Note 1—Summary of Significant Accounting Policies

Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of cash and checks. Visa and its wholly-owned consolidated subsidiaries, including Visa U.S.A. Inc. (“Visa U.S.A.”), Visa International Service Association (“Visa International”), Visa Worldwide Pte. Limited (“VWPL”), Visa Canada Corporation (“Visa Canada”), Inovant LLC (“Inovant”) and CyberSource Corporation (“CyberSource”), operate the world’s largest retail electronic payments network. The Company provides financial institutions with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitates global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Company does not issue cards, set fees, or determine the interest rates consumers will be charged on Visa-branded cards, which are the independent responsibility of the Company’s issuing clients.

Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates its majority-owned and controlled entities, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. The Company’s VIEs have not been material to its consolidated financial statements as of and for the periods presented. Non-controlling interests are reported as a component of equity. All significant intercompany accounts and transactions are eliminated in consolidation. Beginning with this fiscal quarter, equity in earnings of unconsolidated affiliates has been combined with other in the other income (expense) line on the consolidated statements of operations. Prior period information has also been reclassified to conform to current period presentation. The Company has also updated selected captions within the consolidated financial statements to better reflect underlying activities; however, the grouping of underlying financial accounts remains unchanged.

The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by GAAP. Reference should be made to the Visa Inc. Annual Report on Form 10-K for the year ended September 30, 2010 for additional disclosures, including a summary of the Company’s significant accounting policies.

Recently issued accounting pronouncements. In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional information in the roll-forward of Level 3 assets and liabilities, including the presentation of purchases, sales, issuances and settlements on a gross basis. This ASU impacts disclosures only. The Company will adopt this guidance in the second quarter of fiscal 2011. See Note 3—Fair Value Measurements.

Note 2—Retrospective Responsibility Plan

On September 21, 2010, the Company’s board of directors approved a deposit of $800 million into the litigation escrow account, which was funded on October 8, 2010. On an as-converted basis, the funding had the effect of a repurchase by the Company of the equivalent of 11.0 million shares of class A common stock. See Note 6—Stockholders’ Equity.

The following table sets forth the changes in the escrow account during the three months ended December 31, 2010.

 

		(in millions)
Balance at October 1, 2010		$	1,936
Additional funding under the plan			800
American Express settlement payments			(70	)
Balance at December 31, 2010		$	2,666

An accrual for covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates information, including actions taken by the litigation committee. The accrual related to covered litigation could be either higher or lower than the escrow account balance. The Company did not record an additional accrual for covered litigation during the three months ended December 31, 2010.

Note 3—Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

		Fair Value Measurements Using Inputs Considered as
		Level 1								Level 2								Level 3
		December 31 2010				September 30 2010				December 31 2010				September 30 2010				December 31 2010				September 30 2010
		(in millions)
Assets
Cash equivalents and restricted cash
Money market funds and time deposits		$	5,822			$	5,448
Investment securities
U.S. government-sponsored agency debt securities										$	132			$	135
Equity securities			69				60
Auction rate securities																		$	13			$	13
Prepaid and other current assets
Foreign exchange derivative instruments											4				5
		$	5,891			$	5,508			$	136			$	140			$	13			$	13
Liabilities
Accrued liabilities
Visa Europe put option																		$	267			$	267
Foreign exchange derivative instruments										$	56			$	56

There were no transfers between Level 1 and Level 2 assets during the first quarter of fiscal 2011.

 

Level 2 assets and liabilities measured at fair value on a recurring basis. The fair value of the government-sponsored debt securities is based on quoted prices in active markets for similar assets. Foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated with observable market data. There was no substantive change to the valuation techniques and related inputs used to measure fair value during the first quarter of fiscal 2011.

Level 3 assets and liabilities measured at fair value on a recurring basis. Auction rate securities are classified as Level 3 due to a lack of trading in active markets and a lack of observable inputs in measuring fair value. There was no change to the valuation techniques and related inputs used to measure fair value during the first quarter of fiscal 2011.

