WESTERN UNION CO, 10-K filed on 2/22/2013
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Feb. 15, 2013
Jun. 29, 2012
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Western Union CO 
 
 
Entity Central Index Key
0001365135 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Common Stock, Shares Outstanding
 
568,767,242 
 
Entity Public Float
 
 
$ 10.2 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2011
Sep. 30, 2011
Jun. 30, 2011
Mar. 31, 2011
Dec. 31, 2010
Sep. 30, 2010
Jun. 30, 2010
Mar. 31, 2010
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction fees
 
 
 
 
 
 
 
 
 
 
 
 
$ 4,210.0 
$ 4,220.2 
$ 4,055.3 
Foreign exchange revenues
 
 
 
 
 
 
 
 
 
 
 
 
1,332.7 
1,151.2 
1,018.8 
Other revenues
 
 
 
 
 
 
 
 
 
 
 
 
122.1 
120.0 
118.6 
Total revenues
1,424.7 
1,421.6 
1,425.1 
1,393.4 
1,431.3 
1,410.8 
1,366.3 
1,283.0 
 
 
 
 
5,664.8 
5,491.4 
5,192.7 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 
 
 
 
 
 
 
 
 
 
 
 
3,194.2 
3,102.0 
2,978.4 
Selling, general and administrative
 
 
 
 
 
 
 
 
 
 
 
 
1,140.6 
1,004.4 
914.2 
Total expenses
1,138.7 1 2
1,056.0 2
1,079.2 2
1,060.9 2
1,072.9 3
1,047.8 4
1,015.6 4
970.1 4
 
 
 
 
4,334.8 1 2 5
4,106.4 3 4 5
3,892.6 5
Operating income
286.0 
365.6 
345.9 
332.5 
358.4 
363.0 
350.7 
312.9 
 
 
 
 
1,330.0 
1,385.0 
1,300.1 
Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
5.5 
5.2 
2.8 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(179.6)
(181.9)
(169.9)
Derivative gains/(losses), net
 
 
 
 
 
 
 
 
 
 
 
 
0.5 
14.0 
(2.5)
Other income, net
 
 
 
 
 
 
 
 
 
 
 
 
12.4 
52.3 
14.7 
Total other expense, net
(41.2)
(41.8)
(35.8)
(42.4)
(5.8)6
(49.1)
(17.3)6
(38.2)
 
 
 
 
(161.2)
(110.4)6
(154.9)
Income before income taxes
244.8 
323.8 
310.1 
290.1 
352.6 
313.9 
333.4 
274.7 
 
 
 
 
1,168.8 
1,274.6 
1,145.2 
Provision for income taxes
6.9 
54.3 
38.9 
42.8 
(99.7)7
74.2 
70.2 
64.5 
 
 
 
 
142.9 
109.2 7
235.3 
Net income
$ 237.9 
$ 269.5 
$ 271.2 
$ 247.3 
$ 452.3 
$ 239.7 
$ 263.2 
$ 210.2 
 
 
 
 
$ 1,025.9 
$ 1,165.4 
$ 909.9 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$ 0.40 
$ 0.45 
$ 0.44 
$ 0.40 
$ 0.73 
$ 0.38 
$ 0.42 
$ 0.32 
 
 
 
 
$ 1.70 
$ 1.85 
$ 1.37 
Diluted
$ 0.40 
$ 0.45 
$ 0.44 
$ 0.40 
$ 0.73 
$ 0.38 
$ 0.41 
$ 0.32 
 
 
 
 
$ 1.69 
$ 1.84 
$ 1.36 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
588.0 
601.5 
610.9 
619.1 
619.4 
624.9 
631.1 
646.9 
 
 
 
 
604.9 
630.6 
666.5 
Diluted
590.2 
604.2 
613.1 
621.9 
621.7 
627.1 
635.8 
652.1 
 
 
 
 
607.4 
634.2 
668.9 
Cash dividends declared per common share
$ 0.125 
$ 0.1 
$ 0.1 
$ 0.1 
$ 0.08 
$ 0.08 
$ 0.08 
$ 0.07 
$ 0.07 
$ 0.06 
$ 0.06 
$ 0.06 
$ 0.425 
$ 0.31 
$ 0.25 
Consolidated Statements of Income (Parentheticals) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Income Statement [Abstract]
 
 
 
Total related party expenses
$ 95.0 
$ 190.7 
$ 236.4 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Statement of Other Comprehensive Income [Abstract]
 
 
 
Net income
$ 1,025.9 
$ 1,165.4 
$ 909.9 
Unrealized gains/(losses) on investment securities:
 
 
 
Unrealized gains/(losses)
9.9 
9.7 
(0.5)
Tax (expense)/benefit
(3.7)
(3.6)
0.1 
Reclassification of gains into earnings
(5.5)
(6.9)
(4.7)
Tax expense
2.1 
2.6 
1.8 
Net unrealized gains/(losses) on investment securities
2.8 
1.8 
(3.3)
Unrealized gains/(losses) on hedging activities:
 
 
 
Unrealized gains/(losses)
(20.1)
(5.2)
15.8 
Tax benefit
3.1 
5.6 
0.7 
Reclassification of (gains)/losses into earnings
(9.8)
33.0 
(23.0)
Tax expense/(benefit)
(0.2)
(6.4)
1.6 
Net unrealized gains/(losses) on hedging activities
(27.0)
27.0 
(4.9)
Foreign currency translation adjustments:
 
 
 
Foreign currency translation adjustments
(4.6)
(3.7)
8.4 
Tax (expense)/benefit
2.4 
1.7 
(1.8)
Net foreign currency translation adjustments
(2.2)
(2.0)
6.6 
Defined benefit pension plan:
 
 
 
Unrealized losses
(20.5)
(28.4)
(13.7)
Tax benefit
6.2 
10.9 
5.9 
Reclassification of losses into earnings
10.5 
8.1 
6.2 
Tax benefit
(3.9)
(3.1)
(2.3)
Net defined benefit pension plan adjustments
(7.7)
(12.5)
(3.9)
Total other comprehensive income/(loss)
(34.1)
14.3 
(5.5)
Comprehensive income
$ 991.8 
$ 1,179.7 
$ 904.4 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Assets
 
