Lexmark 2009 Annual Report Download - page 39

Other-Than-Temporary Impairment of Marketable Securities
The Company records its investments in marketable securities at fair value through accumulated other
comprehensive earnings using the valuation practices discussed in the fair value section above. Once
these investments have been marked to market, the Company must assess whether or not its individual
unrealized loss positions contain other-than-temporary impairment (“OTTI”). If an unrealized position is
deemed OTTI, then the unrealized loss, or a portion thereof, must be recognized in earnings. The
Company’s portfolio is made up almost entirely of debt securities for which OTTI must be recognized in
accordance with the FASB OTTI guidance effective in the second quarter of 2009. The model in this
guidance requires that an entity recognize OTTI in earnings for the entire unrealized loss position if the
entity intends to sell or it is more likely than not the entity will be required to sell the debt security before its
anticipated recovery of its amortized cost basis. If the entity does not expect to sell the debt security, but the
present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss is
deemed to exist and OTTI shall be considered to have occurred. However, in this case, the OTTI is
separated into two components, the amount representing the credit loss which is recognized in earnings
and the amount related to all other factors which is recognized in other comprehensive income under the
new guidance. See Note 2 to the Consolidated Financial Statements in Part II, Item 8 for more details
regarding this guidance. The Company’s policy considers various factors in making these two
assessments.
In determining whether it is more likely than not that the Company will be required to sell impaired
securities before recovery of net book or carrying values, the Company considers various factors that
include:
• The Company’s current cash flow projections,
• Other sources of funds available to the Company such as borrowing lines,
• The value of the security relative to the Company’s overall cash position,
• The length of time remaining until the security matures, and
• The potential that the security will need to be sold to raise capital.
If the Company determines that it does not intend to sell the security and it is not more likely than not that
the Company will be required to sell the security, the Company assesses whether it expects to recover the
net book or carrying value of the security. The Company makes this assessment based on quantitative and
qualitative factors of impaired securities that include a time period analysis on unrealized loss to net book
value ratio; severity analysis on unrealized loss to net book value ratio; credit analysis of the security’s
issuer based on rating downgrades; and other qualitative factors that may include some or all of the
following criteria:
• The regulatory and economic environment.
• The sector, industry and geography in which the issuer operates.
• Forecasts about the issuer’s financial performance and near-term prospects, such as earnings
trends and analysts’ or industry specialists’ forecasts.
• Failure of the issuer to make scheduled interest or principal payments.
• Material recoveries or declines in fair value subsequent to the balance sheet date.
Securities that are identified through the analysis using the quantitative and qualitative factors described
above are then assessed to determine whether the entire net book value basis of each identified security
will be recovered. The Company performs this assessment by comparing the present value of the cash
flows expected to be collected from the security with its net book value. If the present value of cash flows
expected to be collected is less than the net book value basis of the security, then a credit loss is deemed to
exist and an other-than-temporary impairment is considered to have occurred. There are numerous
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