SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS

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 to provide funding instructions to financial institutions that in turn fund the merchants. We process funds settlement under two models, a sponsorship model and a direct membership model.

Under the sponsorship model, we are designated as a Merchant Service Provider by MasterCard and an ISO by Visa, which means that member clearing banks ("Member") sponsor us and require our adherence to the standards of the networks. In certain markets, we have sponsorship or depository and clearing agreements with financial institution sponsors. These agreements allow us to route transactions under the Members' control and identification numbers to clear credit card transactions through MasterCard and Visa. In this model, 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.

Under the direct membership model, we are direct members in various payment networks, allowing us to process and fund transactions without third-party sponsorship. In this model, we route and clear transactions directly through the card brand’s network and are not restricted from performing funds settlement. Otherwise, we process these transactions similarly to how we process transactions in the sponsorship model. We are required to adhere to the standards of the various networks in which we are direct members. We maintain relationships with financial institutions, which may also serve as our member sponsors for other card brands or in other markets, to assist with funds settlement.

Timing differences, interchange expense, Merchant Reserves and exception items cause differences between the amount received 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 in which merchants have been funded 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 direct 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 funding from the network has been received by the Members but merchants have not yet been funded.


•	Liability to merchants - our liability to merchants for transactions that have been processed but not yet funded where we are a direct 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. In the sponsorship model, we apply 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 the direct membership model, offsetting is not applied, and the individual components are presented as an asset or obligation based on the nature of that component.

As of May 31, 2014 and 2013, settlement processing assets and obligations consisted of the following:



	May 31, 2014			May 31, 2013
	(in thousands)
Settlement processing assets:
Interchange reimbursement	$	217,806		$	70,348
Receivable from Members	206,322			117,404
Receivable from networks	430,763			126,136
Exception items	5,573			2,725
Merchant Reserves	(79,547		)	(57,409		)
	$	780,917		$	259,204

Settlement processing obligations:
Interchange reimbursement	$	54,459		$	200,319
Liability to Members	(5,490		)	(27,717		)
Liability to merchants	(407,651		)	(120,875		)
Exception items	6,313			12,308
Merchant Reserves	(96,622		)	(223,314		)
Reserve for operating losses	(1,725		)	(2,318		)
Reserves for sales allowances	(601		)	(961		)
	$	(451,317	)	$	(162,558	)