 
Cash and cash equivalents
$ 1,776.5 
$ 1,370.9 
Settlement assets
3,114.6 
3,091.2 
Property and equipment, net of accumulated depreciation of $384.5 and $429.7, respectively
196.1 
198.1 
Goodwill
3,179.7 
3,198.9 
Other intangible assets, net of accumulated amortization of $519.7 and $462.5, respectively
878.9 
847.4 
Other assets
319.9 
363.4 
Total assets
9,465.7 
9,069.9 
Liabilities:
 
 
Accounts payable and accrued liabilities
556.2 
535.0 
Settlement obligations
3,114.6 
3,091.2 
Income taxes payable
218.3 
302.4 
Deferred tax liability, net
352.1 
389.7 
Borrowings, carrying value
4,029.2 1
3,583.2 1
Other liabilities
254.7 
273.6 
Total liabilities
8,525.1 
8,175.1 
Commitments and contingencies (Note 6)
   
   
Stockholders' equity:
 
 
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued
Common stock, $0.01 par value; 2,000 shares authorized; 572.1 shares and 619.4 shares issued and outstanding as of December 31, 2012 and December 31, 2011, respectively
5.7 
6.2 
Capital surplus
332.8 
247.1 
Retained earnings
754.7 
760.0 
Accumulated other comprehensive loss
(152.6)
(118.5)
Total stockholders' equity
940.6 
894.8 
Total liabilities and stockholders' equity
$ 9,465.7 
$ 9,069.9 
Consolidated Balance Sheets (Parentheticals) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Assets
 
 
Accumulated depreciation
$ 384.5 
$ 429.7 
Accumulated amortization
$ 519.7 
$ 462.5 
Stockholders' equity:
 
 
Preferred stock, par value
$ 1 
$ 1 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
2,000,000,000 
2,000,000,000 
Common stock, shares issued
572,100,000 
619,400,000 
Common stock, shares outstanding
572,100,000 
619,400,000 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities
 
 
 
Net income
$ 1,025.9 
$ 1,165.4 
$ 909.9 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
61.7 
61.0 
61.5 
Amortization
184.4 
131.6 
114.4 
Deferred income tax (benefit)/provision
(35.2)
21.2 
28.6 
Gain on revaluation of equity interests (Note 3)
(49.9)
Other non-cash items, net
77.2 
29.8 
37.9 
Increase/(decrease) in cash, excluding the effects of acquisitions, resulting from changes in:
 
 
 
Other assets
(27.8)
(27.7)
28.1 
Accounts payable and accrued liabilities
9.3 
(43.0)
10.5 
Income taxes payable (Note 10)
(79.9)
(62.3)
(159.2)
Other liabilities
(30.3)
(51.2)
(37.3)
Net cash provided by operating activities
1,185.3 
1,174.9 
994.4 
Cash flows from investing activities
 
 
 
Capitalization of contract costs
(174.9)
(96.7)
(35.0)
Capitalization of purchased and developed software
(32.4)
(13.0)
(25.4)
Purchases of property and equipment
(60.9)
(52.8)
(53.3)
Acquisition of businesses, net of cash acquired (Note 3)
10.0 
(1,218.6)
(4.7)
Net proceeds from settlement of foreign currency forward contracts related to acquisitions
20.8 
Proceeds from receivable for securities sold
36.9 
Repayments of notes receivable issued to agents
16.9 
Net cash used in investing activities
(258.2)
(1,360.3)
(64.6)
Cash flows from financing activities
 
 
 
Proceeds from exercise of options
53.4 
100.0 
42.1 
Cash dividends paid
(254.2)
(194.2)
(165.3)
Common stock repurchased
(766.5)
(803.9)
(581.4)
Net (repayments of)/proceeds from commercial paper
(297.0)
297.0 
Net proceeds from issuance of borrowings
742.8 
696.3 
247.0 
Principal payments on borrowings
(696.3)
Net cash used in financing activities
(521.5)
(601.1)
(457.6)
Net change in cash and cash equivalents
405.6 
(786.5)
472.2 
Cash and cash equivalents at beginning of year
1,370.9 
2,157.4 
1,685.2 
Cash and cash equivalents at end of year
1,776.5 
1,370.9 
2,157.4 
Supplemental cash flow information:
 
 
 
Interest paid
181.8 
191.3 
175.5 
Income taxes paid (Note 10)
257.1 
144.9 
365.4 
Non-cash exchange of 5.400% notes due 2011 for 5.253% notes due 2020 (Note 15)
$ 0 
$ 0 
$ 303.7 
Consolidated Statements of Cash Flows (Parentheticals)
Nov. 17, 2006
Notes Payable, 2011 [Member]
Mar. 30, 2010
Notes Payable, 2020 [Member]
Stated interest rate
5.40% 
5.253% 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions
Total
Common Stock
Capital Surplus
Retained Earnings
Accumulated Other Comprehensive Loss
Balance at Dec. 31, 2009
$ 353.5 
$ 6.9 
$ 40.7 
$ 433.2 
$ (127.3)
Balance, shares at Dec. 31, 2009
 
686.5 
 
 
 
Net income
909.9 
 
 
909.9 
 
Stock-based compensation and other
34.6 
 
34.6 
 
 
Common stock dividends
(165.3)
 
 
(165.3)
 
Repurchase and retirement of common shares, shares
(35.6)
(35.7)
 
 
 
Repurchase and retirement of common shares
(586.6)
(0.4)
 
(586.2)
 
Shares issued under stock-based compensation plans, shares
 
3.2 
 
 
 
Shares issued under stock-based compensation plans
44.1 
44.1 
 
 
Tax adjustments from employee stock option plans
(2.0)
 
(2.0)
 
 
Unrealized gains/(losses) on investment securities, net of tax
(3.3)
 
 
 
(3.3)
Unrealized gains/(losses) on hedging activities, net of tax
(4.9)
 
 
 
(4.9)
Foreign currency translation adjustment, net of tax
6.6 
 
 
 
6.6 
Defined benefit pension plan liability adjustment, net of tax
(3.9)
 
 
 
(3.9)
Balance at Dec. 31, 2010
582.7 
6.5 
117.4 
591.6 
(132.8)
Balance, shares at Dec. 31, 2010
 
654.0 
 
 
 
Net income
1,165.4 
 
 
1,165.4 
 
Stock-based compensation
31.2 
 
31.2 
 
 
Common stock dividends
(194.2)
 
 
(194.2)
 
Repurchase and retirement of common shares, shares
(40.3)
(40.5)
 
 
 
Repurchase and retirement of common shares
(803.2)
(0.4)
 
(802.8)
 
