MasterCard 2013 Annual Report Download - page 74

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
70
The fair value of the Company's available-for-sale municipal securities, U.S. Government and Agency securities,
corporate securities, asset-backed securities and other fixed income securities included in the Other category are based
on quoted prices for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.
The Company's foreign currency derivative contracts have also been classified within Level 2 in the Other category of
the Valuation Hierarchy, as the fair value is based on broker quotes for the same or similar derivative instruments. See
Note 20 (Foreign Exchange Risk Management) for further details.
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. 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. 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. Historically, the Company used the income approach, which included a discounted cash flow
analysis of the estimated future cash flows adjusted by a risk premium for the ARS portfolio, to estimate the fair value
of its ARS portfolio. The Company estimated the fair value of its ARS portfolio to be a 10% discount to the par value
as of December 31, 2013 and 2012. The Company did not realize any material losses on its ARS portfolio during the
year ended December 31, 2013.
Financial Instruments - Non-Recurring Measurements
Certain financial instruments are carried on the consolidated balance sheet at cost, which approximates fair value due
to their short-term, highly liquid nature. These instruments include cash and cash equivalents, restricted cash, accounts
receivable, settlement due from customers, restricted security deposits held for customers, prepaid expenses, accounts
payable, settlement due to customers and accrued expenses. In addition, nonmarketable equity investments are measured
at fair value on a nonrecurring basis for purposes of initial recognition and impairment testing.
Settlement and Other Guarantee Liabilities
The Company estimates the fair value of its settlement and other guarantees using the market pricing approach which
applies market assumptions for relevant though not directly comparable undertakings, as the latter are not observable
in the market given the proprietary nature of such guarantees. At December 31, 2013 and 2012, the carrying value and
fair value of settlement and other guarantee liabilities were not material. Settlement and other guarantee liabilities are
classified as Level 3 of the fair value hierarchy as their valuation requires substantial judgment and estimation of factors
that are not currently observable in the market. For additional information regarding the Company's settlement and
other guarantee liabilities, see Note 19 (Settlement and Other Risk Management).
Refunding Revenue Bonds
The Company holds refunding revenue bonds with the same payment terms, and which contain the right of set-off with
a capital lease obligation related to the Company's global technology and operations center located in O'Fallon, Missouri.
The Company has netted the refunding revenue bonds and the corresponding capital lease obligation in the consolidated
balance sheet and estimates that the carrying value approximates the fair value for these bonds. See Note 7 (Property,
Plant and Equipment) for further details.
Non-Financial Instruments
Certain assets and liabilities are measured at fair value on a nonrecurring basis for purposes of initial recognition and
impairment testing. The Company's non-financial assets and liabilities measured at fair value on a nonrecurring basis
include property, plant and equipment, goodwill and other intangible assets. These assets are subject to fair value
adjustments in certain circumstances, such as when there is evidence of impairment.