Costco 2011 Annual Report Download - page 54

The following valuation techniques are used to measure fair value:
Level 1 primarily consists of financial instruments, such as money market mutual funds, whose value is
based on quoted market prices, such as quoted net asset values published by the fund as supported in
an active market, exchange-traded instruments and listed equities.
Level 2 includes assets and liabilities where quoted market prices are unobservable but observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities, or could be obtained from data providers or pricing vendors. The Company’s
Level 2 assets and liabilities primarily include United States (U.S.) government and agency securities,
Federal Deposit Insurance Corporation (FDIC) insured corporate bonds, investments in corporate
notes and bonds, asset and mortgage-backed securities, and forward foreign exchange contracts.
Valuation methodologies are based on “consensus pricing,” using market prices from a variety of
industry-standard independent data providers or pricing that considers various assumptions, including
time value, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and
contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other
relevant economic measures. All are observable in the market or can be derived principally from or
corroborated by observable market data, for which the Company typically receives independent
external valuation information.
Level 3 is comprised of significant unobservable inputs for valuations from the Company’s independent
data and a primary pricing vendor that are also supported by little, infrequent, or no market activity.
Management considers indicators of significant unobservable inputs such as the lengthening of
maturities, later-than-scheduled payments, and any remaining individual securities that have otherwise
matured, as indicators of Level 3. Assets and liabilities are considered Level 3 when their fair value
inputs are unobservable, unavailable or management concludes that even though there may be some
observable inputs, an item should be classified as a Level 3 based on other indicators of significant
unobservable inputs, such as situations involving limited market activity, where determination of fair
value requires significant judgment or estimation. The Company utilizes the services of a primary
pricing vendor, which does not provide access to its proprietary valuation models, inputs and
assumptions. While the Company is not provided access to proprietary models of the vendor, the
Company reviewed and contrasted pricing received with other pricing sources to ensure accuracy of
each asset class for which prices are provided. The Company’s review also included an examination of
the underlying inputs and assumptions for a sample of individual securities across asset classes, credit
rating levels and various durations, a process that is continually performed for each reporting period. In
addition, the pricing vendor has an established challenge process in place for all security valuations,
which facilitates identification and resolution of potentially erroneous prices. The Company believes
that the prices received from the primary pricing vendor are representative of exit prices in accordance
with authoritative guidance, and are classified appropriately in the fair value hierarchy.
Our current financial liabilities have fair values that approximate their carrying values. Our long-term
financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price
less unamortized discount.
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