SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS

We are designated as a Merchant Service Provider by MasterCard and an Independent Sales Organization by Visa. These designations are dependent upon member clearing banks ("Member") sponsoring us and our adherence to the standards of the networks. We have primary financial institution sponsors in the various markets where we facilitate payment transactions with whom we have sponsorship or depository and clearing agreements. These agreements allow us to route transactions under the member banks' control and identification numbers to clear credit card transactions through MasterCard and Visa. In certain markets, we are members in various payment networks, allowing us to process and fund transactions without third-party sponsorship.

Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. For transactions processed on our systems, we use our internal network telecommunication infrastructure to provide funding instructions to the Members who in turn fund the merchants. In markets where we utilize third-party sponsorship, the standards of the card networks restrict us from performing funds settlement or accessing merchant settlement funds, and, instead, require that these funds be in the possession of the Member until the merchant is funded. However, in practice and in accordance with the terms of our sponsorship agreements with our Members, we generally follow a net settlement process whereby, if the incoming amount from the card networks precedes the Member's funding obligation to the merchant, we temporarily hold the surplus on behalf of the Member in our account at the Member bank and record a corresponding liability. Conversely, if the Member's funding obligation to the merchant precedes the incoming amount from the card networks, the amount of the Member's net receivable position is either subsequently advanced to the Member by us or the Member satisfies this obligation with its own funds. If the Member uses its own funds, the Member may assess funding cost, which is included in interest and other expense on the accompanying consolidated statements of income. Each participant in the transaction process receives compensation for its services.

Timing differences, interchange expense, Merchant Reserves and exception items cause differences between the amount the Member receives from the card networks and the amount funded to the merchants. These intermediary balances arising in our settlement process for direct merchants are reflected as settlement processing assets and obligations on our balance sheet. Settlement processing assets and obligations consist of the components outlined below:


•	Interchange reimbursement - our receivable from merchants for the portion of the discount fee related to reimbursement of the interchange expense.


•	Receivable from Members - our receivable from the Members for transactions we have funded merchants on behalf of the Members in advance of receipt of card association funding.


•	Receivable from networks - our receivable from the card networks for transactions processed on behalf of merchants where we are a Member of that particular network.


•	Exception items - items such as customer chargeback amounts received from merchants.


•	Merchant Reserves - reserves held to minimize contingent liabilities associated with losses that may occur under the merchant agreement.


•	Liability to Members - our liability to the Members for transactions for which we have received funding from the Members but have not funded merchants on behalf of the Members. Also cases in which the Member uses its own funds to satisfy a funding obligation to merchants that precedes the incoming amount from the card network.


•	Liability to merchants - our liability to merchants for transactions that have been processed but not yet funded where we are a Member of that particular network.


•	Reserve for operating losses - see Note 1 - Summary of Significant Accounting Policies.


•	Reserve for sales allowances.

In accordance with ASC 210-20, Offsetting, we apply offsetting to our settlement processing assets and obligations where legal right of set-off exists. We apply this offsetting by Member because the Member is ultimately responsible for funds settlement. With these Member transactions, we do not have access to the gross proceeds of the receivable from the networks and, thus, do not have a direct obligation or any ability to satisfy the payable that funds the merchant. In these situations, we apply offsetting to determine a net position with each member sponsor. If that net position is an asset, we reflect the net amount in settlement processing assets on our balance sheet and we present the individual components in the settlement processing assets table below. If that net position is a liability, we reflect the net amount in settlement processing obligations on our consolidated balance sheet and we present the individual components in the settlement processing obligations table below. In markets where we have direct membership, offsetting is not applied, and the individual components are presented as an asset or obligation based on the nature of that component.



	February 28, 2014			May 31, 2013
	(in thousands)
Settlement processing assets:
Interchange reimbursement	$	184,195		$	70,348
Receivable from Members	57,670			117,404
Receivable from networks	114,822			126,136
Exception items	8,757			2,725
Merchant Reserves	(82,030		)	(57,409		)
	$	283,414		$	259,204

Settlement processing obligations:
Interchange reimbursement	$	43,676		$	200,319
Receivable from (liability to) Members	19,229			(27,717		)
Liability to merchants	(139,820		)	(120,875		)
Exception items	4,245			12,308
Merchant Reserves	(95,717		)	(223,314		)
Reserve for operating losses	(2,104		)	(2,318		)
Reserves for sales allowances	(1,072		)	(961		)
	$	(171,563	)	$	(162,558	)