ADT 2009 Annual Report Download - page 224

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Financial Instruments (Continued)
provides a single definition of fair value, establishes a comprehensive framework for measuring fair
value and expands the related disclosure requirements.
Specifically, the guidance requires fair value to be determined based on the exchange price that
would be received to sell an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the
measurement date. Fair value is a market-based measurement based on assumptions that ‘‘market
participants’’ would use to price the asset or liability. Accordingly, the framework considers markets or
observable inputs as the preferred source of value followed by assumptions based on hypothetical
transactions, in the absence of market inputs. The fair value should be calculated based on assumptions
that market participants would use in pricing the asset or liability, not on assumptions specific to the
entity. In addition, the fair value of assets and liabilities should include consideration of
non-performance risk including the Company’s own credit risk.
Additionally, the guidance establishes a three-level hierarchy that ranks the quality and reliability
of information used in developing fair value estimates. The hierarchy gives the highest priority to
quoted prices in active markets and the lowest priority to unobservable data. In cases where two or
more levels of inputs are used to determine fair value, a financial instrument’s level is determined
based on the lowest level input that is considered significant to the fair value measurement in its
entirety. The three levels of the fair value hierarchy are summarized as follows:
• Level 1—inputs are based upon quoted prices (unadjusted) in active markets for identical assets
or liabilities which are accessible as of the measurement date.
• Level 2—inputs are based upon quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, and
model-derived valuations for the asset or liability that are derived principally from or
corroborated by market data for which the primary inputs are observable, including forward
interest rates, yield curves, credit risk and exchange rates.
• Level 3—inputs for the valuations are unobservable and are based on management’s estimates of
assumptions that market participants would use in pricing the asset or liability. The fair values
are therefore determined using model-based techniques such as option pricing models and
discounted cash flow models.
Investments
Investments primarily include cash equivalents, U.S. government obligations and corporate debt
securities.
When available, the Company uses quoted market prices to determine the fair value of investment
securities. Such investments are included in Level 1. When quoted market prices are not readily
available, pricing determinations are made based on the results of valuation models using observable
market data such as recently reported trades, bid and offer information and benchmark securities.
These investments are included in Level 2 and consist primarily of U.S. government debt securities and
corporate debt securities.
132 2009 Financials