Visa Europe put option agreement. The Company has granted Visa Europe a perpetual put option which, if exercised, will require Visa Inc. to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain adjustments, applies Visa Inc.’s forward price-to-earnings multiple, or the P/E ratio (as defined in the option agreement), at the time the option is exercised, to Visa Europe’s projected adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income (as defined in the option agreement). The calculation of Visa Europe’s adjusted sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise, the key inputs to this formula, including Visa Europe’s adjusted sustainable income, will be the result of negotiation between the Company and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.

The fair value of the put option represents the value of Visa Europe’s option, which under certain conditions could obligate the Company to purchase its member equity interest for an amount above fair value. While the put option is in fact non-transferable, its fair value represents the Company’s estimate of the amount the Company would be required to pay a third-party market participant to transfer the potential obligation in an orderly transaction at the measurement date. At December 31, 2010 and September 30, 2010, the Company determined the fair value of the put option to be approximately $267 million. In determining the fair value of the put option on these dates, the Company assumed a 40% probability of exercise by Visa Europe at some point in the future and an estimated long-term P/E differential at the time of exercise of 3.5x. While $267 million represents the fair value of the put option at December 31, 2010, it does not represent the actual purchase price that the Company may be required to pay if the option is exercised, which could be several billion dollars or more.

The put option is exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities on our consolidated balance sheet at December 31, 2010. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. The liability is classified within Level 3, as the assumed probability that Visa Europe will elect to exercise its option, the estimated differential between the P/E ratio and the P/E ratio applicable to Visa Europe on a standalone basis at the time of exercise, which the Company refers to as the “P/E differential”, and other inputs used to value the put option are unobservable. Changes in fair value are included in the Company’s consolidated statement of operations. There was no change to the fair value of the put option during the first quarter of fiscal 2011.

 

A separate roll-forward of Level 3 investments measured at fair value on a recurring basis is not presented because there was no change in fair value during the first quarter of fiscal 2011, and activity in the prior year comparable period was immaterial.

Assets measured at fair value on a nonrecurring basis. Certain financial assets are measured at fair value on a nonrecurring basis.

Non-marketable equity investments and investments accounted for under the equity method. Strategic investments are classified as Level 3 due to the absence of quoted market prices, inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management judgment. The Company applies fair value measurement to its strategic investments when certain events or circumstances indicate that these investments may be impaired. The Company revalues the investments using various assumptions including financial metrics and ratios of comparable public companies. There were no events or circumstances that indicated these investments may be impaired during the three months ended December 31, 2010. The Company recorded $1 million in impairment losses in the first quarter of fiscal 2010. At December 31, 2010 and September 30, 2010, non-marketable equity security investments and investments accounted for under the equity method totaled $113 million and $114 million, respectively, and were classified in other assets on the consolidated balance sheets.

Debt. The estimated fair value of the Company’s debt at December 31, 2010 and September 30, 2010 was $46 million and $50 million, respectively, based on credit ratings for similar notes.

Non-financial assets and liabilities. Long-lived assets such as goodwill, indefinite-lived intangible assets, finite-lived intangible assets, and property, equipment and technology are considered non-financial assets. The Company does not have any significant non-financial liabilities. Indefinite-lived intangible assets consist of Visa’s tradename, customer relationships, and Visa Europe franchise right acquired in the October 2007 reorganization. Finite-lived intangible assets consist of customer relationships, reseller relationships and tradenames acquired in the July 2010 acquisition of CyberSource. During the three months ended December 31, 2010, there was no indication that the Company’s long-lived assets were impaired.

Note 4—Pension and Other Postretirement Benefits

The Company sponsors various qualified and non-qualified defined benefit pension and other postretirement benefit plans which provide retirement and health benefits for substantially all employees residing in the United States.

