Lexmark 2015 Annual Report Download - page 82

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2014
During 2014, the Company transferred, on a gross basis, $9.0 million of U.S. agency debt securities and $0.7 million of corporate debt
securities from Level 1 to Level 2 due to lower levels of market activity for certain securities held at the end of 2014 that are measured
at fair value on a recurring basis. 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. A discussion of transfers in
and out of Level 3 for 2014 is presented above with the tables containing additional Level 3 information.
Valuation Techniques
Marketable Securities - General
The Company evaluates its marketable securities in accordance with Financial Accounting Standards Board (“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 are lacking, fair values may be determined using valuation techniques consistent with the income approach
whereby future cash flows are converted to a single discounted amount.
Marketable Securities - Valuation Process
The Company uses third-party pricing information to report the fair values of the securities in which it is invested, though the
responsibility of valuation remains with the Company’s management. The Company corroborates the third-party pricing information
with additional pricing data it obtains from other available sources, but does not use the additional pricing data to report fair values.
Each quarter, the Company utilizes multiple sources of pricing as well as broker quotes, trading and other market data in its process of
assessing the reasonableness of the third-party pricing information 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 to reasonably determine
that the price provided is consistent with the accounting guidance for fair value measurements. The fair values of the Company’s
investments in marketable securities are based on third-party pricing information without adjustment. As permitted under the
accounting guidance for fair value disclosures the Company has not provided quantitative information about the significant
unobservable inputs used in the fair value measurements of certain securities.
The fair values reported for securities classified as Level 3 in the fair value hierarchy are less likely to be transacted upon than the fair
values reported for securities classified in other levels of the fair value hierarchy.
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 valuation process described above is used to corroborate the prices of these
securities. 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 typically classified as Level 2.
Corporate Debt Securities
The corporate debt securities in which the Company is invested most often have multiple sources of pricing with relatively low
dispersion. The valuation process described above is used to corroborate the prices of these securities. The fair values of these
securities are generally classified as Level 2. These securities may be classified as Level 3 if the Company is unable to corroborate the
prices of these securities with a sufficient level of observable market data. In addition, certain corporate debt securities are classified
as Level 1 due to trading volumes sufficient to indicate an active market for the securities.
Smaller amounts of commercial paper and certificates of deposit, which generally have shorter maturities and less frequent trades, are
also grouped into this fixed income sector. Such securities are valued via mathematical calculations using observable inputs until such
time that market activity reflects an updated price. The fair values of these securities are typically classified as Level 2 measurements.
Asset-Backed and Mortgage-Backed Securities
Securities in this group include asset-backed securities, U.S. agency mortgage-backed securities, and other mortgage-backed
securities. These securities generally have lower levels of trading activity than government and agency debt securities and corporate
debt securities and, therefore, their fair values may be based on other inputs, such as spread data. The valuation process described
above is used to corroborate the prices of these securities. Fair value measurements of these investments are most often categorized as
Level 2; however, these securities are categorized as Level 3 when there is higher variability in the pricing data, a low number of