Graco 2012 Annual Report Download - page 97

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91
FOOTNOTE 18
Fair Value
Accounting principles generally accepted in the U.S. define fair value as the price that would be received to sell an asset or transfer
a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should
be determined based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance
discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of
future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These
valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Company’s market assumptions. As the basis for evaluating such inputs,
a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability,
including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or
liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant
value drivers are observable.
Level 3: Unobservable inputs that reflect the reporting entity's own assumptions.
Recurring Fair Value Measurements
The Company’s financial assets and liabilities adjusted to fair value at least annually are its money market fund investments
included in cash and cash equivalents, its mutual fund investments included in other assets, and its derivative instruments, which
are primarily included in prepaid expenses and other, other assets, other accrued liabilities and other noncurrent liabilities.
The Company determines the fair value of its mutual fund investments based on quoted market prices (Level 1).
Level 2 fair value determinations are derived from directly or indirectly observable (market-based) information. Such inputs are
the basis for the fair values of the Company’s money market fund investments and derivative instruments. The money market fund
investments held by the Company and included in cash and cash equivalents are not publicly traded, but the fair value is determined
based on the values of the underlying investments in the money market fund (Level 2). The Company generally uses derivatives
for hedging purposes pursuant to the relevant authoritative guidance, and the Company’s derivatives are primarily foreign currency
forward contracts and interest rate swaps. The Company determines the fair value of its derivative instruments using standard
pricing models and market-based assumptions for all significant inputs, such as yield curves and quoted spot and forward exchange
rates. Accordingly, the Company’s derivative instruments are classified as Level 2.
The following tables present the Company’s non-pension financial assets and liabilities which are measured at fair value on a
recurring basis (in millions):
Fair value as of December 31, 2012 Total Level 1 Level 2 Level 3
Assets
Investment securities, including mutual funds (1) $ 11.5 $ 8.2 $ 3.3 $ —
Interest rate swaps 38.9 — 38.9 —
Foreign currency derivatives 0.5 — 0.5 —
Total $ 50.9 $ 8.2 $ 42.7 $ —
Liabilities
Interest rate swaps $ 7.2 $ — $ 7.2 $ —
Foreign currency derivatives 1.3 — 1.3 —
Total $ 8.5 $ — $ 8.5 $ —
Fair value as of December 31, 2011
Assets
Investment securities, including mutual funds (1) $ 17.7 $ 7.3 $ 10.4 $ —
Interest rate swaps 35.8 — 35.8 —
Foreign currency derivatives 2.4 — 2.4 —
Total $ 55.9 $ 7.3 $ 48.6 $ —
(1) The values of investment securities, including mutual funds, are classified as cash and cash equivalents ($2.3 million and $5.1 million as of December 31,
2012 and 2011, respectively) and other assets ($9.2 million and $12.6 million as of December 31, 2012 and 2011, respectively). For mutual funds that are