Memorex 2013 Annual Report Download - page 91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
value measurements based upon the observability of the inputs to the valuation of an asset or liability as of the measurement
date. Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2
measurements include quoted prices in markets that are not active or model inputs that are observable either directly or
indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
A financial instrument’s level within the hierarchy is based on the highest level of any input that is significant to the fair value
measurement. Following is a description of our valuation methodologies used to estimate the fair value for our assets and
liabilities.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets such as goodwill, intangible assets and property, plant and equipment are recorded
at fair value when an impairment is recognized or at the time acquired in a business combination. As discussed in Note 6 —
Intangible Assets and Goodwill and Note 7 — Restructuring and Other Expense, during each of 2012 and 2011, we recorded
impairment charges associated with goodwill, intangible assets or property, plant and equipment and reduced the carrying
amount of such assets subject to the impairment to their estimated fair value. Additionally, as discussed in Note 4 —
Acquisitions, the Company consummated various business acquisitions during 2012 and 2011 and recorded the acquired
assets and liabilities, including goodwill, intangible assets and property, plant and equipment at their estimated fair value. The
determination of the estimated fair value of such assets required the use of significant unobservable inputs which would be
considered Level 3 fair value measurements.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at their estimated fair value on a recurring basis, including cash
and cash equivalents, derivative instruments and our contingent consideration obligations associated with certain acquisitions.
Derivative Financial Instruments
We maintain a foreign currency exposure management policy that allows the use of derivative instruments, principally
foreign currency forward, option contracts and option combination strategies to manage risks associated with foreign
exchange rate volatility. Generally, these contracts are entered into to fix the U.S. dollar amount of the eventual cash flows.
The derivative instruments range in duration at inception from between one to 16 months. The fair value of our derivative
instruments is determined based on inputs that are observable in the public market, but are other than publicly quoted prices
(Level 2). We are exposed to the risk of nonperformance by our counter-parties, but we do not anticipate nonperformance by
any of these counter-parties. We actively monitor our exposure to credit risk through the use of credit approvals and credit
limits and by using major international banks and financial institutions as counter-parties.
Cash Flow Hedges. We attempt to substantially mitigate the risk that forecasted cash flows denominated in foreign
currencies may be adversely affected by changes in the currency exchange rates through the use of option, forward and
combination option contracts. The degree of our hedging can fluctuate based on management judgment and forecasted
projections. We formally document all relationships between hedging instruments and hedged items, as well as our risk
management objective and strategy for undertaking the hedged items. This process includes linking all derivatives to
forecasted transactions. We formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives
used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. At December 31,
2013 and 2012, our contracts had durations of 12 months or less. The fair value of these contracts is recorded in other current
assets and other current liabilities on our Consolidated Balance Sheets.
Gains and losses related to cash flow hedges are deferred in accumulated other comprehensive loss with a
corresponding asset or liability. When the hedged transaction occurs, the gains and losses in accumulated other
comprehensive loss are reclassified into our Consolidated Statements of Operations in the same line as the item being
hedged. If at any time it is determined that a derivative is not highly effective as a hedge, we discontinue hedge accounting
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