resources of TSYS and outlines the factors that have affected its recent earnings, as well as those factors that may affect its future earnings. The accompanying Consolidated Financial Statements and related Notes are an integral part of this Financial Review and should be read in conjunction with it. Critical Accounting Policies and Estimates TSYS’ financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to gain a full understanding of the Company’s financial statements, one must have a clear understanding of the account- ing policies employed. Refer to Note 1 in the consolidated financial statements for more information on the Company’s basis of presentation and a sum- mary of significant accounting policies. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations are listed in the Company’s forward-looking statements. Negative developments in these or other risk factors could have a material adverse effect on the Company’s financial position, results of operations and cash flows. Management believes that the following accounting policies are the most critical to fully understand and evaluate the Company’s results. Within each critical policy, the Company makes estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain. A summary of the Company’s critical accounting estimates appli- cable to all three reportable operating segments follows: Allowance for Doubtful Accounts and Billing Adjustments The Company estimates the allowances for doubtful accounts. When estimating the allowances for doubtful accounts, the Com- pany takes into consideration such factors as its day-to-day knowl- edge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receiv- able aging, prior experience with specific customers of accounts receivable write-offs and prior history of allowances in proportion to the overall receivable balance. This analysis includes an ongo- ing and continuous communication with its largest clients and those clients with past due balances. A financial decline of any one of the Company’s large clients could have a material adverse effect on collectibility of receivables and thus the adequacy of the allowance for doubtful accounts. If the actual collectibility of clients’ accounts is not consistent with the Company’s estimates, bad debt expense, which is recorded in selling, general and administrative expenses, 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. The Company estimates allowances for billing adjustments for potential billing discrepancies. When estimating the allowance for billing adjustments, the Company considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. If the actual adjustments to clients’ billing is not consistent with the Company’s estimates, billing adjustments, which is recorded as a reduction of revenues in the Company’s consolidated statements of income, may be materially different than was initially recorded. The Company’s experience and exten- sive data accumulated historically indicates that these estimates have proven reliable over time. Contract Acquisition Costs In evaluating for recoverability, expected undiscounted net oper- ating cash flows are estimated by management. The Company evaluates the carrying value of contract acquisition costs associ- ated with each customer for impairment on the basis of whether these costs are fully recoverable from either contractual minimum fees (conversion costs) or from expected undiscounted net oper- ating cash flows of the related contract (cash incentives paid). The determination of expected undiscounted net operating cash flows requires management to make estimates. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded. These costs may become impaired with the loss of a contract, the financial decline of a client, termination of conversion efforts after a contract is signed or diminished prospects for current clients. Note 9 in the consolidated financial statements contains a dis- cussion of contract acquisition costs. The net carrying value of contract acquisition costs on the Company’s Consolidated Bal- ance Sheet as of December 31, 2010 was $166.3 million. Software Development Costs In evaluating for recoverability, expected undiscounted net oper- ating cash flows are estimated by management. The Company evaluates the unamortized capitalized costs of software develop- ment as compared to the net realizable value of the software product, which is determined by expected undiscounted net operating cash flows. The amount by which the unamortized software development costs exceed the net realizable value is written off in the period that such determination is made. If the actual cash flows are not consistent with the Company’s estimates, a material write-off may result and net income may be materially different than was initially recorded. Note 8 in the consolidated financial statements contains a discussion of internally developed software costs. The net carrying value of internally developed software on the Company’s Consolidated Balance Sheet as of December 31, 2010 was $81.2 million. 11