Derivatives | 9 Months Ended |
Sep. 30, 2014 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
Derivatives | ' |
Derivatives |
The Company is exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the euro, and to a lesser degree the Canadian dollar, British pound, Australian dollar, Swiss franc, and other currencies, related to forecasted money transfer revenues and on money transfer settlement assets and obligations. The Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency Business Solutions payments operations. Additionally, the Company is exposed to interest rate risk related to changes in market rates both prior to and subsequent to the issuance of debt. The Company uses derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency Business Solutions payments by writing derivatives to customers. |
The Company executes derivatives with established financial institutions, with the substantial majority of these financial institutions having credit ratings of "A-" or better from a major credit rating agency. The Company also writes Business Solutions derivatives mostly with small and medium size enterprises. The primary credit risk inherent in derivative agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review of the credit risk of these counterparties at the inception of the contract and on an ongoing basis. The Company also monitors the concentration of its contracts with any individual counterparty. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements, but takes action when doubt arises about the counterparties' ability to perform. These actions may include requiring Business Solutions customers to post or increase collateral and for all counterparties possible termination of the related contracts. The Company's hedged foreign currency exposures are in liquid currencies; consequently, there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future. |
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Foreign Currency — Consumer-to-Consumer |
The Company's policy is to use longer-term foreign currency forward contracts, with maturities of up to 36 months at inception and a targeted weighted-average maturity of approximately one year, to mitigate some of the risk that changes in foreign currency exchange rates compared to the United States dollar could have on forecasted revenues denominated in other currencies related to its business. As of September 30, 2014, the Company's longer-term foreign currency forward contracts had maturities of a maximum of 24 months with a weighted-average maturity of approximately one year. These contracts are accounted for as cash flow hedges of forecasted revenue, with effectiveness assessed based on changes in the spot rate of the affected currencies during the period of designation. Accordingly, all changes in the fair value of the hedges not considered effective or portions of the hedge that are excluded from the measure of effectiveness are recognized immediately in "Derivative gains/(losses), net" within the Company's Condensed Consolidated Statements of Income. |
The Company also uses short duration foreign currency forward contracts, generally with maturities from a few days up to approximately one month, to offset foreign exchange rate fluctuations on settlement assets and obligations between initiation and settlement. In addition, forward contracts, typically with maturities of less than one year at inception, are utilized to offset foreign exchange rate fluctuations on certain foreign currency denominated cash and other asset positions. None of these contracts are designated as accounting hedges. |
The aggregate equivalent United States dollar notional amounts of foreign currency forward contracts as of September 30, 2014 were as follows (in millions): |
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Contracts designated as hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Euro | $ | 397.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Canadian dollar | 118.4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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British pound | 78.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Australian dollar | 53.4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Swiss franc | 44.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Other | 88.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Contracts not designated as hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Euro | $ | 301.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Canadian dollar | 61.4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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British pound | 60.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Australian dollar | 29.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Other (a) | 162.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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____________________ |
