Bed, Bath and Beyond 2013 Annual Report Download - page 28

5. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., ‘‘the exit price’’) in an
orderly transaction between market participants at the measurement date. In determining fair value, the Company uses
various valuation approaches, including quoted market prices and discounted cash flows. The hierarchy for inputs used in
measuring fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing
the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that
reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability
developed based on the best information available under the circumstances. The fair value hierarchy is broken down into
three levels based on the reliability of inputs as follows:
• Level1—Valuations based on quoted prices in active markets for identical instruments that the Company is able to
access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation
of these products does not entail a significant degree of judgment.
• Level2—Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets
that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets.
• Level3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
As of March 1, 2014, the Company’s financial assets utilizing Level 1 inputs include long term investment securities traded on
active securities exchanges. The Company did not have any financial assets utilizing Level 2 inputs. Financial assets utilizing
Level 3 inputs included long term investments in auction rate securities consisting of preferred shares of closed end municipal
bond funds (See ‘‘Investment Securities,’’ Note 6).
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the
determination of fair value requires more judgment. Accordingly, the Company’s degree of judgment exercised in determining
fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, an asset or liability must be classified in its entirety based on the
lowest level of input that is significant to the measurement of fair value.
Valuation techniques used by the Company must be consistent with at least one of the three possible approaches: the market
approach, income approach and/or cost approach. The Company’s Level 1 valuations are based on the market approach and
consist primarily of quoted prices for identical items on active securities exchanges. The Company’s Level 3 valuations of
auction rate securities, which had temporary valuation adjustments of approximately $3.3 million and $2.0 million as of
March 1, 2014 and March 2, 2013, respectively, are based on the income approach, specifically, discounted cash flow analyses
which utilize significant inputs based on the Company’s estimates and assumptions. As of March 1, 2014, the inputs used in the
Company’s discounted cash flow analysis included current coupon rates ranging from 0.06% to 0.09%, an estimated
redemption period of 5 years and a discount rate of 1.43%. The discount rate was based on market rates for risk-free
tax-exempt securities, as adjusted for a risk premium to reflect the lack of liquidity of these investments. Assuming a higher
discount rate, a longer estimated redemption period and lower coupon rates would result in a lower fair market value.
Conversely, assuming a lower discount rate, a shorter estimated redemption period and higher coupon rates would result in a
higher fair market value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
BED BATH & BEYOND 2013 ANNUAL REPORT
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