Lexmark 2014 Annual Report Download - page 40

Environmental Remediation Obligations
Lexmark accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably
estimable. In the early stages of a remediation process, particular components of the overall obligation may not be reasonably
estimable. In this circumstance, the Company recognizes a liability for the best estimate (or the minimum amount in a range if no best
estimate is available) of its allocable share of the cost of the remedial investigation-feasibility study, consultant and external legal fees,
corrective measures studies, monitoring, and any other component remediation costs that can be reasonably estimated. Accruals are
adjusted as further information develops or circumstances change. Recoveries from other parties are recorded as assets when their
receipt is deemed probable. Although environmental costs and accruals are presently not material to the Company’s results of
operations, financial position, or cash flows, such estimates could change as the processes draw closer to final resolution.
Waste Obligation
Waste Electrical and Electronic Equipment (“WEEE”) Directives issued by the European Union require producers of electrical and
electronic goods to be financially responsible for specified collection, recycling, treatment and disposal of past and future covered
products. The Company’s estimated liability for these costs involves a number of uncertainties and takes into account certain
assumptions and judgments including collection costs, return rates and product lives. Should actual costs and activities differ from the
Company’s estimates and assumptions, revisions to the estimated liability may be required.
Fair Value
The Company currently uses recurring fair value measurements in several areas including marketable securities, pension plan assets
and derivatives. The Company also uses fair value measurements on a nonrecurring basis when testing goodwill and long-lived assets
for impairment.
The Company uses third parties to report the fair values of its marketable securities and pension plan assets, though the responsibility
remains with the Company’s management. The Company utilizes various sources of pricing as well as trading and other market data
in its process of corroborating fair values and testing default level assumptions for these investments. The Company also uses third
parties to assist with the valuation of certain illiquid securities as well as the valuation of certain assets acquired and liabilities
assumed in business combinations when it is determined that an income approach is the most appropriate method to determine fair
value.
In certain situations, there may be little or no market data available at the measurement date for the Company’s fair value
measurements, thus requiring the use of significant unobservable inputs. Such measurements require more judgment and are generally
classified as Level 3 within the fair value hierarchy.
The Company’s Level 3 recurring fair value measurements are related to certain corporate debt, asset-backed and mortgage-backed
securities. The fair values are classified as Level 3 due to (1) a low number of observed trades or pricing sources or (2) variability in
the pricing data is higher than expected. There is less certainty that the fair values of these securities would be realized in the market
due to the low level of observable market data.
Nonrecurring, nonfinancial fair value measurements are most often based on inputs or assumptions that are less observable in the
market, thus requiring more judgment on the part of the Company in estimating fair value. Determination of the highest and best use
of an asset from the perspective of market participants can result in fair value measurements that differ from estimates based on the
Company’s specific intentions for the asset.
Refer to Part II, Item 8, Notes 2 and 3 of the Notes to Consolidated Financial Statements for information regarding the Company’s fair
value accounting policies and fair value measurements, respectively. Refer to Part II, Item 8, Note 17 of the Notes to Consolidated
Financial Statements for information regarding pension plan assets.
Other-Than-Temporary Impairment of Marketable Securities
The Company records its investments in marketable securities at fair value through accumulated other comprehensive earnings in
accordance with the accounting guidance for available-for-sale securities. 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. 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. The OTTI is
separated into two components, the amount representing the credit loss which is recognized in earnings and the amount related to all
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