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(a) | Comprised of exposures to 16 different currencies. None of these individual currency exposures is greater than $20 million. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Foreign Currency — Business Solutions |
The Company writes derivatives, primarily foreign currency forward contracts and option contracts, mostly with small and medium size enterprises and derives a currency spread from this activity as part of its Business Solutions operations. The Company aggregates its Business Solutions payments foreign currency exposures arising from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties. The derivatives written are part of the broader portfolio of foreign currency positions arising from its cross-currency Business Solutions payments operations, which primarily include spot exchanges of currency in addition to forwards and options. Foreign exchange revenues from the total portfolio of positions were $94.4 million and $92.2 million for the three months ended September 30, 2014 and 2013, respectively, and $272.5 million and $264.9 million for the nine months ended September 30, 2014 and 2013, respectively. None of the derivative contracts used in Business Solutions operations are designated as accounting hedges. The duration of these derivative contracts at inception is generally less than one year. |
The aggregate equivalent United States dollar notional amounts of foreign currency derivative customer contracts held by the Company in its Business Solutions operations as of September 30, 2014 were approximately $6 billion. The significant majority of customer contracts are written in major currencies such as the Canadian dollar, euro, Australian dollar, and British pound. |
Interest Rate Hedging — Corporate |
The Company utilizes interest rate swaps to effectively change the interest rate payments on a portion of its notes from fixed-rate payments to short-term LIBOR-based variable rate payments in order to manage its overall exposure to interest rates. The Company designates these derivatives as fair value hedges. The change in fair value of the interest rate swaps is offset by a change in the carrying value of the debt being hedged within "Borrowings" in the Condensed Consolidated Balance Sheets and "Interest expense" in the Condensed Consolidated Statements of Income has been adjusted to include the effects of interest accrued on the swaps. |
The Company, at times, utilizes derivatives to hedge the forecasted issuance of fixed-rate debt. These derivatives are designated as cash flow hedges of the variability in the fixed-rate coupon of the debt expected to be issued. The effective portion of the change in fair value of the derivatives is recorded in "Accumulated other comprehensive loss" in the Condensed Consolidated Balance Sheets. |
The Company held interest rate swaps in an aggregate notional amount of $1,225.0 million and $1,550.0 million as of September 30, 2014 and December 31, 2013, respectively. Of this aggregate notional amount held at September 30, 2014, $250.0 million related to notes due in 2015, $500.0 million related to notes due in 2017, $300.0 million related to notes due in 2018, and $175.0 million related to notes due in 2020. |
Balance Sheet |
The following table summarizes the fair value of derivatives reported in the Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (in millions): |
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| Derivative Assets | | Derivative Liabilities | | | | | | | | | | | | | |
| | | Fair Value | | | | Fair Value | | | | | | | | | | | | | |
| Balance Sheet | | September 30, | | December 31, | | Balance Sheet | | September 30, | | December 31, | | | | | | | | | | | | | |
Location | 2014 | 2013 | Location | 2014 | 2013 | | | | | | | | | | | | | |
Derivatives — hedges: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate fair value hedges — Corporate | Other assets | | $ | 2.8 | | | $ | 11.4 | | | Other liabilities | | $ | 5.9 | | | $ | 7.8 | | | | | | | | | | | | | | |
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Foreign currency cash flow hedges — Consumer-to-Consumer | Other assets | | 41.3 | | | 11.1 | | | Other liabilities | | 4 | | | 27.7 | | | | | | | | | | | | | | |
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Total | | | $ | 44.1 | | | $ | 22.5 | | | | | $ | 9.9 | | | $ | 35.5 | | | | | | | | | | | | | | |
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Derivatives — undesignated: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency — Business Solutions | Other assets | | $ | 284 | | | $ | 201.2 | | | Other liabilities | | $ | 248.9 | | | $ | 186.2 | | | | | | | | | | | | | | |
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Foreign currency — Consumer-to-Consumer | Other assets | | 5.6 | | | 0.6 | | | Other liabilities | | 1.7 | | | 1.7 | | | | | | | | | | | | | | |
