HCA Holdings 2011 Annual Report Download - page 132

HCA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (Continued)
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2
inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets,
as well as inputs observable for the asset or liability (other than quoted prices), such as interest rates, foreign
exchange rates, and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any,
related market activity. In instances where the determination of the fair value measurement is based on inputs
from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input significant to the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability.
Cash Traded Investments
Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy
because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources
with reasonable levels of price transparency. Certain types of cash traded instruments are classified within
Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price
transparency. Such instruments include auction rate securities (“ARS”) and limited partnership investments. The
transaction price is initially used as the best estimate of fair value.
Our wholly-owned insurance subsidiaries had investments in tax-exempt ARS, which are backed by student
loans substantially guaranteed by the federal government, of $131 million ($139 million par value) at
December 31, 2011. We do not currently intend to attempt to sell the ARS as the liquidity needs of our insurance
subsidiaries are expected to be met by other investments in their investment portfolios. During 2011 and 2010,
certain issuers and their broker/dealers redeemed or repurchased $112 million and $150 million, respectively, of
our ARS at par value. The valuation of these securities involved management’s judgment, after consideration of
market factors and the absence of market transparency, market liquidity and observable inputs. Our valuation
models derived a fair market value compared to tax-equivalent yields of other student loan backed variable rate
securities of similar credit worthiness and similar effective maturities.
Derivative Financial Instruments
We have entered into interest rate and cross currency swap agreements to manage our exposure to fluctuations
in interest rates and foreign currency risks. The valuation of these 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, foreign exchange rates and implied volatilities. To comply with
the provisions of ASC 820, we incorporate credit valuation adjustments to reflect both our own nonperformance risk
and the respective counterparty’s nonperformance risk in the fair value measurements.
Although we determined the majority of the inputs used to value our derivatives fall within Level 2 of the
fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such
as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We
assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our
derivative positions and at December 31, 2011 and 2010, we determined the credit valuation adjustments were
not significant to the overall valuation of our derivatives.
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