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Visa Europe (Tables) | 12 Months Ended
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Sep. 30, 2016
Business Combinations [Abstract] |
Schedule of Purchase Consideration | The following table details the purchase consideration:
| Accounting Purchase Consideration
| (in millions)
Cash payment | $ | 13,882 |
Fair value of preferred stock(1) | 5,692 |
Total upfront consideration | $ | 19,574 |
Fair value of deferred cash consideration(2) | 1,236 |
Total consideration before adjustments | $ | 20,810 |
Less: Visa Europe Framework Agreement loss(3) | (1,856 | )
Less: Treasury stock(4) | (170 | )
Total accounting purchase consideration | $ | 18,784 |
(1) | The fair value of preferred stock was determined based on its as-converted value of $6.1 billion on June 21, 2016, less a 6% discount for illiquidity as these shares are subject to limitations on transferability. The fair value was also adjusted to reflect $25 million of "right to recover for covered losses" related to VE territory covered losses prior to the Closing. See Note 20—Legal Matters.
(2) | This amount reflects the fair value of deferred cash consideration of €1.0 billion, plus 4.0% compound annual interest, payable on the third anniversary of the Closing, discounted at a rate of 1.2%. At September 30, 2016, the deferred consideration of $1.2 billion reflects interest accretion recognized during the three months ended September 30, 2016, more than offset by the impact of changes in the euro to U.S. dollar exchange rate from the Closing.
Total consideration has been adjusted to account for the following items to arrive at the accounting purchase consideration:
(3) | the loss upon consummation of the transaction resulting from the effective settlement of the Framework Agreement between Visa and Visa Europe. The Visa Europe Framework Agreement provided Visa Europe with a perpetual, exclusive right to operate the Visa business in the Visa Europe region in exchange for a license fee paid to Visa. Under the terms of the Framework Agreement, the license fee paid by Visa Europe has increased modestly since inception in 2007, while the value of the Visa Europe business has increased at a greater rate. Using an income approach, the Company assessed the contractual terms and conditions of the Framework Agreement as compared to current market conditions and the historical and expected financial performance of Visa Europe. Based on the analysis performed, the Company determined that the terms were not at fair value as determined under U.S. GAAP at the Closing. The present value of the expected differential between payments required by the Framework Agreement and those that would be required if the contract were at fair value under U.S. GAAP was calculated over the Framework Agreement's contractual perpetual term, resulting in a loss of $1.9 billion recognized within operating expense in the Company's consolidated statement of operations during the third quarter of fiscal 2016, and a reduction to the purchase accounting consideration; and
(4) | the fair value of the Visa class C common stock held by Visa Europe as of the Closing.
Schedule of Purchase Price Allocation | The following table summarizes the preliminary purchase price allocation.
| Preliminary Purchase Price Allocation
| (in millions)
Current assets(1) | $ | 4,457 |
Non-current assets(2) | 258 |
Current liabilities(3) | (2,731 | )
Non-current liabilities(2) | (2,605 | )
Tangible assets and liabilities | $ | (621 | )
Intangible assets — customer relationships and reacquired rights(2) | 16,137 |
Goodwill(4) | 3,268 |
Fair value of net assets acquired | $ | 18,784 |
(1) | Current assets are largely comprised of cash and cash equivalents and settlement receivable.
(2) | Intangible assets consist of customer relationships and reacquired rights, which have been valued as a single composite intangible asset as they are inextricably linked. These intangibles are considered indefinite-lived assets as the associated customer relationships have historically not experienced significant attrition, and the reacquired rights are based on the Framework Agreement, which has a perpetual term. Non-current assets and liabilities include deferred tax assets and liabilities that result in net deferred tax liabilities of $2.4 billion, which are primarily related to these indefinite-lived intangible assets, and are not expected to be realized in the foreseeable future.
(3) | Current liabilities assumed mainly include settlement payable, client incentives liabilities and accrued liabilities.
(4) | The excess of purchase consideration over net assets acquired was recorded as goodwill, which represents the value that is expected from increased scale and synergies as a result of the integration of both businesses.
Schedule of Acquisition Impact on Net Income | Therefore, the acquisition of Visa Europe reduced Visa Inc. fiscal year 2016 consolidated net income by approximately $872 million, as follows:
Impact of Visa Europe acquisition on fiscal 2016 consolidated net income: | (in millions)
Visa Europe net income included in consolidated net income | $ | 299 |
Less approximately $65 million of revenue that would have been recorded by Visa Inc. under the Framework Agreement, net of tax | (41 | )
Less acquisition-related expense recorded by Visa Inc., net of tax, upon: |
Effective settlement of the Framework Agreement | (1,184 | )
Interest expense incurred on $16.0 billion debt, net of interest income earned | (243 | )
Transaction costs incurred | (96 | )
Add acquisition-related gains recorded by Visa Inc., net of tax, upon: |
Revaluation of Visa Europe put option | 255 |
Remeasurement of euro deposits | 91 |
Remeasurement of currency forward contracts | 47 |
Total impact of Visa Europe acquisition on consolidated net income | $ | (872 | )
Schedule of Pro Forma Information |
| Pro Forma Consolidated Results
| Fiscal 2016 |  | Fiscal 2015
| (in millions, except per share data)
Total operating revenues | $ | 16,090 |  |  | $ | 15,425 |
Net income | $ | 7,072 |  |  | $ | 5,210 |
Diluted earnings per share | $ | 2.93 |  |  | $ | 2.06 |

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