MasterCard 2009 Annual Report Download - page 100

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except percent and per share data)
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value at
December 31,
2008
Municipal bonds1................................ $ — $485,490 $ — $485,490
Taxable short-term bond funds ...................... 102,588 — — 102,588
Auction rate securities ............................ — — 191,760 191,760
Foreign currency forward contracts .................. — 33,731 — 33,731
Other .......................................... 17 — — 17
Total .......................................... $102,605 $519,221 $191,760 $813,586
1Available-for-sale municipal bonds are carried at fair value and are included in the above tables. However,
held-to-maturity municipal bonds are carried at amortized cost and excluded from the above tables.
The fair value of the Company’s available-for-sale municipal bonds are based on quoted prices for similar
assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.
The fair value of the Company’s short-term bond funds are based on quoted prices and are therefore
included in Level 1 of the Valuation Hierarchy.
The Company’s auction rate securities (“ARS”) investments have been classified within Level 3 of the
Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not
currently observable in the market due to the lack of trading in the securities. This valuation may be revised in
future periods as market conditions evolve. The Company has considered the lack of liquidity in the ARS market
and the lack of comparable, orderly transactions when estimating the fair value of its ARS portfolio. Therefore,
the Company uses the income approach, which includes a discounted cash flow analysis of the estimated future
cash flows adjusted by a risk premium, to estimate the fair value of its ARS portfolio. When a determination is
made to classify a financial instrument within Level 3, the determination is based upon the significance of the
unobservable parameters to the overall fair value measurement. However, the fair value determination for Level
3 financial instruments may include observable components.
The Company’s foreign currency forward contracts have been classified within Level 2 of the valuation
hierarchy, as the fair value is based on broker quotes for the same or similar derivative instruments. See Note 23
(Foreign Exchange Risk Management) for further details.
Financial Instruments—Non-Recurring Measurements
Certain financial instruments are carried on the consolidated balance sheets at cost, which approximates fair
value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts
receivable, settlement due from customers, restricted security deposits held for customers, prepaid expenses,
accounts payable, settlement due to customers and accrued expenses.
Investment Securities Held-to-Maturity
The Company utilizes quoted prices for identical and similar securities from active markets to estimate the
fair value of its held-to-maturity securities. See Note 5 (Investment Securities) for fair value disclosure.
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