Rayovac 2013 Annual Report Download - page 115

SPECTRUM BRANDS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(Amounts in thousands, except per share figures)
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 instrument 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.
The Company’s derivatives are valued on a recurring basis using internal models, which are based on
market observable inputs including interest rate curves and both forward and spot prices for currencies and
commodities.
The Company’s net derivative portfolio as of September 30, 2013, contains Level 2 instruments and consists
of commodity and foreign exchange contracts. The fair values of these instruments as of September 30, 2013
were as follows:
Level 1 Level 2 Level 3 Total
Total Assets, net ............................................... $— $ — $— $ —
Liabilities:
Commodity contracts, net ................................... $— $ (86) $— $ (86)
Foreign exchange contracts, net ............................... — (8,103) — (8,103)
Total Liabilities, net ............................................ $— $(8,189) $— $(8,189)
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