Texas Instruments 2008 Annual Report Download - page 23

TEXAS INSTRUMENTS 2008 ANNUAL REPORT [ 21 ]
10. Fair value measurement
As discussed in Note 1, effective January 1, 2008, we adopted SFAS 157 for measuring and reporting financial assets and liabilities at
fair value. SFAS 157 defines fair value as the price that would be received to sell 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 on the
measurement date.
SFAS 157 establishes a three-level disclosure hierarchy to indicate the level of judgment used to estimate fair value measurements:
Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation
with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets
that are not active. Level 2 also includes assets and liabilities valued using models or other pricing methodologies that do
not require significant judgment because the input assumptions used in the models, such as interest rates and volatility
factors, are corroborated by readily observable data.
Level 3 – Uses inputs that are unobservable, supported by little or no market activity and reflect significant management judgment.
These values are generally determined using pricing models that utilize management’s estimates of market participant
assumptions.
Investments in auction-rate securities are our only Level 3 assets. In the first quarter of 2008, these assets were transferred from
Level 2 because quoted prices from broker-dealers were unavailable due to events described in Note 9. As a result, we use a DCF
model to determine the estimated fair value of these investments. Assumptions used in preparing this model include estimates for the
amount and timing of future interest and principal payments, and the rate of return required by investors to own these securities in the
current environment. In making these assumptions, we considered relevant factors including: the formula for each security that defines
the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such
formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department
of Education of the underlying student loans, guarantees by other third parties, and additional credit enhancements provided through
other means; and, publicly available pricing data for recently traded student loan asset-backed securities that are not subject to
auctions. Our estimate of the rate of return required by investors to own these securities also considers the current reduced liquidity for
auction-rate securities.
The table below sets forth, by level, our financial assets and liabilities that were accounted for at fair value as of December 31, 2008. The
table does not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.