Shares issued under stock-based compensation plans, shares
 
5.9 
 
 
 
Shares issued under stock-based compensation plans
98.8 
0.1 
98.7 
 
 
Tax adjustments from employee stock option plans
(0.2)
 
(0.2)
 
 
Unrealized gains/(losses) on investment securities, net of tax
1.8 
 
 
 
1.8 
Unrealized gains/(losses) on hedging activities, net of tax
27.0 
 
 
 
27.0 
Foreign currency translation adjustment, net of tax
(2.0)
 
 
 
(2.0)
Defined benefit pension plan liability adjustment, net of tax
(12.5)
 
 
 
(12.5)
Balance at Dec. 31, 2011
894.8 
6.2 
247.1 
760.0 
(118.5)
Balance, shares at Dec. 31, 2011
 
619.4 
 
 
 
Net income
1,025.9 
 
 
1,025.9 
 
Stock-based compensation
34.0 
 
34.0 
 
 
Common stock dividends
(254.2)
 
 
(254.2)
 
Repurchase and retirement of common shares, shares
(51.0)
(51.3)
 
 
 
Repurchase and retirement of common shares
(777.5)
(0.5)
 
(777.0)
 
Shares issued under stock-based compensation plans, shares
 
4.0 
 
 
 
Shares issued under stock-based compensation plans
51.9 
51.9 
 
 
Tax adjustments from employee stock option plans
(0.2)
 
(0.2)
 
 
Unrealized gains/(losses) on investment securities, net of tax
2.8 
 
 
 
2.8 
Unrealized gains/(losses) on hedging activities, net of tax
(27.0)
 
 
 
(27.0)
Foreign currency translation adjustment, net of tax
(2.2)
 
 
 
(2.2)
Defined benefit pension plan liability adjustment, net of tax
(7.7)
 
 
 
(7.7)
Balance at Dec. 31, 2012
$ 940.6 
$ 5.7 
$ 332.8 
$ 754.7 
$ (152.6)
Balance, shares at Dec. 31, 2012
 
572.1 
 
 
 
Formation of the Entity and Basis of Presentation
Formation of the Entity and Basis of Presentation
Formation of the Entity and Basis of Presentation
The Western Union Company (“Western Union” or the “Company”) is a leader in global money movement 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 - The Consumer-to-Consumer operating segment facilitates money transfers between two consumers, primarily through a network of third-party agents. The Company's multi-currency, real-time money transfer service is viewed by the Company as one interconnected global network where a money transfer can be sent from one location to another, around the world. 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. This segment also includes money transfer transactions that can be initiated through the Company's websites and account based money transfers.

Consumer-to-Business - The Consumer-to-Business operating segment facilitates bill payments from consumers to businesses and other organizations, including utilities, auto finance companies, mortgage servicers, financial service providers, government agencies and other businesses. This segment consists of United States bill payments, Pago Fácil (bill payments in Argentina), and international bill payments. The significant majority of the segment's revenue was generated in the United States during all periods presented.

Business Solutions - The Business Solutions operating segment facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and individuals. The majority of the segment's business relates to exchanges of currency at the spot rate which enables customers to make cross-currency payments. In addition, in certain countries, the Company writes foreign currency forward and option contracts for customers to facilitate future payments. Travelex Global Business Payments (“TGBP”), which was acquired in November 2011 (see Note 3), is included in this segment.
All businesses that have not been classified in the above segments are reported as “Other” and include the Company's money order, prepaid services, mobile money transfer, and other businesses and services, in addition to costs for the investigation and closing of acquisitions.
The Company's previously reported segments were Consumer-to-Consumer, Global Business Payments, and Other. The changes in the Company's segment structure primarily relate to the separation of the Global Business Payments segment into two new reportable segments, Consumer-to-Business and Business Solutions. All prior segment information has been reclassified to reflect these new segments.
There are legal or regulatory limitations on transferring certain assets of the Company outside of the countries where these assets are located, or these assets 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. Additionally, the Company must meet minimum capital requirements in some countries in order to maintain operating licenses. As of December 31, 2012, the amount of net assets subject to these limitations totaled approximately $305 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 all of its money transfer and consumer payments businesses 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 “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 the Company’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
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

The Company consolidates financial results when it has both the power to direct the activities of an entity that most significantly impact the entity's economic performance and the ability to absorb losses or the right to receive benefits of the entity that could potentially be significant to the entity. The Company utilizes the equity method of accounting when it is able to exercise significant influence over the entity's operations, which generally occurs when the Company 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 period, and therefore, reduce the dilutive effect.

As of December 31, 2012, 2011 and 2010 there were 23.3 million, 17.1 million and 34.0 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.

The following table provides the calculation of diluted weighted-average shares outstanding (in millions):
 
For the Year Ended December 31,
 
2012
 
2011
 
2010
Basic weighted-average shares outstanding
604.9

 
630.6

 
666.5

Common stock equivalents
2.5

 
3.6

 
2.4

Diluted weighted-average shares outstanding
607.4

 
634.2

 
668.9



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. 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. Further, these investments have no redemption restrictions, and redemptions can generally be done monthly or quarterly with required notice ranging from one to 45 days.

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.

Carrying amounts for many of the Company's financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables and settlement obligations, and commercial paper borrowings 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. 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 8 and are based on market quotations. For more information on the fair value of financial instruments, see Note 8.

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 include amortization expense arising from acquired intangible assets. The Company expenses all costs as incurred related to or involved with an acquisition in “Selling, general and administrative” expenses.

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 fair value.

The Company maintains cash and cash equivalent balances with various financial institutions, including a substantial portion in money market funds. The Company limits the concentration of its cash and cash equivalents with any one institution. The Company 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

The Company 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 $46.8 million and $28.5 million as of December 31, 2012 and 2011, respectively, and is recorded in the same Consolidated Balance Sheet caption as the related receivable. During the years ended December 31, 2012, 2011 and 2010, the provision for doubtful accounts (bad debt expense) reflected in the Consolidated Statements of Income was $44.9 million, $24.3 million and $19.1 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. The Company 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 Business Solutions segment.

Settlement assets consist of cash and cash equivalents, receivables from selling agents and Business Solutions customers, and investment securities. Cash received by Western Union agents generally becomes available to the Company 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 the Company. Western Union has a large and diverse agent base, thereby reducing the credit risk of the Company from any one agent. In addition, the Company performs ongoing credit evaluations of its agents' financial condition and credit worthiness. See Note 7 for information concerning the Company's investment securities.

