Investments and Fair Value Measurements

12 Months Ended

Sep. 30, 2011

Investments and Fair Value Measurements

Note 4—Fair Value Measurements and Investments

Fair Value Measurements

The Company measures certain assets and liabilities at fair value. See Note 1—Summary of Significant Accounting Policies.

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

	Fair Value Measurements at September 30 Using Inputs Considered as
	Level 1				Level 2				Level 3
	2011		2010		2011		2010		2011		2010
	(in millions)
Assets
Cash equivalents and restricted cash
Money market funds and time deposits	$	4,225	$	5,448
U.S. government-sponsored debt securities					$	175
Investment securities
U.S. government-sponsored debt securities						1,568	$	135
U.S. Treasury securities		350		—
Equity securities		57		60
Auction rate securities									$	7	$	13
Prepaid and other current assets
Foreign exchange derivative instruments						30		5
	$	4,632	$	5,508	$	1,773	$	140	$	7	$	13
Liabilities
Accrued liabilities
Visa Europe put option									$	145	$	267
Earn-out related to PlaySpan acquisition										24		—
Foreign exchange derivative instruments					$	7	$	56

There were no transfers between Level 1 and Level 2 assets during fiscal 2011.

Level 1 assets measured at fair value on a recurring basis. Cash equivalents (money market funds), mutual fund equity securities, U.S. Treasury securities and exchange-traded equity securities are classified as Level 1 within the fair value hierarchy, as fair value is based on quoted prices in active markets.

Level 2 assets and liabilities measured at fair value on a recurring basis. U.S. government-sponsored debt securities and foreign exchange derivative instruments are classified as Level 2 within the fair value hierarchy. 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 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. During fiscal 2011, one of the auction rate securities was called. As a result, the Company received proceeds of $10 million and recorded a pre-tax gain of $4 million in investment income, net, on the consolidated statements of operations. There was no substantive change to the valuation techniques and related inputs used to measure fair value during fiscal 2011.

Visa Europe put option agreement. The Company granted Visa Europe a perpetual put option which is carried at fair value in accrued liabilities on the consolidated balance sheets. The fair value of the put option at September 30, 2011 and 2010, was $145 million and $267 million, respectively. Changes in the fair value are recorded as non-cash, non-operating income in the Company’s consolidated statements of operations. See Note 2—Visa Europe. The liability is classified within Level 3 as the assumed probability that Visa Europe will elect to exercise its option and the estimated P/E differential are among several unobservable inputs used to value the put option.

Earn-out related to PlaySpan acquisition. In connection with the PlaySpan acquisition in the second quarter of fiscal 2011, the Company recorded a liability of $24 million to reflect the fair value of a potential earn-out provision included in the purchase agreement. The liability is classified as Level 3 due to a lack of observable inputs, such as the likelihood of meeting certain future revenue targets and other milestones. There was no significant change to the fair value of the potential earn-out provision during fiscal 2011. Changes in fair value are included in general and administrative expense on the consolidated statements of operations. See Note 5—Acquisitions.

A separate roll-forward of Level 3 investments measured at fair value on a recurring basis is not presented because the primary activities during fiscal 2011 and 2010 are already discussed above.

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 the financial metrics and ratios of comparable public companies. There were no events or circumstances that indicated these investments have become impaired during fiscal 2011, compared with impairment losses of $3 million and $7 million recognized during fiscal 2010 and 2009, respectively.

During fiscal 2011, the Company’s wholly-owned subsidiary Visa International sold its 10 percent investment in Visa Vale issuer Companhia Brasileira de Soluções e Serviços, or CBSS. See Note 6—Prepaid Expenses and Other Assets.

At September 30, 2011 and 2010, non-marketable equity security investments and investments accounted for under the equity method totaled $100 million and $114 million, respectively. These assets are classified in other assets on the consolidated balance sheets. See Note 6—Prepaid Expenses and Other Assets.

Reserve Primary Fund. The Company accounted for its investment in the Reserve Primary Fund under the cost method. After the Company determined the investment to be other-than-temporarily impaired, the investment was classified as a Level 3 asset. During fiscal 2010 and 2009, the Company substantially received its remaining pro-rata ownership in the Fund, resulting in the recognition of a pre-tax gain of $20 million in investment income, net during fiscal 2010, for amounts received in excess of the carrying value.

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. The Company measures fair value of goodwill and indefinite-lived intangible assets on a non-recurring basis for purposes of initial recognition, and testing for and recording impairment, if any. Finite-lived intangible assets primarily consist of customer relationships, reseller relationships and tradenames obtained through acquisitions. See Note 5—Acquisitions.

The Company uses an income approach for estimating the fair values of goodwill and indefinite-lived intangible assets. As the assumptions employed to measure these assets on a non-recurring basis are based on management’s judgment using internal and external data, these fair value determinations are classified in level 3 of the fair value hierarchy. The Company completed its annual impairment review of its indefinite-lived intangible assets and goodwill as of February 1, 2011, and concluded there was no impairment. No recent events or changes in circumstances indicate that impairment existed at September 30, 2011. See Note 1—Summary of Significant Accounting Policies.

Investments

Available-for-sale investments

Available-for-sale investment securities, which are recorded at fair value, consist of the types of securities presented below. The amortized cost, unrealized gains and losses, and fair value of available-for-sale securities are as follows:

	September 30, 2011 (in millions)									September 30, 2010 (in millions)
	Amortized Cost		Gross Unrealized				Fair Value			Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses							Gains		Losses
September 30:
Debt securities:
U.S. Treasury securities	$	350	$	—	$	—	$	350		$	—	$	—	$	—	$	—
U.S. government-sponsored debt securities		1,568		—		—		1,568			130		5		—		135
Auction rate securities		7		—		—		7			13		—		—		13
Total	$	1,925	$	—	$	—	$	1,925		$	143	$	5	$	—	$	148
Less: current portion of available-for-sale securities								(1,214	)								(124	)
Long-term available-for-sale securities							$	711								$	24

The contractual maturity of available-for-sale debt securities regardless of their balance sheet classification is presented below. Contractual maturities may differ from expected maturities as borrowers may have the right to prepay certain obligations in advance of the contractual due date.

	Amortized Cost		Fair Value
	(in millions)
September 30, 2011:
Due within one year	$	1,214	$	1,214
Due after 1 year through 5 years		704		704
Due after 5 years through 10 years		—		—
Due after 10 years		7		7
Total	$	1,925	$	1,925

Trading assets

Trading assets primarily consist of mutual fund investments related to various employee compensation plans. See Note 1—Summary of Significant Accounting Policies. As of September 30, 2011 and 2010, trading assets totaled $57 million and $60 million, respectively.

Investment income

Investment income, net, consisted of the following:

	For the Years Ended September 30,
	2011			2010			2009
	(in millions)
Interest and dividend income on cash and investments	$	16		$	26		$	113
Gain on other investments		92			20			473
Investment securities-available-for-sale:
Gross realized gains		4			2			3
Investment securities-trading assets:
Unrealized (losses) gains, net		(5	)		3			8
Realized gains (losses), net		1			1			(6	)
Other-than-temporary impairment on investments and other assets		—			(3	)		(16	)
Investment income, net	$	108		$	49		$	575

The gain on other investments in fiscal 2011 primarily includes the pre-tax gain from the sale of the Company’s equity interest in Visa Vale of $85 million. The gain on other investments in fiscal 2009 represents the pre-tax gain from the sale of the Company’s equity interest in VisaNet do Brasil.