The components of net periodic benefit cost are as follows:

 

		Pension Benefits								Other Postretirement Benefits
		Three Months Ended December 31,
		2010				2009				2010				2009
		(in millions)
Service cost		$	9			$	13			$	—			$	—
Interest cost			10				10				—				—
Expected return on assets			(14	)			(12	)			—				—
Amortization of:
Prior service credit			(2	)			(2	)			(1	)			—
Actuarial loss			5				6				—				—
Total net periodic benefit cost		$	8			$	15			$	(1	)		$	—

Note 5—Settlement Guarantee Management

The indemnification for settlement losses that Visa provides to its customers creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The term and amount of the indemnification are unlimited. The Company requires certain customers that do not meet its credit standards to post collateral. The Company’s estimated maximum settlement exposure was approximately $40.6 billion at December 31, 2010 compared to $38.7 billion at September 30, 2010. Of these amounts, approximately $3.2 billion at December 31, 2010 and $3.0 billion at September 30, 2010 were covered by collateral.

The Company maintained collateral as follows:

 

		December 31, 2010				September 30, 2010
		(in millions)
Cash equivalents		$	883			$	899
Pledged securities at market value			398				470
Letters of credit			815				869
Guarantees			1,986				1,803
Total		$	4,082			$	4,041

The total available collateral balances presented above are greater than the settlement exposure covered by customer collateral held due to instances in which the available collateral exceeds the total settlement exposure for certain financial institutions at each date presented.

The fair value of the settlement risk guarantee is estimated based on a proprietary probability-weighted model and was less than $1 million at December 31, 2010 and September 30, 2010. These amounts are reflected in accrued liabilities on the consolidated balance sheets.

Note 6—Stockholders’ Equity

The number of shares of each class and the number of shares of class A common stock outstanding on an as-converted basis at December 31, 2010 are as follows:

 

(in millions except conversion rate)		Shares Outstanding at December 31, 2010				Conversion Rate Into Class A Common Stock				Class A Common Stock As Converted(1)
Class A common stock			495				—				495
Class B common stock			245				0.5102				125
Class C common stock			93				1.0000				93
Total											713

 

(1)	Figures may not sum due to rounding. As-converted class A common stock count calculated based on whole numbers.

Share repurchases. During the three months ended December 31, 2010, the Company repurchased 15.3 million shares at an average price of $72.08 per share, for a total cost of $1.1 billion. Of the $1.1 billion, $800 million of share repurchase was executed through the October funding of the litigation escrow account previously established under the retrospective responsibility plan, and $306 million was executed through the repurchase of class A common stock in the open market.

Under the terms of the retrospective responsibility plan, when Visa funds the escrow account, the conversion rate of class B common stock retained by the Company’s U.S. financial institution clients and their affiliates is adjusted. The $800 million funding had the effect of a repurchase, on an as-converted basis, of 11.0 million shares of class A common stock, at approximately $72.74 per share. See Note 2—Retrospective Responsibility Plan.

The open market repurchases totaled 4.3 million shares at an average price of $70.40 per share, and were made under a $1.0 billion share repurchase plan, as authorized by the Company’s board of directors. The authorization will be in effect through September 30, 2011, and is subject to change at the discretion of the Company’s board of directors. At December 31, 2010, the share repurchase plan had remaining authorized funds of $694 million. Repurchased shares have been retired and constitute authorized but unissued shares.

Accelerated class C share release programs. Of the 96 million shares of class C common stock released from transfer restrictions under the 2009 and 2010 accelerated class C share release programs, 59 million shares have been converted from class C common stock to class A common stock upon the sale or transfer by the class C shareholders into the public market through December 31, 2010. Approximately 4 million of those shares were converted during the three months ended December 31, 2010.

On January 26, 2011, the Company’s board of directors approved a class C share release program in which the remaining 55 million shares of class C common stock, which were to be released from general transfer restrictions on March 25, 2011 under Visa’s amended and restated certificate of incorporation, will automatically become eligible for public sale on February 7, 2011. Class C shares sold in the public market upon release under this program will automatically convert to class A common stock. Shareholder application is not required. The release of these shares will not increase the number of outstanding shares on an as-converted basis, and there will be no dilutive effects to the outstanding class A common stock share count on an as-converted basis from these transactions.

