Dollar General 2012 Annual Report Download - page 142

10-K
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of presentation and accounting policies (Continued)
fair value measurement in its entirety requires judgment and considers factors specific to the asset or
liability.
The valuation of the Company’s derivative financial instruments is determined using widely
accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of
each derivative. This analysis reflects the contractual terms of the derivatives, including the period to
maturity, and uses observable market-based inputs, including interest rate curves. The fair values of
interest rate swaps are determined using the market standard methodology of netting the discounted
future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or
payments). The variable cash receipts (or payments) are based on an expectation of future interest
rates (forward curves) derived from observable market interest rate curves.
The Company incorporates credit valuation adjustments (CVAs) to appropriately reflect both its
own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance
risk, the Company has considered the impact of netting and any applicable credit enhancements, such
as collateral postings, thresholds, mutual puts, and guarantees.
In connection with accounting standards for fair value measurement, the Company has made an
accounting policy election to measure the credit risk of its derivative financial instruments that are
subject to master netting agreements on a net basis by counterparty portfolio. The Company has
determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair
value hierarchy. However, the CVAs associated with its derivatives utilize Level 3 inputs, such as
estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.
As of February 1, 2013, the Company has assessed the significance of the impact of the CVAs on the
overall valuation of its derivative positions and has determined that the CVAs are not significant to the
overall valuation of its derivatives. Based on the Company’s review of the CVAs by counterparty
portfolio, the Company has determined that the CVAs are not significant to the overall portfolio
valuations, as the CVAs are deemed to be immaterial in terms of basis points and are a very small
percentage of the aggregate notional value. Although some of the CVAs as a percentage of termination
value appear to be more significant, primary emphasis was placed on a review of the CVA in basis
points and the percentage of the notional value. As a result, the Company has determined that its
derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Derivative financial instruments
The Company accounts for derivative financial instruments in accordance with accounting
standards for derivative instruments and hedging activities. All financial instrument positions taken by
the Company are intended to be used to reduce risk by hedging an underlying economic exposure.
The Company records all derivatives on the balance sheet at fair value. The accounting for
changes in the fair value of derivatives depends on the intended use of the derivative, whether the
Company has elected to designate a derivative in a hedging relationship and apply hedge accounting
and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.
Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an
asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to
variability in expected future cash flows, or other types of forecasted transactions, are considered cash
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