notes, net of discount, due 2014 (c)
    498.6       559.5              
5.930% notes, net of discount, due 2016 (d)
    1,012.5       1,080.0       1,014.4       903.5  
6.200% notes, net of discount, due 2036
    497.5       499.4       497.4       391.4  
Other borrowings
    6.0       6.0       6.0       6.0  
                                 
Total borrowings
  $ 3,048.5     $ 3,211.3     $ 3,143.5     $ 2,846.7  
                                 
 
 
(a) The term loan due in December 2009 (“Term Loan”) was paid and financed with the issuance of the 6.500% notes due 2014 (“2014 Notes”) on February 26, 2009.
 
(b) At December 31, 2009 and 2008, the Company held interest rate swaps related to the 5.400% notes due 2011 (“2011 Notes”) with an aggregate notional amount of $750 million and $550 million, respectively. The carrying value at December 31, 2009 and 2008 contained $34.3 million and $42.7 million, respectively, of hedge accounting adjustments related to active swaps as well as the unamortized portion of previously terminated swaps. These hedge accounting adjustments will be reclassified as reductions to “interest expense” over the life of the 2011 Notes.
 
(c) The 2014 Notes were issued on February 26, 2009 and the proceeds were used to repay the Term Loan.
 
(d) The carrying value at December 31, 2009 and 2008 included $12.8 million and $15.4 million, respectively, of hedge accounting adjustments. The remaining unamortized portion of this previously terminated swap will be reclassified as a reduction to “interest expense” over the life of the 2016 Notes.
 
(e) At December 31, 2008, the fair value of commercial paper approximated its carrying value due to the short term nature of the obligations. The fair value of the Term Loan approximated its carrying value as it was a variable rate loan and Western Union credit spreads did not move significantly between the date of the borrowing (December 5, 2008) and December 31, 2008. The fair value of the fixed rate notes is determined by obtaining quotes from multiple independent banks and excludes the impact of discounts and related interest rate swaps.
 
Exclusive of discounts and the fair value of the interest rate swaps, maturities of borrowings as of December 31, 2009 are $1.0 billion in 2011, $500 million in 2014, and $1.5 billion thereafter.
 
The Company’s obligations with respect to its outstanding borrowings, as described below, rank equally.
 
Commercial Paper Program
 
On November 3, 2006, the Company established a commercial paper program pursuant to which the Company may issue unsecured commercial paper notes (the “Commercial Paper Notes”) in an amount not to exceed $1.5 billion outstanding at any time. The Commercial Paper Notes may have maturities of up to 397 days from date of issuance. Interest rates for borrowings are based on market rates at the time of issuance. The Company’s commercial paper borrowings at December 31, 2008 had weighted-average interest rates of approximately 4.1% and weighted-average initial terms of 27 days. The Company had no commercial paper borrowings outstanding at December 31, 2009.
 
Revolving Credit Facility
 
On September 27, 2006, the Company entered into a f