Dividends. On January 26, 2011, the Company’s board of directors declared a dividend in the amount of $0.15 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis), which will be paid on March 1, 2011, to all holders of record of the Company’s class A, class B and class C common stock as of February 11, 2011. The Company paid $108 million in dividends during the three months ended December 31, 2010.

Note 7—Earnings Per Share

The following table presents basic and diluted earnings per share for the three months ended December 31, 2010.

 

		Basic Earnings Per Share																Diluted Earnings Per Share
		(in millions, except per share data)
		Income Allocation (A)				Weighted Average Shares Outstanding (B)				Earnings per Share  = (A)/(B)(1)								Income Allocation (A)				Weighted Average Shares Outstanding (B)				Earnings per Share = (A)/(B)(1)
Class A		$	609				494				$1.23							$	884				719	(2)			$1.23
Class B			156	(3)			245				0.63								155	(3)			245				0.63
Class C			116				94				1.23								116				94				1.23
Participating Securities(4)			3				Not presented				Not presented								3				Not presented				Not presented
Net income attributable to Visa Inc.		$	884

 

The following table presents basic and diluted earnings per share for the three months ended December 31, 2009.

 

		Basic Earnings Per Share																Diluted Earnings Per Share
		(in millions, except per share data)
		Income Allocation (A)				Weighted Average Shares Outstanding (B)				Earnings per Share = (A)/(B)(1)								Income Allocation (A)				Weighted Average Shares Outstanding (B)				Earnings per Share = (A)/(B)(1)
Class A		$	481				468				$1.03								$763				745	(2)			$1.02
Class B			147	(3)			245				0.60								146	(3)			245				0.60
Class C			133				129				1.03								132				129				1.02
Participating Securities(4)			2				Not presented				Not presented								2				Not presented				Not presented
Net income attributable to Visa Inc.		$	763

 

(1)	Earnings per share calculated based on whole numbers, not rounded numbers.

(2)	The computation of weighted average dilutive shares outstanding excluded stock options to purchase approximately 2 million and 1 million shares of common stock for the three months ended December 31, 2010 and 2009, respectively, because their effect would have been anti-dilutive.

(3)

Net income attributable to Visa is allocated to each class of common stock on an as-converted basis. On an as-converted basis and for the purpose of calculating net income attributable to Visa allocated to each class of common stock, the weighted average numbers of shares of class B common stock outstanding on an as-converted basis used in the allocation were 126 million and 143 million for the three months ended December 31, 2010 and 2009, respectively.

(4)	Participating securities are unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, such as the Company’s restricted stock awards and restricted stock units.

Note 8—Share-based Compensation

During the three months ended December 31, 2010, the Company granted 834,722 non-qualified stock options, or options, 920,961 restricted stock awards, or RSAs, and 275,459 restricted stock units, or RSUs, to Company employees and non-employee directors under the 2007 Equity Incentive Compensation Plan. The options had a weighted average exercise price per share of $79.80 and a weighted average grant-date fair value per share of $24.43. The RSAs and RSUs had weighted average grant-date fair values per share of $79.80. The Company accounted for these awards using the straight-line method of attribution for expensing equity awards with only service conditions. Compensation expense is recorded net of estimated forfeitures, which are adjusted as appropriate. Stock-based compensation expense recorded in the three months ended December 31, 2010 also included approximately $6 million related to the immediate recognition of expense on newly granted awards for employees who had reached eligible retirement age.

The Company also granted performance-based shares during the three months ended December 31, 2010. The ultimate number of performance shares to be earned will be between zero and 331,800, depending on 1) the Company’s achievement of specified cumulative net income performance targets, and 2) the Company’s total shareholder return ranked against that of other companies that are included in the Standard & Poor’s 500 Index (the market condition), during the approximate two-year period beginning October 7, 2010. These performance-based shares vest in two equal installments on November 30, 2012 and 2013, subject to earlier vesting in full under certain conditions. The grant-date fair value of the performance-based shares, incorporating the market condition using a Monte Carlo simulation model, is $85.05 per share. Compensation expense for the performance awards is initially estimated based on the target net income performance and is adjusted as appropriate throughout the performance period. For awards with performance conditions, the Company uses the graded-vesting method of expense attribution. Compensation expense is recorded net of estimated forfeitures, which are adjusted as appropriate.

