PACCAR 2012 Annual Report Download - page 80

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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
December 31, 2012, 2011 and 2010 (currencies in millions)
P. FAIR VA LU E ME A S U R E M E NT S
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Inputs to valuation techniques used to measure
fair value are either observable or unobservable. These inputs have been categorized into the fair value hierarchy
described below.
Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded
markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and
regularly available in an active market or exchange traded market, valuation of these instruments does not
require a significant degree of judgment.
Level 2 – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which
all significant assumptions are observable in the market.
Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained
from indirect market information that is significant to the overall fair value measurement and which require a
significant degree of management judgment.
There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy during the
year ended December 31, 2012. The Company’s policy is to recognize transfers between levels at the end of the
reporting period.
The Company uses the following methods and assumptions to measure fair value for assets and liabilities subject to
recurring fair value measurements.
Marketable Securities: The Company’s marketable debt securities consist of municipal bonds, government
obligations, investment-grade corporate obligations, commercial paper, asset-backed securities and term deposits.
The fair value of U.S. government obligations is determined using the market approach and is based on quoted
prices in active markets and are categorized as Level 1.
The fair value of non-U.S. government bonds, municipal bonds, corporate bonds, asset-backed securities,
commercial paper, and term deposits is determined using the market approach and is primarily based on matrix
pricing as a practical expedient which does not rely exclusively on quoted prices for a specific security. Significant
inputs used to determine fair value include interest rates, yield curves, credit rating of the security and other
observable market information and are categorized as Level 2.
Derivative Financial Instruments: The Company’s derivative contracts consist of interest-rate swaps, cross currency
swaps and foreign currency exchange contracts. These derivative contracts are traded over the counter and their fair
value is determined using industry standard valuation models, which are based on the income approach (i.e.,
discounted cash flows). The significant observable inputs into the valuation models include interest rates, yield
curves, currency exchange rates, credit default swap spreads and forward spot rates and are categorized as Level 2.
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