Lexmark 2010 Annual Report Download - page 87

Transfers
2010
The Company transferred, on a gross basis, $51.6 million from Level 1 to Level 2 due to lower levels of
market activity for certain U.S. agency debt securities noted during 2010. The fair values of the Company’s
U.S. agency debt securities are generally categorized as Level 1 but may be downgraded based on the
Company’s assessment of market activity for individual securities. The Company also transferred from
Level 2 to Level 1, on a gross basis, $14.8 million of corporate debt securities due to trading volumes
sufficient to indicate an active market for the securities as well as $1.7 million of U.S. agency debt
securities due to the securities resuming higher levels of market activity during 2010.
Additionally, as indicated in the table above, the Company transferred, on a gross basis, $11.1 million of
corporate debt and asset-backed securities from Level 2 to Level 3 during 2010. The Company has been
unable to corroborate the consensus price of these securities with a sufficient level of observable market
data to maintain Level 2 classification. The Company also transferred, on a gross basis, $8.4 million of
corporate debt and mortgage-backed securities from Level 3 to Level 2 as the Company was able to obtain
information demonstrating that the prices were observable in the market as of December 31, 2010.
2009
Net Transfers into Level 3 for 2009 were $2.7 million, made up of gross transfers in of $4.5 million offset
partially by gross transfers out of $1.8 million. Level 3 transfer activity in 2009 was driven by asset-backed
and mortgage-backed securities. The Company believed that a Level 3 classification was appropriate for
these securities due to several reasons including a low number of inputs used in the consensus price
default methodology and the use of unobservable inputs in certain fair value measurements.
Valuation Techniques
Marketable securities — general
The Company evaluates its marketable securities in accordance with FASB guidance on accounting for
investments in debt and equity securities, and has determined that all of its investments in marketable
securities should be classified as available-for-sale and reported at fair value. The Company generally
employs a market approach in valuing its marketable securities, using quoted market prices or other
observable market data when available. In certain instances, when observable market data is lacking, fair
values are determined using valuations techniques consistent with the income approach whereby future
cash flows are converted to a single discounted amount.
The Company uses multiple third parties to report the fair values of its marketable securities, though the
responsibility of valuation remains with the Company’s management. Most of the securities’ fair values are
based upon a consensus price method, whereby prices from a variety of industry data providers are input
into a distribution-curve based algorithm to determine the most appropriate fair value. Starting in the first
quarter of 2010, the Company acquired access to additional sources of pricing, trading, and other market
data in order to enhance its process of corroborating fair values and testing default level assumptions. The
Company assesses the quantity of pricing sources available, variability in the prices provided, trading
activity, and other relevant data in performing this process.
Government and agency debt securities
The Company’s government and agency debt securities are generally highly liquid investments having
multiple sources of pricing with low variability among the data providers. The consensus price method,
described previously, is used to select the most appropriate price. Fair value measurements for
U.S. government and agency debt securities are most often based on quoted market prices in active
markets and are categorized as Level 1. Securities with lower levels of market activity, including certain
U.S. agency debt securities and international government debt securities, are classified as Level 2.
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