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Total | | | $ | 289.6 | | | $ | 201.8 | | | | | $ | 250.6 | | | $ | 187.9 | | | | | | | | | | | | | | |
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Total derivatives | | | $ | 333.7 | | | $ | 224.3 | | | | | $ | 260.5 | | | $ | 223.4 | | | | | | | | | | | | | | |
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The fair values of derivative assets and liabilities associated with contracts that include netting language that the Company believes to be enforceable have been netted in the following tables to present the Company's net exposure with these counterparties. The Company's rights under these agreements generally allow for transactions to be settled on a net basis, including upon early termination, which could occur upon the counterparty's default, a change in control, or other conditions. |
In addition, certain of the Company's other agreements include netting provisions, the enforceability of which may vary from jurisdiction to jurisdiction and depending on the circumstances. Due to the uncertainty related to the enforceability of these provisions, the derivative balances associated with these agreements are included within "Derivatives that are not or may not be subject to master netting arrangement or similar agreement" in the following tables. In certain circumstances, the Company may require its Business Solutions customers to maintain collateral balances which may mitigate the risk associated with potential customer defaults. |
The following tables summarize the gross and net fair value of derivative assets and liabilities as of September 30, 2014 and December 31, 2013 (in millions): |
Offsetting of Derivative Assets |
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September 30, 2014 | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts Presented in the Condensed Consolidated Balance Sheets | | Derivatives Not Offset in the Condensed Consolidated Balance Sheets | | Net Amounts | | | | | | | | | | | | |
Derivatives subject to a master netting arrangement or similar agreement | | $ | 182.3 | | | $ | — | | | $ | 182.3 | | | $ | (105.2 | ) | | $ | 77.1 | | | | | | | | | | | | | |
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Derivatives that are not or may not be subject to master netting arrangement or similar agreement | | 151.4 | | | | | | | | | | | | | | | | | | | | | |
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Total | | $ | 333.7 | | | | | | | | | | | | | | | | | | | | | |
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December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | |
Derivatives subject to a master netting arrangement or similar agreement | | $ | 118.4 | | | $ | — | | | $ | 118.4 | | | $ | (93.3 | ) | | $ | 25.1 | | | | | | | | | | | | | |
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Derivatives that are not or may not be subject to master netting arrangement or similar agreement | | 105.9 | | | | | | | | | | | | | | | | | | | | | |
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Total | | $ | 224.3 | | | | | | | | | | | | | | | | | | | | | |
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Offsetting of Derivative Liabilities |
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September 30, 2014 | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts Presented in the Condensed Consolidated Balance Sheets | | Derivatives Not Offset in the Condensed Consolidated Balance Sheets | | Net Amounts | | | | | | | | | | | | |
Derivatives subject to a master netting arrangement or similar agreement | | $ | 134.3 | | | $ | — | | | $ | 134.3 | | | $ | (105.2 | ) | | $ | 29.1 | | | | | | | | | | | | | |
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Derivatives that are not or may not be subject to master netting arrangement or similar agreement | | 126.2 | | | | | | | | | | | | | | | | | | | | | |
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Total | | $ | 260.5 | | | | | | | | | | | | | | | | | | | | | |
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December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | |
Derivatives subject to a master netting arrangement or similar agreement | | $ | 146.1 | | | $ | — | | | $ | 146.1 | | | $ | (93.3 | ) | | $ | 52.8 | | | | | | | | | | | | | |
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Derivatives that are not or may not be subject to master netting arrangement or similar agreement | | 77.3 | | | | | | | | | | | | | | | | | | | | | |
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Total | | $ | 223.4 | | | | | | | | | | | | | | | | | | | | | |
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Income Statement |
The following tables summarize the location and amount of gains and losses of derivatives in the Condensed Consolidated Statements of Income segregated by designated, qualifying hedging instruments and those that are not, for the three and nine months ended September 30, 2014 and 2013: |