Note 9—Commitments and Contingencies

In October 2010, one of the Company’s processing clients tendered a contractual indemnity claim to Visa relating to the Company’s customer call center operational practices. The Company has agreed to pay for losses that may be incurred by this processing client related to its claim, and the Company has established an accounting reserve for this claim and any related claims that might be made by this client in an amount that is not material to the Company’s consolidated financial statements. The reserve is an accounting estimate only, and there can be no assurances that the total losses sustained by the Company in connection with these claims, or any related claims asserted by others, will not become material.

Note 10—Income Taxes

The effective income tax rates were 36% and 37% for the three months ended December 31, 2010 and 2009, respectively. The rate for the three months ended December 31, 2010 was lower than the rate for the same period in the prior year primarily due to changes in the geographic mix of the Company’s global income and the benefit of tax incentives in Singapore, the Company’s largest operating hub outside the U.S.

During the three months ended December 31, 2010, total unrecognized tax benefits decreased by $41 million, primarily due to the effective settlement of uncertainties surrounding the timing of certain deductions. This effective settlement did not impact the effective tax rate. During the same period, total reserves for potential interest and penalties decreased by $13 million and $2 million, respectively, primarily due to the effective settlement of these uncertainties.

Note 11—Legal Matters

The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or amounts are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could in the future incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.

There was no significant provision activity for the three months ended December 31, 2010. The Company’s litigation provision was ($43) million for the three months ended December 31, 2009. The credit to the provision for the three months ended December 31, 2009, was primarily the result of a $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation. The litigation accrual is an estimate and is based on management’s understanding of its litigation profile, the specifics of each case, advice of counsel to the extent appropriate and management’s best estimate of incurred loss at the balance sheet date.

The following table summarizes the activity related to accrued litigation for both covered and other non-covered litigation for the three months ended December 31:

 

		2010				2009
		(in millions)
Balance at October 1		$	697			$	1,717
Provision for settled legal matters(1)			—				(43	)
Interest accretion on settled matters			4				10
Payments on settled matters(2)			(71	)			(755	)
Balance at December 31		$	630			$	929

 

(1)

The amount for the three months ended December 31, 2009, includes the reduction to the provision for the $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation. There was no other significant provision activity during the three months ended December 31, 2010.

(2)	The amount for the three months ended December 31, 2009, includes the Company’s October 2009 prepayment of its remaining $800 million in payment obligations in the Retailers’ litigation at a discounted amount of $682 million.

Covered Litigation

Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are subject to the retrospective responsibility plan, which the Company refers to as the covered litigation. See Note 2—Retrospective Responsibility Plan. An accrual for covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination the Company evaluates available information, including funding decisions made by the litigation committee. The accrual related to covered litigation could be either higher or lower than the escrow account balance. The Company did not record an additional accrual for covered litigation during fiscal 2011.

The Attridge Litigation. On January 12, 2011, the court issued an order reassigning the case to the Honorable John E. Munter.

Other Litigation

Merchant Acceptance Rules Investigations. On October 4, 2010, Visa announced a settlement with the United States Department of Justice and the attorneys general of seven states to resolve their investigations. On December 20, 2010, eleven additional states joined the settlement. As part of the settlement, Visa will allow U.S. merchants to offer discounts or other incentives to steer customers to a particular form of payment including to a specific network brand or to any card product, such as a “non-reward” Visa credit card. Visa’s rules always have allowed U.S. merchants to steer customers to other forms of payment and offer discounts to customers who choose to pay with cash, check or PIN debit. The new rules will expand U.S. merchants’ ability to discount for their preferred form of payment, though they will not be able to pick and choose amongst issuing banks. The settlement agreement does not address Visa’s rule prohibiting U.S. merchants from surcharging consumers. Apart from a partial reimbursement to some of the state attorneys general of their attorneys’ fees and expenses, there is no monetary obligation associated with the settlement. The reimbursement amount is not considered material to the consolidated financial statements.

