after the charge is made, in order to offset potential contingent liabilities such as chargebacks and reject losses that would arise if the merchant went out of business. Most chargeback and reject losses are charged to cost of services as they are incurred. How- ever, the Company also maintains a reserve against losses, includ- ing major fraud losses, which are both less predictable and involve larger amounts. The loss reserve was established using historical loss rates, applied to recent bankcard processing volume. TSYS only assumed liabilities as of April 1, 2010 on a go forward basis and thus, has no material merchant loss reserve recorded. 

## Transaction Processing Provisions 

The Company records estimates to accrue for contract contin- gencies (performance penalties) and processing errors. A signif- icant number of the Company’s contracts with large clients contain service level agreements which can result in TSYS incurring per- formance penalties if contractually required service levels are not met. When estimating these accruals, the Company takes into consideration such factors as the prior history of performance penalties and processing errors incurred, actual contractual pen- alties inherent in the Company’s contracts, progress towards milestones and known processing errors not covered by insur- ance. If the actual performance penalties incurred are not con- sistent with the Company’s estimates, performance penalties and processing errors, which is recorded in cost of services, may be materially different than was initially recorded. The Company’s experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. 

## Income Taxes 

In calculating its effective tax rate, the Company makes decisions regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax juris- dictions. The Company has various tax filing positions, including the timing and amount of deductions and credits, the establish- ment of reserves for audit matters and the allocation of income among various tax jurisdictions. 

The Company makes estimates as to the amount of deferred tax assets and liabilities and records valuation allowances to reduce its deferred tax assets to reflect the amount that is more likely than not to be realized. The Company considers projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Actual results may differ from the Company’s estimates. If the Company realizes a deferred tax asset or the Company was unable to realize a net deferred tax asset, an adjustment to the deferred tax asset would increase or decrease earnings, respectively, in the period the difference is recognized. 

## Related Party Transactions 

The Company provides electronic payment processing and other services to the Company’s equity investments, Total System Ser- vices de México, S.A. de C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data). 

The related party services are performed under contracts that are similar to its contracts with unrelated third party customers. The Company believes the terms and conditions of transactions between the Company and these related parties are comparable to those which could have been obtained in transactions with unaffiliated parties. The Company’s margins with respect to related party transactions are comparable to margins recognized in transactions with unrelated third parties. The amounts related to these transactions are immaterial. No significant changes have been made to the method of establishing terms with the affiliated companies during the periods presented. 

Refer to Note 4 in the consolidated financial statements for more information on transactions with affiliated companies. 

## Off-Balance Sheet Arrangements 

OPERATING LEASES: As a method of funding its operations, TSYS employs noncancelable operating leases for computer equipment, software and facilities. These leases allow the Com- pany to provide the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are included on the balance sheet. Refer to Notes 1 and 19 in the consolidated financial statements for further information on operating lease commitments. 

CONTRACTUAL OBLIGATIONS: The total liability for uncertain tax positions under ASC 740, “Income Taxes,” at December 31, 2010 is $4.5 million. Refer to Note 20 in the consolidated financial statements for more information on income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect any significant changes related to these obligations within the next year. 

## Recent Accounting Pronouncements 

In December 2010, the Task Force issued Accounting Standards Update (ASU) No. 2010-29, “Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combina- tions ( A consensus of the FASB Emerging Issues Task Force).” The Task Force reached a consensus that when a public entity presents comparative financial statements, the entity should disclose rev- enue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU also expands the supplemental pro forma disclosures to include a description of the nature and the amount of material, nonrecurring pro forma adjustments directly 

