Family Dollar 2009 Annual Report Download - page 52

The Company does not currently expect to liquidate any auction rate securities going forward through the normal
auction process. However, the Company does expect to be able to liquidate substantially all of its remaining
auction rate securities at par through issuer calls or refinancings, settlements with broker dealers, or upon
maturity. During fiscal 2009, the Company liquidated $43.2 million of auction rate securities at par as a result of
issuer calls or sales to broker dealers. Subsequent to the end of fiscal 2009, the Company liquidated an additional
$3.0 million of auction rate securities at par as a result of an issuer call. Because the Company received notice of
the call prior to the end of fiscal 2009, the security was classified as a current asset on the Consolidated Balance
Sheet and measured at fair value using Level 2 inputs. The Company’s remaining auction rate securities were
classified as long-term assets due to the continued failure of the auction process and the continued uncertainty
regarding the timing of future liquidity, and were measured at fair value using Level 3 inputs, as discussed
below.
Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to
the resetting rates, and the Company had no cumulative gross unrealized or realized gains or losses from these
investments prior to fiscal 2008. However, due to the liquidity issues noted above, the Company had a temporary
gross unrealized loss of $15.3 million ($9.5 million, net of taxes) with respect to these investments as of
August 29, 2009. Because there is no active market for the Company’s auction rate securities, the fair value of
each security was determined through the use of a discounted cash flow analysis using Level 3 inputs. The terms
used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that
the securities will be called or refinanced by the issuer or settled with broker dealers prior to maturity. The
discount rates used in the analysis were based on market rates for similar liquid tax-exempt securities with
comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the discount
rates were adjusted further to reflect the illiquidity of the investments. The Company’s valuation is sensitive to
market conditions and management’s judgment and can change significantly based on the assumptions used. A
100 basis point increase or decrease in the discount rate along with a 12-month increase or decrease in the term
could result in a gross unrealized loss ranging from $5.8 million to $26.5 million.
The Company evaluated each of its auction rate securities for other-than-temporary impairment in accordance
with FSP FAS 115-2 and FAS 124-2. The Company determined that there was no material other-than-temporary
impairment as of August 29, 2009. The Company’s evaluation was based on an analysis of the credit rating and
parity ratio of each security. The parity ratio is the ratio of trust assets available for distribution to creditors to the
trust obligations to those creditors. The credit quality of the Company’s auction rate securities portfolio remains
high (80% AAA-rated, 14% AA-rated, and 6% A-rated).
The following table summarizes the change in the fair value of the Company’s auction rate securities measured
using Level 3 inputs during fiscal 2009:
(in thousands) Fair Value
Balance at August 30, 2008 .................................. $222,104
Unrealized loss included in other comprehensive income ....... (7,409)
Net sales/settlements ................................... (48,150)
Transfer out of Level 3 .................................. (3,000)
Balance at August 29, 2009 .................................. $163,545
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities
the option to measure many financial instruments and certain other items at fair value. If a company elects the
fair value option for an eligible item, then it will report unrealized gains and losses on those items at each
subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company did not elect the fair value option under SFAS 159.
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