Receivables from Business Solutions customers arise from cross-currency payment transactions in the Business Solutions segment. Receivables occur when funds have been paid out to a beneficiary but not yet received from the customer. Aside from these receivables, the credit risk associated with spot foreign currency exchange contracts is largely mitigated, as in most cases the Company 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 the Company. 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.

Settlement assets and obligations consisted of the following (in millions):
 
December 31,
 
2012
 
2011
Settlement assets:
 
 
 
Cash and cash equivalents
$
574.5

 
$
712.5

Receivables from selling agents and Business Solutions customers
1,025.3

 
1,046.7

Investment securities
1,514.8

 
1,332.0

 
$
3,114.6

 
$
3,091.2

Settlement obligations:
 
 
 
Money transfer, money order and payment service payables
$
2,297.1

 
$
2,242.3

Payables to agents
817.5

 
848.9

 
$
3,114.6

 
$
3,091.2



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,
 
2012
 
2011
Equipment
$
384.6

 
$
434.8

Buildings
80.0

 
80.1

Leasehold improvements
65.6

 
61.1

Furniture and fixtures
33.4

 
33.1

Land and improvements
16.9

 
16.9

Projects in process
0.1

 
1.8

 
580.6

 
627.8

Less accumulated depreciation
(384.5
)
 
(429.7
)
Property and equipment, net
$
196.1

 
$
198.1



Amounts charged to expense for depreciation of property and equipment were $61.7 million, $61.0 million and $61.5 million during the years ended December 31, 2012, 2011 and 2010, respectively.

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 impairment assessment did not identify any goodwill impairment during the years ended December 31, 2012, 2011 and 2010.

Other Intangible Assets

Other intangible assets primarily consist of acquired contracts, contract costs (primarily amounts paid to agents in connection with establishing and renewing long-term contracts) and software. Other intangible assets are amortized on a straight-line basis over the length of the contract or benefit periods. Included in the Consolidated Statements of Income is amortization expense of $184.4 million, $131.6 million and $114.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Acquired contracts include customer and contractual relationships and networks of subagents that are recognized in connection with the Company's acquisitions.

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.

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, 2012
 
December 31, 2011
 
 
Weighted-
Average
Amortization
Period
(in years)
 
Initial Cost
 


Net of
Accumulated
Amortization
 
Initial Cost
 


Net of
Accumulated
Amortization
Acquired contracts
 
11.3
 
$
627.2

 
$
466.2

 
$
629.5

 
$
526.5

Capitalized contract costs
 
6.1
 
457.2

 
303.7

 
399.1

 
213.8

Internal use software
 
3.2
 
221.0

 
54.7

 
197.4

 
61.0

Acquired trademarks
 
22.7
 
43.4

 
28.4

 
41.5

 
31.0

Projects in process
 
3.0
 
15.4

 
15.4

 
0.8

 
0.8

Other intangibles
 
2.7
 
34.4

 
10.5

 
41.6

 
14.3

Total other intangible assets
 
8.4
 
$
1,398.6

 
$
878.9

 
$
1,309.9

 
$
847.4



The estimated future aggregate amortization expense for existing other intangible assets as of December 31, 2012 is expected to be $188.4 million in 2013, $161.0 million in 2014, $117.4 million in 2015, $89.7 million in 2016, $75.0 million in 2017 and $247.4 million thereafter.

Other intangible assets are reviewed for impairment on an annual basis and whenever events or changes in circumstances 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. The Company did not record any impairment related to other intangible assets during the years ended December 31, 2012 and 2011, and recorded impairments of approximately $9 million for the year ended December 31, 2010.

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 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 Business Solutions 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 the 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 Business Solutions payment service operations.

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, 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, 2012, 2011 and 2010 were $177.5 million, $174.8 million and $163.9 million, respectively.

Income Taxes

The Company 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 substantially all of the Company's businesses. 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 year. 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

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 Solutions payments by writing derivatives to customers. 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, except for cash flows associated with foreign currency forward contracts entered into in order to reduce the economic variability related to the cash amounts used to fund acquisitions of businesses with purchase prices denominated in foreign currencies, which are recorded in investing activities.

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 hedges of the forecasted issuance of fixed rate debt. 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, to the extent the change in the fair value of the instrument is effective in offsetting the change in fair value of the hedged item. The portions of the change in fair value that are either considered ineffective or are excluded from the measure of effectiveness are recognized immediately in “Derivative gains/(losses), 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, 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.” In addition, changes in fair value of derivative contracts, consisting of forward contracts with maturities of less than one year entered into to reduce the economic variability related to the cash amounts used to fund acquisitions of businesses with purchase prices denominated in foreign currencies, are recorded in “Derivative gains/(losses), net.” The Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency Business Solutions payments operations. The duration of these derivative contracts at inception is generally less than one year. The Company aggregates its foreign exchange exposures in its cross-currency Business Solutions payments operations, including the exposure generated by the derivative contracts it writes to its customers, and typically hedges the net exposure through offsetting contracts with established financial institution counterparties (economic hedge contract) as part of a broader foreign currency portfolio, including significant spot exchanges of currency in addition to forwards and options. The changes in fair value related to these contracts are recorded in “Foreign exchange revenues.”

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 grants of Western Union stock options, restricted stock awards and restricted and unrestricted stock units to employees and non-employee directors of the Company 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.

Severance and Other Related Expenses

The Company records severance-related expenses once they are both probable and estimable in accordance with the provisions of the applicable accounting guidance for severance provided under an ongoing benefit arrangement. One-time, involuntary benefit arrangements and other costs are generally recognized when the liability is incurred. Expenses 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 and other activities when the carrying amount of the assets may not be fully recoverable, in accordance with the appropriate accounting guidance.
Acquisitions
Acquisitions
Acquisitions

On November 7, 2011, the Company acquired the business-to-business payment business known as Travelex Global Business Payments from Travelex Holdings Limited for cash consideration of £596 million ($956.5 million), net of a final working capital adjustment which resulted in a return of £15 million ($24.1 million) of purchase consideration in the third quarter of 2012. In connection with the July 5, 2011 purchase agreement, on May 4, 2012, the Company also acquired the French assets of TGBP for cash consideration of £3 million ($4.8 million) after receiving regulatory approval. For the year ended December 31, 2011, the Company incurred $20.7 million of costs associated with the closing of the TGBP acquisition. With the acquisition of TGBP and the Company's existing Business Solutions business, the Company has the ability to leverage TGBP's business-to-business payments market expertise, distribution, products and capabilities with Western Union's brand, existing Business Solutions operations, global infrastructure and relationships, and financial strength. The results of operations for TGBP have been included in the Company's consolidated financial statements from the date of acquisition.

