Southwest Airlines 2011 Annual Report Download - page 109

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remaining time value associated with those derivatives that have not yet settled. The Company also considers
counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has
consistently applied these valuation techniques in all periods presented and believes it has obtained the most
accurate information available for the types of derivative contracts it holds.
The Company’s investments associated with its excess benefit plan consist of mutual funds that are
publicly traded and for which market prices are readily available. This plan is a deferred compensation plan
designed to hold Employee contributions in excess of limits established by Section 415 of the Internal Revenue
Code. Payments under this plan are made based on the participant’s distribution election and plan balance. Assets
related to the funded portion of the deferred compensation plan are held in a trust and we remain liable to these
participants for the unfunded portion of the plan. The Company records changes in the fair value of the liability
and the asset in the Company’s earnings.
All of the Company’s auction rate security instruments, totaling $67 million at December 31, 2011, are
classified as available-for-sale securities and are reflected at estimated fair value in the Consolidated Balance
Sheet. In periods when an auction process successfully took place every 30-35 days, quoted market prices would
be readily available, which would qualify the securities as Level 1. However, due to events in credit markets
beginning during first quarter 2008, the auction events for these remaining instruments failed, and have
continued to fail through the current period. Therefore, the Company determines the estimated fair values of
these securities utilizing a discounted cash flow analysis or other type of valuation model. The Company has
performed, and routinely updates, a valuation for each of its auction rate security instruments, considering,
among other items, the collateralization underlying the security investments, the expected future cash flows,
including the final maturity, associated with the securities, and estimates of the next time the security is expected
to have a successful auction or return to full par value.
In association with its estimate of fair value related to auction rate security instruments as of December 31,
2011, the Company has recorded a temporary unrealized decline in fair value of $14 million, with an offsetting
entry to AOCI. The Company continues to believe that this decline in fair value is due entirely to market liquidity
issues, because the underlying assets for the majority of these auction rate securities held by the Company are
currently rated investment grade by Moody’s, Standard and Poor’s, and Fitch and are almost entirely backed by
the U.S. Government. The range of maturities for the Company’s auction rate securities are from 7 years to 36
years. Considering the relative insignificance of these securities in comparison to the Company’s liquid assets
and other sources of liquidity, the Company has no current intention of selling these securities nor does it expect
to be required to sell these securities before a recovery in their cost basis. At the time of the first failed auctions
during first quarter 2008, the Company held a total of $463 million in auction rate securities and, since that time,
has been able to sell $382 million of these instruments at par value.
The Company remains in discussions with its remaining counterparties to determine whether mutually
agreeable decisions can be reached regarding the effective repurchase of its remaining auction rate securities. The
Company continues to earn interest on its outstanding auction rate security instruments. Any future fluctuation in
fair value related to these instruments that the Company deems to be temporary, including any recoveries of
previous temporary write-downs, would be recorded to AOCI. If the Company determines that any future
valuation adjustment is other than temporary, it will record a charge to earnings as appropriate.
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