Visa 2011 Annual Report Download - page 93

Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011
(in millions, except as noted)
There were no transfers between Level 1 and Level 2 assets during fiscal 2011.
Level 1 assets measured at fair value on a recurring basis. Cash equivalents (money market funds), mutual fund equity securities, U.S. Treasury
securities and exchange-traded equity securities are classified as Level 1 within the fair value hierarchy, as fair value is based on quoted prices in active
markets.
Level 2 assets and liabilities measured at fair value on a recurring basis. U.S. government-sponsored debt securities and foreign exchange derivative
instruments are classified as Level 2 within the fair value hierarchy. The fair value of the government-sponsored debt securities is based on quoted prices in
active markets for similar assets. Foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived
principally from or corroborated with observable market data. There was no substantive change to the valuation techniques and related inputs used to measure
fair value during fiscal 2011.
Level 3 assets and liabilities measured at fair value on a recurring basis. Auction rate securities are classified as Level 3 due to a lack of trading in
active markets and a lack of observable inputs in measuring fair value. During fiscal 2011, one of the auction rate securities was called. As a result, the
Company received proceeds of $10 million and recorded a pre-tax gain of $4 million in investment income, net, on the consolidated statements of operations.
There was no substantive change to the valuation techniques and related inputs used to measure fair value during fiscal 2011.
Visa Europe put option agreement. The Company granted Visa Europe a perpetual put option which is carried at fair value in accrued liabilities on the
consolidated balance sheets. The fair value of the put option at September 30, 2011 and 2010, was $145 million and $267 million, respectively. Changes in
the fair value are recorded as non-cash, non-operating income in the Company's consolidated statements of operations. See Note 2—Visa Europe. The liability
is classified within Level 3 as the assumed probability that Visa Europe will elect to exercise its option and the estimated P/E differential are among several
unobservable inputs used to value the put option.
Earn-out related to PlaySpan acquisition. In connection with the PlaySpan acquisition in the second quarter of fiscal 2011, the Company recorded a
liability of $24 million to reflect the fair value of a potential earn-out provision included in the purchase agreement. The liability is classified as Level 3 due to
a lack of observable inputs, such as the likelihood of meeting certain future revenue targets and other milestones. There was no significant change to the fair
value of the potential earn-out provision during fiscal 2011. Changes in fair value are included in general and administrative expense on the consolidated
statements of operations. See Note 5—Acquisitions.
A separate roll-forward of Level 3 investments measured at fair value on a recurring basis is not presented because the primary activities during fiscal
2011 and 2010 are already discussed above.
Assets measured at fair value on a nonrecurring basis. Certain financial assets are measured at fair value on a nonrecurring basis.
Non-marketable equity investments and investments accounted for under the equity method. Strategic investments are classified as Level 3 due to the
absence of quoted market prices, inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require
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