Citrix 2014 Annual Report Download - page 56

50
asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
• Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
• Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
• Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop
its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service,
or the Service, which uses quoted market prices for identical or comparable instruments rather than direct observations of
quoted prices in active markets. The Service gathers observable inputs for all of our fixed income securities from a variety of
industry data providers including, for example, large custodial institutions and other third-party sources. Once the observable
inputs are gathered by the Service, all data points are considered and an average price is determined. The Service’s providers
utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades,
yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of our
available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2
in the table below. We periodically independently assess the pricing obtained from the Service and historically have not
adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant
observable inputs for a security are not available.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect
the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair
value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used
to determine the applicable level in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our fixed income available-for-sale security portfolio generally consists of high quality, investment grade securities from
diverse issuers with a minimum credit rating of A-/A3 and a minimum weighted-average credit rating of AA-/Aa3. We values
these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets
(Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in
determining fair value, and accordingly, we classify all of our fixed income available-for-sale securities as Level 2. See Note 4
to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2014
for more information regarding our available-for-sale investments.
We measure our cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued
expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
We have invested in convertible debt securities of certain early-stage entities that are classified as available-for-sale
investments. As quoted prices in active markets or other observable inputs were not available for these investments, in order to
measure them at fair value, we utilized a discounted cash flow model using a discount rate reflecting the market risk inherent in
holding securities of an early-stage enterprise, adjusted by the probability-weighted exit possibilities associated with the
convertible debt securities. This methodology required us to make assumptions that were not directly or indirectly observable
regarding the fair value of the convertible debt securities; accordingly they are a Level 3 valuation and included in the table
below.
Investments
(in thousands)
Balance at December 31, 2013 $ 10,291
Purchases of Level 3 securities 2,050
Proceeds received on Level 3 securities (10,441)
Total net realized gains included in earnings 3,441
Transfers into Level 3 732
Balance at December 31, 2014 $ 6,073
Transfers into Level 3 relate to certain of our investments in convertible debt securities of early-stage entities that were
reclassified from cost method investments, which were previously included in Other assets in the accompanying consolidated