On October 31, 2011 and April 20, 2011, the Company acquired the remaining 70% interests in European-based Finint S.r.l. (“Finint”) and Angelo Costa S.r.l. (“Costa”), respectively, two of the Company's largest agents providing services in a number of European countries. The Company previously held a 30% equity interest in each of these agents. The Company expects these acquisitions will help accelerate the introduction of additional Western Union products and services and will leverage its existing European infrastructure to build new opportunities across the European Union. The acquisitions do not impact the Company's money transfer revenue, because the Company was already recording all of the revenue arising from money transfers originating at Finint's and Costa's subagents. As of the acquisition dates, the Company no longer incurs commission costs for transactions related to Finint and Costa; rather the Company now pays commissions to Finint and Costa subagents, resulting in lower overall commission expense. The Company's operating expenses include costs attributable to Finint's and Costa's operations subsequent to the acquisition dates.

The Company acquired the remaining 70% interest in Finint for cash consideration of €99.6 million ($139.4 million). The Company revalued its previous 30% equity interest to fair value of approximately $47.7 million on the acquisition date, resulting in total value of $187.1 million. In conjunction with the revaluation, the Company recognized a gain of $20.5 million, recorded in “Other income, net” in the Consolidated Statements of Income, for the amount by which the fair value of the 30% equity interest exceeded its previous carrying value.

The Company acquired the remaining 70% interest in Costa for cash consideration of €95 million ($135.7 million). The Company revalued its previous 30% equity interest to fair value of approximately $46.2 million on the acquisition date, resulting in total value of $181.9 million. In conjunction with the revaluation, the Company recognized a gain of $29.4 million, recorded in “Other income, net” in the Consolidated Statements of Income, for the amount by which the fair value of the 30% equity interest exceeded its previous carrying value.

All assets and liabilities have been recorded at fair value, excluding deferred tax liabilities. The following table summarizes the final allocations of consideration for TGBP, Finint and Costa (in millions):
 
Travelex Global Business
Payments (b)
 
Finint S.r.l.
 
Angelo Costa
S.r.l.
Assets:
 
 
 
 
 
Cash and cash equivalents
$
30.7

 
$

 
$

Settlement assets
160.4

 
52.2

 
46.3

Property and equipment
5.1

 
0.5

 
3.0

Goodwill
704.3

 
153.6

 
174.2

Other intangible assets
314.2

 
64.8

 
51.4

Other assets
45.3

 
2.0

 
1.5

Total assets
$
1,260.0

 
$
273.1

 
$
276.4

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accounts payable and accrued liabilities
$
49.6

 
$
6.1

 
$
10.8

Settlement obligations
160.4

 
57.5

 
55.7

Income taxes payable
1.7

 
3.1

 
10.3

Deferred tax liability, net
65.5

 
15.8

 
15.5

Other liabilities
21.5

 
3.5

 
2.2

Total liabilities
298.7

 
86.0

 
94.5

Total consideration (a)
$
961.3

 
$
187.1

 
$
181.9

____________________
(a)
Total consideration includes cash consideration transferred and the revaluation of the Company's previous equity interest, if any, to fair value on the acquisition date.
(b)
Amounts include the impact of the acquisition of the French assets of TGBP on May 4, 2012 and the final working capital adjustment in the third quarter of 2012.

The valuation of assets acquired was derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation, and resulted in identifiable intangible assets as follows (in millions):
 
Travelex Global Business
Payments (a)
 
Finint S.r.l.
 
Angelo Costa
S.r.l.
Customer and other contractual relationships
$
264.5

 
$

 
$

Network of subagents

 
53.9

 
44.6

Other
49.7

 
10.9

 
6.8

Total identifiable intangible assets
$
314.2

 
$
64.8

 
$
51.4


____________________
(a)
Amounts include the impact of the acquisition of the French assets of TGBP on May 4, 2012.

Customer and other contractual relationships and network of subagents identifiable intangible assets were valued using an income approach and are being amortized over 9 to 15 years. Other intangibles were valued using both income and cost approaches and are being amortized over one to five years. For the remaining assets and liabilities, excluding goodwill and deferred tax liabilities, fair value approximated carrying value.

The goodwill recognized for TGBP of $704.3 million is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce and relates entirely to the Business Solutions segment. The goodwill recognized for Finint and Costa of $153.6 million and $174.2 million, respectively, is attributable to growth opportunities that will arise from the Company directly managing its agent relationships, expected synergies, projected long-term business growth and an assembled workforce and relates entirely to the Consumer-to-Consumer segment. Goodwill expected to be deductible for income tax purposes for TGBP, Finint and Costa is approximately $488.4 million, $97.0 million and $104.9 million, respectively.

The following table presents changes to goodwill for the years ended December 31, 2012 and 2011 (in millions):
 
Consumer-to-Consumer
 
Consumer-to-Business
 
Business Solutions
 
Other
 
Total
January 1, 2011 balance
$
1,619.9

 
$
227.2

 
$
289.4

 
$
15.2

 
$
2,151.7

Acquisitions
325.4

 

 
728.7

 

 
1,054.1

Currency translation

 
(2.3
)
 
(4.4
)
 
(0.2
)
 
(6.9
)
December 31, 2011 balance
$
1,945.3

 
$
224.9

 
$
1,013.7

 
$
15.0

 
$
3,198.9

Purchase price adjustments
2.4

 

 
(24.4
)
 

 
(22.0
)
Currency translation

 
(3.8
)
 
6.7
 
(0.1
)
 
2.8
December 31, 2012 balance
$
1,947.7

 
$
221.1

 
$
996.0

 
$
14.9

 
$
3,179.7

Related Party Transactions
Related Party Transactions
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, 2012, 2011 and 2010 totaled $66.1 million, $131.9 million and $183.5 million, respectively. Commission expense recognized for Finint prior to October 31, 2011 and Costa prior to April 20, 2011, the date of the acquisitions (see Note 3), was considered a related party transaction.