 

The consent decree setting forth the terms of settlement is subject to court approval. Visa will make formal rule changes after the court enters a final judgment following a public comment period, but will refrain from enforcing its current discounting rules in the interim.

Venezuela Interchange Proceedings. On December 29, 2010, the Superintendencia para la Promoción y Protección de la Libre Competencia (“Competition Authority”) of Venezuela issued a decision, subject to appeal, that it had found no violation of Venezuelan competition law by Visa or any of the other defendants.

European Interchange Proceedings. After public consultation, on December 8, 2010, the European Commission concluded that the proposed agreement with Visa Europe addressed its competition concerns, made the agreement legally binding upon Visa Europe, and closed its investigation with regard to interchange fees for debit card transactions. For credit card and deferred debit card payments, the European Commission announced that it will “continue to investigate.” Meanwhile, it has issued further requests for information to Visa Europe, Visa Inc. and Visa International and commissioned a cost-of-cash study. Pursuant to existing agreements among the parties, Visa Europe is obligated to indemnify Visa International and Visa Inc. in connection with this proceeding, including payment of any fines that may be imposed.

Canadian Competition Bureau Proceedings. On December 15, 2010, the Commissioner of Competition filed a Notice of Application against Visa Canada Corporation and MasterCard International. The proceeding challenges certain Visa policies regarding merchant acceptance practices, including Visa’s “no-surcharge” and “honour all cards” policies. Visa Canada filed a Response to the Notice of Application on January 31, 2011.

CyberSource securities litigation. The court held a final approval hearing on January 14, 2011 and issued an order and final judgment approving the settlement on January 21, 2011. The settlement amount is not considered material to the Company’s consolidated financial statements.

Data pass litigation. On November 19, 2010, the plaintiff filed an amended complaint, adding GameStop Corporation as a defendant, asserting additional claims against Visa under federal and state consumer protection statutes and state common law, and seeking certification of a class of persons and entities whose credit card or debit card data was improperly accessed by Webloyalty.com since October 1, 2008. On December 23, 2010, Webloyalty.com, GameStop, and Visa each filed motions to dismiss the amended complaint. Webloyalty.com also has asked the Judicial Panel on Multi-district Litigation to consolidate with this case, for pretrial proceedings, a case pending in federal district court in California in which Webloyalty.com and Movietickets.com (but not Visa) are named as defendants.

Intellectual Property Litigation

Restricted Spending Solutions, LLC—Prepaid and Commercial Cards. On December 22, 2010, Visa moved to recover its attorneys’ fees incurred in the litigation on grounds that, at the outset of the case, plaintiff improperly refused to acknowledge the invalidity of its patent when presented with Visa’s evidence. On January 27, 2011, plaintiff and Visa filed a stipulation of settlement, whereby plaintiff agreed to withdraw its appeal and pay Visa’s litigation costs in exchange for Visa’s withdrawal of its fee petition.

Note 12—Subsequent Events

On January 24, 2011, the Company’s wholly-owned subsidiary, Visa International, sold its 10 percent stake in Visa Vale issuer Companhia Brasileira de Solucoes e Servicos (“CBSS”) to Banco do Brasil and Bradesco. Visa’s gross proceeds from the sale were U.S. $103 million. The sale is subject to regulatory approval by Brazil’s Conselho Administrativo de Defesa Economica. Prior to the sale, the Company accounted for the investment under the cost method with a book value of approximately $17 million, reflected in other non-current assets on its consolidated balance sheet. Upon regulatory approval, the Company will recognize an estimated pre-tax gain, net of transaction costs, of approximately $85 million in investment income, net on the Company’s consolidated statement of operations. The amount of the gain net of tax is estimated to be approximately $44 million.

Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of cash and checks. Visa and its wholly-owned consolidated subsidiaries, including Visa U.S.A. Inc. (“Visa U.S.A.”), Visa International Service Association (“Visa International”), Visa Worldwide Pte. Limited (“VWPL”), Visa Canada Corporation (“Visa Canada”), Inovant LLC (“Inovant”) and CyberSource Corporation (“CyberSource”), operate the world’s largest retail electronic payments network. The Company provides financial institutions with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitates global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Company does not issue cards, set fees, or determine the interest rates consumers will be charged on Visa-branded cards, which are the independent responsibility of the Company’s issuing clients.

Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates its majority-owned and controlled entities, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. The Company’s VIEs have not been material to its consolidated financial statements as of and for the periods presented. Non-controlling interests are reported as a component of equity. All significant intercompany accounts and transactions are eliminated in consolidation. Beginning with this fiscal quarter, equity in earnings of unconsolidated affiliates has been combined with other in the other income (expense) line on the consolidated statements of operations. Prior period information has also been reclassified to conform to current period presentation. The Company has also updated selected captions within the consolidated financial statements to better reflect underlying activities; however, the grouping of underlying financial accounts remains unchanged.

The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by GAAP. Reference should be made to the Visa Inc. Annual Report on Form 10-K for the year ended September 30, 2010 for additional disclosures, including a summary of the Company’s significant accounting policies.

The Company consolidates its majority-owned and controlled entities, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. The Company’s VIEs have not been material to its consolidated financial statements as of and for the periods presented. Non-controlling interests are reported as a component of equity. All significant intercompany accounts and transactions are eliminated in consolidation.

Recently issued accounting pronouncements. In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional information in the roll-forward of Level 3 assets and liabilities, including the presentation of purchases, sales, issuances and settlements on a gross basis. This ASU impacts disclosures only. The Company will adopt this guidance in the second quarter of fiscal 2011. See Note 3—Fair Value Measurements.

The following table sets forth the changes in the escrow account during the three months ended December 31, 2010.

 

		(in millions)
Balance at October 1, 2010		$	1,936
Additional funding under the plan			800
American Express settlement payments			(70	)
Balance at December 31, 2010		$	2,666

Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

		Fair Value Measurements Using Inputs Considered as
		Level 1								Level 2								Level 3
		December 31 2010				September 30 2010				December 31 2010				September 30 2010				December 31 2010				September 30 2010
		(in millions)
Assets
Cash equivalents and restricted cash
Money market funds and time deposits		$	5,822			$	5,448
Investment securities
U.S. government-sponsored agency debt securities										$	132			$	135
Equity securities			69				60
Auction rate securities																		$	13			$	13
Prepaid and other current assets
Foreign exchange derivative instruments											4				5
		$	5,891			$	5,508			$	136			$	140			$	13			$	13
Liabilities
Accrued liabilities
Visa Europe put option																		$	267			$	267
Foreign exchange derivative instruments										$	56			$	56

The components of net periodic benefit cost are as follows:

 

		Pension Benefits								Other Postretirement Benefits
		Three Months Ended December 31,
		2010				2009				2010				2009
		(in millions)
Service cost		$	9			$	13			$	—			$	—
Interest cost			10				10				—				—
Expected return on assets			(14	)			(12	)			—				—
Amortization of:
Prior service credit			(2	)			(2	)			(1	)			—
Actuarial loss			5				6				—				—
Total net periodic benefit cost		$	8			$	15			$	(1	)		$	—

The Company maintained collateral as follows:

 

		December 31, 2010				September 30, 2010
		(in millions)
Cash equivalents		$	883			$	899
Pledged securities at market value			398				470
Letters of credit			815				869
Guarantees			1,986				1,803
Total		$	4,082			$	4,041

The number of shares of each class and the number of shares of class A common stock outstanding on an as-converted basis at December 31, 2010 are as follows:

 

(in millions except conversion rate)		Shares Outstanding at December 31, 2010				Conversion Rate Into Class A Common Stock				Class A Common Stock As Converted(1)
Class A common stock			495				—				495
Class B common stock			245				0.5102				125
Class C common stock			93				1.0000				93
Total											713

 

(1)	Figures may not sum due to rounding. As-converted class A common stock count calculated based on whole numbers.