Family Dollar 2011 Annual Report Download - page 51

During fiscal 2011, the Company re-evaluated its fair value hierarchy, specifically as it relates to a portion of its
municipal and corporate debt securities. Although the Company believes these investments trade in active
markets and prices could be obtained for identical assets, the Company believed that the classification of these
investments as Level 2 was more appropriate because these investments are valued by a third-party pricing
service where matrix pricing is used. Additionally, the classification of Level 2 versus Level 1 does not indicate a
change in fair value or deterioration in the market where these investments are traded; it is a classification change
based only on how the fair values were derived for these assets. As a result, the Company has revised the
classification of these investments where matrix pricing is used to Level 2 for all periods presented.
On a non-recurring basis, the Company adjusts certain property and equipment to fair value through impairment
charges. Property and equipment is reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The fair value of the property and
equipment is determined based on a discounted cash flow analysis using Level 3 inputs. The Company estimates
future cash flows based on historical experience and its expectations of future cash flows. Impairment charges
were not material during fiscal 2011.
Auction Rate Securities
The Company’s investment securities include student loan auction rate securities that were measured at fair value
using either Level 2 or Level 3 inputs. The auction rate securities are tax-exempt bonds that are collateralized by
federally guaranteed student loans. While the underlying securities generally have long-term nominal maturities
that exceed one year, the interest rates reset periodically in scheduled auctions (generally every 7-35 days). The
Company generally has the opportunity to sell its investments during such periodic auctions subject to the
availability of buyers.
Beginning in the second quarter of fiscal 2008, issues in the global credit and capital markets led to failed
auctions with respect to substantially all of the Company’s auction rate securities. A failed auction typically
occurs when the number of securities submitted for sale in the auction exceeds the number of purchase bids. As
of August 27, 2011, substantially all of the Company’s $116.9 million par value investments were subject to
failed auctions. As a result of the failed auctions, the interest rates on the investments reset to the established
rates per the applicable investment offering statements. The Company will not be able to liquidate the
investments until a successful auction occurs, a buyer is found outside the auction process, the securities are
called or refinanced by the issuer, the securities are repurchased by the broker dealers, or the securities mature.
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 or upon maturity. During fiscal 2011, the
Company liquidated $48.7 million of auction rate securities at par as a result of issuer calls. Substantially all of
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.
Due to the liquidity issues noted above, the Company had a temporary gross unrealized loss of $9.3 million ($5.8
million, net of taxes) with respect to these investments as of August 27, 2011. Changes in the unrealized loss are
included in Accumulated Other Comprehensive Loss within Shareholders’ Equity on the Consolidated Balance
Sheets. 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 repurchased by the 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
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