Capital One 2012 Annual Report Download - page 256

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) We do not offset the fair value of derivative contracts in a loss position against the fair value of contracts in a gain position. We also do
not offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a
master netting arrangement.
(2) Does not reflect $9 million and $23 million recognized as a net valuation allowance on derivative assets and liabilities for non-
performance risk as of December 31, 2012 and 2011, respectively. Non-performance risk is reflected in other assets/liabilities on the
balance sheet and offset through the income statement in other income.
The determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy is
performed at the end of each reporting period. We consider all available information, including observable
market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques
and significant inputs. Based upon the specific facts and circumstances of each instrument or instrument
category, judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value
measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.
The process for determining fair value using unobservable inputs is generally more subjective and involves a
high degree of management judgment and assumptions. During 2012, we had minimal movements between
Levels 1 and 2.
Level 3 Instruments Only
Financial instruments are considered Level 3 when their values are determined using pricing models, which
include comparison of prices from multiple sources, discounted cash flow methodologies or similar techniques
and at least one significant model assumption or input is unobservable or there is significant variability among
pricing sources. Level 3 financial instruments also include those for which the determination of fair value
requires significant management judgment or estimation. The tables below present a reconciliation for all assets
and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs
(Level 3). When assets and liabilities are transferred between levels, we recognize the transfer as of the end of
the period.
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