The Company has a director who is also a director for a company that previously held significant investments in two of the Company's existing agents. As of December 31, 2012, this company holds a significant investment in one agent. These agents had been agents of the Company prior to the director being appointed to the board. The Company recognized commission expense of $28.9 million, $58.8 million, and $52.9 million for the years ended December 31, 2012, 2011 and 2010, respectively, related to these agents during the period the agents were affiliated with the Company's director.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies

Letters of Credit and Bank Guarantees

The Company had approximately $100 million in outstanding letters of credit and bank guarantees as of December 31, 2012 with expiration dates through 2016, the majority 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

The Company and one of its subsidiaries are defendants in two purported class action lawsuits: James P. Tennille v. The Western Union Company and Robert P. Smet v. The Western Union Company, both of which are pending in the United States District Court for the District of Colorado. The original complaints asserted claims for violation of various consumer protection laws, unjust enrichment, conversion and declaratory relief, based on allegations that the Company waits too long to inform consumers if their money transfers are not redeemed by the recipients and that the Company uses the unredeemed funds to generate income until the funds are escheated to state governments. The Tennille complaint was served on the Company on April 27, 2009. The Smet complaint was served on the Company on April 6, 2010. On September 21, 2009, the Court granted the Company's motion to dismiss the Tennille complaint and gave the plaintiff leave to file an amended complaint. On October 21, 2009, Tennille filed an amended complaint. The Company moved to dismiss the Tennille amended complaint and the Smet complaint. On November 8, 2010, the Court denied the motion to dismiss as to the plaintiffs' unjust enrichment and conversion claims. On February 4, 2011, the Court dismissed plaintiffs' consumer protection claims. On March 11, 2011, the plaintiffs filed an amended complaint that adds a claim for breach of fiduciary duty, various elements to its declaratory relief claim and Western Union Financial Services, Inc. as a defendant. On April 25, 2011, the Company and Western Union Financial Services, Inc. filed a motion to dismiss the breach of fiduciary duty and declaratory relief claims. Western Union Financial Services, Inc. also moved to compel arbitration of the plaintiffs' claims and to stay the action pending arbitration. On November 21, 2011, the Court denied the motion to compel
arbitration and the stay request. Both companies appealed the decision. On January 24, 2012, the United States Court of Appeals for the Tenth Circuit granted the companies' request to stay the District Court proceedings pending their appeal. During the fourth quarter of 2012, the parties executed a settlement agreement, which the Court preliminarily approved on January 3, 2013. The settlement agreement, which is subject to the Court's final approval, would result in a substantial amount of the settlement proceeds to be paid from the Company's existing related unclaimed property liabilities. If a settlement agreement is not approved, the Company and Western Union Financial Services, Inc. intend to vigorously defend themselves against both lawsuits.

During 2009, the Company recorded an accrual of $71.0 million for an agreement and settlement with the State of Arizona and other states, which was paid in 2010. On February 11, 2010, the Company signed this agreement and settlement, which resolved all outstanding legal issues and claims with the State of Arizona and required 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 are participating with Arizona. The accrual included 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 has made and expects to make certain investments in its compliance programs along the United States and Mexico border and a monitor has been engaged for those programs. On January 23, 2013, the monitor announced his intention to resign. A replacement monitor has been identified and is subject to court appointment. Pursuant to the terms and conditions of the agreement and settlement, the costs of the investments in the Company's programs and for the monitor were expected to be $23.0 million over the period from signing through 2013; however, actual costs have exceeded this amount. In addition, in the fourth quarter of 2012, the Company's Business Solutions business was included in the scope of the monitor's review. The Company is considering entering into an extension of the term of the agreement and settlement, or another arrangement with the State of Arizona, either of which would require the approval of the State of Arizona and could have further adverse effects on the Company's business, including additional costs. The monitor has made a number of recommendations related to the Company's compliance programs. While the Company has devoted significant time and resources to these efforts, it is expected that not every recommendation of the monitor will be fully implemented within the required timeframe ending on July 31, 2013. If the Company is not able to negotiate an extension of the agreement and settlement or other arrangement and the State of Arizona determines that the Company has committed a willful and material breach, the State of Arizona has indicated that it will pursue remedies under the agreement and settlement, which could include initiating civil or criminal actions. The pursuit by the State of Arizona of remedies under the agreement and settlement could have a material adverse effect on the Company's business, financial condition or results of operations.

On March 20, 2012, the Company was served with a federal grand jury subpoena issued by the United States Attorney's Office for the Central District of California (“USAO”) seeking documents relating to Shen Zhou International (“US Shen Zhou”), a former Western Union agent located in Monterey Park, California. The principal of US Shen Zhou was indicted in 2010 and is currently awaiting trial in U.S. v. Zhi He Wang (SA CR 10-196, C.D. Cal.). Concurrent with the government's service of the subpoena, the government notified the Company that it is a target of an ongoing investigation into structuring and money laundering. Since March 20, 2012, the Company has received additional subpoenas from the USAO seeking additional documents relating to US Shen Zhou, materials relating to certain other former and current agents and other materials relating to the Company's anti-money laundering compliance policies and procedures. The government's investigation is ongoing and the Company may receive additional requests for information as part of the investigation. The Company continues to cooperate fully with the government. The Company is unable to predict the outcome of the government's investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against the Company. Should such charges or claims be brought, the Company could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on the Company's business, financial condition and results of operations.

In the normal course of business, the Company is subject to claims and litigation. Management of the Company believes such matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on the Company's financial condition, results of operations and cash flows. The Company accrues for loss contingencies as they become probable and estimable.

On January 26, 2006, the First Data Corporation (“First Data”) Board of Directors announced its intention to pursue the distribution of all 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 “Spin-off”). The Spin-off resulted in the formation of the Company and these assets and businesses no longer being part of First Data. 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
Investment Securities

Investment securities, classified within “Settlement assets” in the Consolidated Balance Sheets, consist primarily of highly-rated state and municipal debt securities, including variable rate demand notes. Variable rate demand note securities 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 2049. 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. The Company is required to hold specific highly-rated, investment grade securities and such investments are restricted to satisfy outstanding settlement obligations in accordance with applicable state and foreign country requirements. The substantial majority of the Company's 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 investing in highly-rated securities and through investment diversification. As of December 31, 2012, the majority of the Company's investment securities had credit ratings of “AA-” or better from a major credit rating agency.

