Quest Diagnostics 2013 Annual Report Download - page 95

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F- 23
The Company offers certain employees the opportunity to participate in a non-qualified deferred compensation
program. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in a
hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies,
with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. Changes in the cash
surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments.
Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on
the market price per unit multiplied by the number of units. The cash surrender value and the deferred compensation
obligations are classified within Level 2 because their inputs are derived principally from observable market data by correlation
to the hypothetical investments.
The fair value measurements of the Company's interest rate swaps and forward starting swaps are model-derived
valuations as of a given date in which all significant inputs are observable in active markets including certain financial
information and certain assumptions regarding past, present and future market conditions.
Investment in available-for-sale equity securities consists of the revaluation of an existing investment in unregistered
common shares of a publicly-held company. This investment was classified within Level 3 because the unregistered securities
contained restrictions on their sale, and therefore, the fair value measurement reflected a discount for the effect of the
restriction.
In connection with the acquisition of certain businesses of UMass, the Company granted to UMass a call option and
UMass granted to the Company a put option for UMass to acquire an 18.90% equity interest in a newly formed entity. The put
and call options are derivative instruments that have a remaining vesting period of approximately 15 months and their fair
values have been measured using a combination of discounted cash flows and the Black-Scholes-Merton option pricing model
(See Note 5).
The following table provides a reconciliation of the beginning and ending balances of assets and liabilities using
significant unobservable inputs:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Available-
for-Sale
Equity
Securities
Put Option
Derivative
Asset Total
Balance, December 31, 2012 $1$—$1
Purchases, additions and issuances — 8 8
Total gains (losses) - realized/ unrealized:
Included in earnings — (4)(4)
Included in other comprehensive income (loss) (1)— (1)
Transfers in and out of Level 3 — — —
Balance, December 31, 2013 $—$4$4
Call Option
Derivative
Liability
Balance, December 31, 2012 $—
Purchases, additions and issuances 11
Total (gains) losses - realized/ unrealized:
Included in earnings (3)
Transfers in and out of Level 3 —
Balance, December 31, 2013 $8
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)