Fair Value Hedges |
The following table presents the location and amount of gains/(losses) from fair value hedges for the three months ended September 30, 2014 and 2013 (in millions): |
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| | Gain/(Loss) Recognized in Income on Derivatives | | | | Gain/(Loss) Recognized in Income on Related Hedged Item (a) | | Gain/(Loss) Recognized in Income on |
Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| | Income | | Amount | | | | Income | | Amount | | Income | | Amount |
Statement | Statement | Statement Location |
Derivatives | | Location | | September 30, | | September 30, | | Hedged Item | | Location | | September 30, | | September 30, | | | | September 30, 2014 | | September 30, 2013 |
| 2014 | 2013 | | 2014 | 2013 | |
Interest rate contracts | | Interest expense | | $ | (2.6 | ) | | $ | 3.1 | | | Fixed-rate debt | | Interest expense | | $ | 5.6 | | | $ | (0.6 | ) | | Interest expense | | $ | (0.1 | ) | | $ | — | |
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Total gain/ (loss) | | | | $ | (2.6 | ) | | $ | 3.1 | | | | | | | $ | 5.6 | | | $ | (0.6 | ) | | | | $ | (0.1 | ) | | $ | — | |
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The following table presents the location and amount of gains/(losses) from fair value hedges for the nine months ended September 30, 2014 and 2013 (in millions): |
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| | Gain/(Loss) Recognized in Income on Derivatives | | | | Gain/(Loss) Recognized in Income on Related Hedged Item (a) | | Gain/(Loss) Recognized in Income on |
Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| | Income | | Amount | | | | Income | | Amount | | Income | | Amount |
Statement | Statement | Statement Location |
Derivatives | | Location | | September 30, | | September 30, | | Hedged Item | | Location | | September 30, | | September 30, | | | | September 30, 2014 | | September 30, 2013 |
| 2014 | 2013 | | 2014 | 2013 | |
Interest rate contracts | | Interest expense | | $ | 8.2 | | | $ | (5.0 | ) | | Fixed-rate debt | | Interest expense | | $ | 1.1 | | | $ | 12.9 | | | Interest expense | | $ | (0.4 | ) | | $ | — | |
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Total gain/ (loss) | | | | $ | 8.2 | | | $ | (5.0 | ) | | | | | | $ | 1.1 | | | $ | 12.9 | | | | | $ | (0.4 | ) | | $ | — | |
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Cash Flow Hedges |
The following table presents the location and amount of gains/(losses) from cash flow hedges for the three months ended September 30, 2014 and 2013 (in millions): |
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| | Gain/(Loss) Recognized | | Gain/(Loss) Reclassified from | | Gain/(Loss) Recognized in Income on | | | | |
in OCI on Derivatives | Accumulated OCI into Income | Derivatives (Ineffective Portion and Amount | | | | |
(Effective Portion) | (Effective Portion) | Excluded from Effectiveness Testing) (b) | | | | |
| | Amount | | Income | | Amount | | Income | | Amount | | | | |
Derivatives | | September 30, 2014 | | September 30, 2013 | | Statement Location | | September 30, 2014 | | September 30, 2013 | | Statement Location | | September 30, 2014 | | September 30, 2013 | | | | |
Foreign currency contracts | | $ | 50.9 | | | $ | (27.0 | ) | | Revenue | | $ | (3.1 | ) | | $ | 4.2 | | | Derivative gains/(losses), net | | $ | (1.8 | ) | | $ | 0.3 | | | | | |
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Interest rate contracts (c) | | — | | | — | | | Interest expense | | (0.9 | ) | | (0.9 | ) | | Interest expense | | — | | | — | | | | | |
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Total gain/(loss) | | $ | 50.9 | | | $ | (27.0 | ) | | | | $ | (4.0 | ) | | $ | 3.3 | | | | | $ | (1.8 | ) | | $ | 0.3 | | | | | |
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The following table presents the location and amount of gains/(losses) from cash flow hedges for the nine months ended September 30, 2014 and 2013 (in millions): |
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| | Gain/(Loss) Recognized | | Gain/(Loss) Reclassified from | | Gain/(Loss) Recognized in Income on | | | | |
in OCI on Derivatives | Accumulated OCI into Income | Derivatives (Ineffective Portion and Amount | | | | |
(Effective Portion) | (Effective Portion) | Excluded from Effectiveness Testing) (b) | | | | |
| | Amount | | Income | | Amount | | Income | | Amount | | | | |
Derivatives | | September 30, 2014 | | September 30, 2013 | | Statement Location | | September 30, 2014 | | September 30, 2013 | | Statement Location | | September 30, 2014 | | September 30, 2013 | | | | |
Foreign currency contracts | | $ | 49.5 | | | $ | 1.2 | | | Revenue | | $ | (7.1 | ) | | $ | 10.4 | | | Derivative gains/(losses), net | | $ | (3.4 | ) | | $ | — | | | | | |
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Interest rate contracts (c) | | — | | | — | | | Interest expense | | (2.7 | ) | | (2.7 | ) | | Interest expense | | — | | | — | | | | | |