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, 2012, 2011 and 2010 were $16.3 billion, $14.2 billion and $14.7 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 are as follows (in millions):
December 31, 2012
 
Amortized
Cost
 
 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains/ (Losses)
State and municipal debt securities (a)
$
991.5

 
$
1,003.7

 
$
12.5

 
$
(0.3
)
 
$
12.2

State and municipal variable rate demand notes
463.3

 
463.3

 

 

 

Corporate debt and other
47.7

 
47.8

 
0.1

 

 
0.1

 
$
1,502.5

 
$
1,514.8

 
$
12.6

 
$
(0.3
)
 
$
12.3

 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Amortized
Cost
 
 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains/ (Losses)
State and municipal debt securities (a)
$
858.5

 
$
866.5

 
$
10.4

 
$
(2.4
)
 
$
8.0

State and municipal variable rate demand notes
376.9

 
376.9

 

 

 

Corporate debt and other
88.7

 
88.6

 
0.6

 
(0.7
)
 
(0.1
)
 
$
1,324.1

 
$
1,332.0

 
$
11.0

 
$
(3.1
)
 
$
7.9

____________

(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, 2012 and 2011.

The following summarizes contractual maturities of investment securities as of December 31, 2012 (in millions):

 
Amortized
Cost
 
Fair
Value
Due within 1 year
$
228.5

 
$
229.5

Due after 1 year through 5 years
785.0

 
795.9

Due after 5 years through 10 years
79.3

 
79.6

Due after 10 years
409.7

 
409.8

 
$
1,502.5

 
$
1,514.8



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 $21.0 million, $15.5 million, $26.0 million and $400.8 million are included in the “Due within 1 year,” “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
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 the Company measures fair value, refer to Note 2.

The following tables reflect assets and liabilities that were measured at fair value on a recurring basis (in millions):
  
Fair Value Measurement Using
 
Assets/
Liabilities at
Fair
Value
December 31, 2012
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
State and municipal debt securities
$

 
$
1,003.7

 
$

 
$
1,003.7

State and municipal variable rate demand notes

 
463.3

 

 
463.3

Corporate debt and other

 
47.8

 

 
47.8

Derivatives

 
96.8

 

 
96.8

Total assets
$

 
$
1,611.6

 
$

 
$
1,611.6

Liabilities:
 
 
 
 
 
 
 
Notes and other borrowings
$

 
$
4,200.8

 
$

 
$
4,200.8

Derivatives

 
86.1

 

 
86.1

Total liabilities
$

 
$
4,286.9

 
$

 
$
4,286.9

 
 
 
 
 
 
 
 
 
Fair Value Measurement Using
 
Assets/
Liabilities at
Fair
Value
December 31, 2011
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
State and municipal debt securities
$

 
$
866.5

 
$

 
$
866.5

State and municipal variable rate demand notes

 
376.9

 

 
376.9

Corporate debt and other
0.1

 
88.5

 

 
88.6

Derivatives

 
124.8

 

 
124.8

Total assets
$
0.1

 
$
1,456.7

 
$

 
$
1,456.8

Liabilities:
 
 
 
 
 
 
 
Commercial paper
$

 
$
297.0

 
$

 
$
297.0

Notes and other borrowings

 
3,563.5

 

 
3,563.5

Total borrowings

 
3,860.5

 

 
3,860.5

Derivatives

 
86.6

 

 
86.6

Total liabilities
$

 
$
3,947.1

 
$

 
$
3,947.1



No non-recurring fair value adjustments were recorded during the years ended December 31, 2012 and 2011, except those associated with acquisitions, as disclosed in Note 3.

Other Fair Value Measurements

The carrying amounts for many of the Company's financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables and settlement obligations, and commercial paper borrowings approximate fair value due to their short maturities. The aggregate fair value of the Company's borrowings, excluding commercial paper borrowings, was based on quotes from multiple banks and excluded the impact of related interest rate swaps. All the assets and liabilities in the above tables were carried at fair value in the Consolidated Balance Sheets, with the exception of borrowings, which had a carrying value of $4,029.2 million and $3,583.2 million as of December 31, 2012 and 2011, respectively (see Note 15).

The fair value of the assets in the Trust, which holds the assets for the Company's defined benefit plan, is disclosed in Note 11.
Other Assets and Other Liabilities
Other Assets and Other Liabilities
Other Assets and Other Liabilities

The following table summarizes the components of other assets and other liabilities (in millions):

 
December 31,
 
2012
 
2011
Other assets:
 
 
 
Derivatives
$
96.8

 
$
124.8

Prepaid expenses
56.9

 
54.5

Equity method investments
41.0

 
41.3

Amounts advanced to agents, net of discounts
37.7

 
34.1

Other receivables
21.4

 
37.6

Debt issue costs
17.3

 
15.8

Deferred customer set up costs
15.9

 
18.0

Accounts receivable, net
15.6

 
14.8

Other
17.3

 
22.5

Total other assets
$
319.9

 
$
363.4

Other liabilities:
 
 
 
Pension obligations
$
102.1

 
$
112.7

Derivatives
86.1

 
86.6

Deferred revenue
30.5

 
33.6

Other
36.0

 
40.7

Total other liabilities
$
254.7

 
$
273.6

Income Taxes
Income Taxes
Income Taxes

The components of pre-tax income, generally based on the jurisdiction of the legal entity, were as follows (in millions):
 
Year Ended December 31,
 
2012
 
2011
 
2010
Components of pre-tax income:
 
 
 
 
 
Domestic
$
94.8

 
$
423.9

 
$
151.4

Foreign
1,074.0

 
850.7

 
993.8

 
$
1,168.8

 
$
1,274.6

 
$
1,145.2



For the years ended December 31, 2012, 2011 and 2010, 92%, 67% and 87% of the Company's pre-tax income was derived from foreign sources, respectively. For the year ended December 31, 2011, the increase in domestic pre-tax income and decrease in foreign pre-tax income were primarily due to the pre-tax impact of the Company's agreement with the United States Internal Revenue Service (“IRS Agreement”) resolving substantially all of the issues related to the Company's restructuring of its international operations in 2003.

