Rayovac 2010 Annual Report Download - page 134

SPECTRUM BRANDS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
the underlying transactions did not occur as originally forecasted. As a result, the Predecessor Company
reclassified approximately $(6,191), pretax, of (losses) from AOCI as an adjustment to Interest expense during
the period from October 1, 2008 through August 30, 2009. As a result, the portion of derivative net losses to be
reclassified from AOCI into earnings over the next 12 months was $0. The Predecessor Company’s related
derivative contracts were terminated during the pendency of the Bankruptcy Cases and settled at a loss on the
Effective Date.
(s) Fair Value of Financial Instruments
ASC Topic 820: “Fair Value Measurements and Disclosures,” (“ASC 820”), establishes a new framework for
measuring fair value and expands related disclosures. Broadly, the ASC 820 framework requires fair value to be
determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants. ASC 820 establishes market or observable inputs as the preferred source of values, followed
by assumptions based on hypothetical transactions in the absence of market inputs. The Company utilizes
valuation techniques that attempt to maximize the use of observable inputs and minimize the use of unobservable
inputs. The determination of the fair values considers various factors, including closing exchange or
over-the-counter market pricing quotations, time value and credit quality factors underlying options and
contracts. The fair value of certain derivative financial instruments is estimated using pricing models based on
contracts with similar terms and risks. Modeling techniques assume market correlation and volatility, such as
using prices of one delivery point to calculate the price of the contract’s different delivery point. The nominal
value of interest rate transactions is discounted using applicable forward interest rate curves. In addition, by
applying a credit reserve which is calculated based on credit default swaps or published default probabilities for
the actual and potential asset value, the fair value of the Company’s derivative financial instruments assets
reflects the risk that the counterparties to these contracts may default on the obligations. Likewise, by assessing
the requirements of a reserve for non-performance which is calculated based on the probability of default by the
Company, the Company adjusts its derivative contract liabilities to reflect the price at which a potential market
participant would be willing to assume the Company’s liabilities. The Company has not changed its valuation
techniques in measuring the fair value of any financial assets and liabilities during the year.
The valuation techniques required by ASC 820 are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect
market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:
Level 1 Unadjusted quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived valuations whose
inputs are observable or whose significant value drivers are observable.
Level 3 Significant inputs to the valuation model are unobservable.
The Company maintains policies and procedures to value instruments using the best and most relevant data
available. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its
entirety falls must be determined based on the lowest level input that is significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability. In addition, the Company has risk
management teams that review valuation, including independent price validation for certain instruments. Further,
in other instances, the Company retains independent pricing vendors to assist in valuing certain instruments.
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