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Total gain/(loss) | | $ | 49.5 | | | $ | 1.2 | | | | | $ | (9.8 | ) | | $ | 7.7 | | | | | $ | (3.4 | ) | | $ | — | | | | | |
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Undesignated Hedges |
The following table presents the location and amount of net gains/(losses) from undesignated hedges for the three and nine months ended September 30, 2014 and 2013 (in millions): |
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| Gain/(Loss) Recognized in Income on Derivatives (d) | | | | | | | | | | | | | | | |
| Income Statement Location | | Amount | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended | | | | | | | | | | | | | | | |
September 30, | September 30, | | | | | | | | | | | | | | | |
Derivatives | | | 2014 | | 2013 | | 2014 | | 2013 | | | | | | | | | | | | | | | |
Foreign currency contracts (e) | Selling, general and administrative | | $ | 28.1 | | | $ | (15.3 | ) | | $ | 27.3 | | | $ | (1.9 | ) | | | | | | | | | | | | | | | |
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Foreign currency contracts (f) | Derivative gains/(losses), net | | 2.3 | | | (1.2 | ) | | 1.3 | | | (0.6 | ) | | | | | | | | | | | | | | | |
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Total gain/(loss) | | | $ | 30.4 | | | $ | (16.5 | ) | | $ | 28.6 | | | $ | (2.5 | ) | | | | | | | | | | | | | | | |
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____________________ |
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(a) | The gain/(loss) of $5.6 million and $(0.6) million in the three months ended September 30, 2014 and 2013, respectively, was comprised of a gain/(loss) in value on the debt of $2.7 million and $(3.1) million, respectively, and amortization of hedge accounting adjustments of $2.9 million and $2.5 million, respectively. The gain of $1.1 million and $12.9 million in the nine months ended September 30, 2014 and 2013, respectively, was comprised of a gain/(loss) in value on the debt of $(7.8) million and $5.0 million, respectively, and amortization of hedge accounting adjustments of $8.9 million and $7.9 million, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(b) | The portion of the change in fair value of a derivative excluded from the effectiveness assessment for foreign currency forward contracts designated as cash flow hedges represents the difference between changes in forward rates and spot rates. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(c) | The Company uses derivatives to hedge the forecasted issuance of fixed-rate debt and records the effective portion of the derivative's fair value in "Accumulated other comprehensive loss" in the Condensed Consolidated Balance Sheets. These amounts are reclassified to "Interest expense" in the Condensed Consolidated Statements of Income over the life of the related notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(d) | The Company uses foreign currency forward and option contracts as part of its Business Solutions payments operations. These derivative contracts are excluded from this table as they are managed as part of a broader currency portfolio that includes non-derivative currency exposures. The gains and losses on these derivatives are included as part of the broader disclosure of portfolio revenue for this business discussed above. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(e) | The Company uses foreign currency forward contracts to offset foreign exchange rate fluctuations on settlement assets and obligations as well as certain foreign currency denominated positions. Foreign exchange gains/(losses) on settlement assets and obligations and cash balances, not including amounts related to derivatives activity as displayed above and included in "Selling, general and administrative" in the Condensed Consolidated Statements of Income, were $(24.5) million and $9.7 million for the three months ended September 30, 2014 and 2013, respectively, and $(29.5) million and $(2.3) million for the nine months ended September 30, 2014 and 2013, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(f) | The derivative contracts used in the Company's revenue hedging program are not designated as hedges in the final month of the contract. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
An accumulated other comprehensive pre-tax gain of $26.5 million related to the foreign currency forward contracts is expected to be reclassified into revenue within the next 12 months as of September 30, 2014. Approximately $3.6 million of net losses on the forecasted debt issuance hedges are expected to be recognized in "Interest expense" in the Condensed Consolidated Statements of Income within the next 12 months as of September 30, 2014. No amounts have been reclassified into earnings as a result of the underlying transaction being considered probable of not occurring within the specified time period. |