The provision for income taxes was as follows (in millions):
 
Year Ended December 31,
 
2012
 
2011
 
2010
Federal
$
92.5

 
$
78.1

 
$
132.2

State and local
(14.8
)
 
4.5

 
39.8

Foreign
65.2

 
26.6

 
63.3

 
$
142.9

 
$
109.2

 
$
235.3



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 pre-tax 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,
 
2012
 
2011
 
2010
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal income tax benefits
0.6
 %
 
2.0
 %
 
1.9
 %
Foreign rate differential, net of U.S. tax paid on foreign earnings (5.1%, 1.2%, and 5.1%, respectively)
(22.5
)%
 
(14.0
)%
 
(12.0
)%
IRS Agreement
 %
 
(16.1
)%
 
 %
Other
(0.9
)%
 
1.7
 %
 
(4.4
)%
Effective tax rate
12.2
 %
 
8.6
 %
 
20.5
 %


For the years ended December 31, 2012 and 2011, the Company's effective tax rate significantly decreased due to the IRS Agreement, which resolved substantially all of the issues related to the Company's restructuring of its international operations in 2003, as described below, and resulted in a tax benefit of $204.7 million related to the adjustment of reserves associated with this matter for the year ended December 31, 2011. For the year ended December 31, 2012, the Company's effective tax rate was also impacted by benefits from favorable tax settlements and changes in the mix of foreign and U.S. income and applicable tax rates, and for the year ended December 31, 2011, the Company's effective tax rate was also impacted by higher taxes associated with the Finint and Costa remeasurement gains (see Note 3). The tax rate for the year ended December 31, 2010 was impacted by a cumulative tax planning benefit from certain foreign acquisitions and the settlement with the United States Internal Revenue
Service (“IRS”) of certain issues relating to the 2002-2004 tax years. The Company continues to benefit from a significant proportion of its profits being foreign-derived, and therefore taxed at lower rates than its combined federal and state tax rates in the United States. However, certain portions of the Company's foreign source income are subject to United States federal and state income tax as earned due to the nature of the income, and dividend repatriations of the Company's foreign source income are generally subject to United States federal and state income tax.
The Company's provision for income taxes consisted of the following components (in millions):
 
Year Ended December 31,
 
2012
 
2011
 
2010
Current:
 
 
 
 
 
Federal
$
117.2

 
$
36.2

 
$
103.6

State and local
(2.5
)
 
0.6

 
30.1

Foreign
63.4

 
51.2

 
73.0

Total current taxes
178.1

 
88.0

 
206.7

Deferred:
 
 
 
 
 
Federal
(24.7
)
 
41.9

 
28.6

State and local
(12.3
)
 
3.9

 
9.7

Foreign
1.8

 
(24.6
)
 
(9.7
)
Total deferred taxes
(35.2
)
 
21.2

 
28.6

 
$
142.9

 
$
109.2

 
$
235.3



Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of the Company's assets and liabilities. The following table outlines the principal components of deferred tax items (in millions):
 
December 31,
 
2012
 
2011
Deferred tax assets related to:
 
 
 
Reserves, accrued expenses and employee-related items
$
65.7

 
$
40.6

Pension obligations
36.7

 
40.0

Tax attribute carryovers
4.2

 
11.9

Other
22.8

 
20.6

Total deferred tax assets
129.4

 
113.1

Deferred tax liabilities related to:
 
 
 
Intangibles, property and equipment
481.5

 
502.8

Total deferred tax liabilities
481.5

 
502.8

Net deferred tax liability
$
352.1

 
$
389.7


Uncertain Tax Positions

The Company has established contingency reserves for a variety of material, known tax exposures. As of December 31, 2012, the total amount of tax contingency reserves was $111.9 million, including accrued interest and penalties, net of related benefits. The Company's tax reserves reflect management's judgment as to the resolution of the issues involved if subject to judicial review or other settlement. 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. Such resolution could materially increase or decrease income tax expense in the Company's consolidated financial statements in future periods and could impact operating cash flows.
Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the Company's consolidated 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):
 
2012
 
2011
Balance as of January 1,
$
123.7

 
$
618.7

Increases - positions taken in current period (a)
13.1

 
143.1

Increases - positions taken in prior periods (b)

 
34.1

Increases - acquisitions

 
9.7

Decreases - positions taken in prior periods
(6.1
)
 
(27.9
)
Decreases - settlements with taxing authorities
(24.1
)
 
(650.9
)
Decreases - lapse of applicable statute of limitations
(3.4
)
 
(3.1
)
Balance as of December 31,
$
103.2

 
$
123.7

____________

(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.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $93.5 million and $115.6 million as of December 31, 2012 and 2011, 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 $0.5 million, $(4.0) million, and $6.9 million in interest and penalties during the years ended December 31, 2012, 2011 and 2010, respectively. The Company has accrued $20.0 million and $20.7 million for the payment of interest and penalties as of December 31, 2012 and 2011, respectively.

The unrecognized tax benefits accrual as of December 31, 2012 consists of federal, state and foreign tax matters. It is reasonably possible that the Company's total unrecognized tax benefits will decrease by approximately $25 million during the next 12 months in connection with various matters which may be resolved.

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 as its major tax jurisdiction, as the income tax imposed by any one foreign country is not material to the Company. The United States federal income tax returns of First Data, which include the Company, are eligible to be examined for the years 2005 and 2006. The Company's United States federal income tax returns since the Spin-off are also eligible to be examined.

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. In December 2011, the Company reached an agreement with the IRS resolving substantially all of the issues related to the Company's restructuring of its international operations in 2003. As a result of the IRS Agreement, the Company expects to make cash payments of approximately $190 million, of which $92.4 million were made in the year ended December 31, 2012. In the first quarter of 2010, the Company made a $250 million tax deposit relating to United States federal tax liabilities, including those arising from the Company’s 2003 international restructuring, which had been previously accrued in the Company’s consolidated financial statements. The deposit was recorded as a reduction to “Income taxes payable” in the Consolidated Balance Sheets and a decrease in cash flows from operating activities in the Consolidated Statement of Cash Flows. The deposit limited the further accrual of interest charges with respect to such tax liabilities, to the extent of the deposit. The IRS completed its examination of the United States federal consolidated income tax returns of First Data, which include the Company's 2005 and pre-Spin-off 2006 taxable periods, and issued its report on October 31, 2012 (“FDC 30-Day Letter”). Furthermore, the IRS completed its examination of the Company's United States federal consolidated income tax returns for the 2006 post-Spin-off period through 2009 and issued its report also on October 31, 2012
(“WU 30-Day Letter”). Both the FDC 30-Day Letter and the WU 30-Day Letter propose tax adjustments affecting the Company, some of which are agreed and some of which are unagreed. Both First Data and the Company filed their respective protests with the IRS Appeals Division on November 28, 2012 related to the unagreed proposed adjustments. The Company believes its reserves are adequate with respect to both the agreed and unagreed adjustments.