ADP 2009 Annual Report Download - page 49

On April 1, 2009, the Company adopted FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment of debt
securities, where fair value is below amortized cost, is triggered by one of the following: an entity has the intent to sell a security, it is more
likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or the entity does not expect to
recover the entire amortized cost basis of the security (also known as a credit loss). If an entity intends to sell a security or if it is more likely
than not that the entity will be required to sell the security before recovery, the entity would recognize a charge in earnings equal to the entire
difference between the security’ s amortized cost basis and its fair value. If an entity does not intend to sell a security or it is not more likely
than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss,
which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income
(loss).
At June 30, 2009, the Company evaluated whether the losses related to any of its debt securities in an unrealized loss position, which were
p
rimarily comprised of corporate bonds and commercial mortgage backed securities, were due to credit losses utilizing a variety of quantitative
and qualitative factors including whether the Company will be able to collect all amounts due under the contractual terms of the security,
information about current and past events of the issuer, and the length of time and the extent to which fair value has been less than the cost
basis. At June 30, 2009, other than the $18.3 million in losses that were recorded during the first and third quarters of fiscal 2009 related to the
investment in the Reserve Fund, the Company concluded that unrealized losses of $101.4 million for available-for-sale securities held at June
30, 2009 were not credit losses and were attributable to other factors, including changes in interest rates. Additionally, the Company concluded
that it did not have the intent to sell any securities in an unrealized loss position at June 30, 2009 and that it was not more likely than not that
the Company would be required to sell a security in an unrealized loss position at June 30, 2009 before recovery. As a result, the $101.4 million
in unrealized losses were recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets at June 30, 2009.
NOTE 6. FAIR VALUE MEASUREMENTS
On July 1, 2008, the Company adopted SFAS No. 157 for assets and liabilities recognized or disclosed at fair value on a recurring basis. SFAS
N
o. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value
measurements. SFAS No. 157 defines fair value as 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. SFAS No.
157 establishes market or observable inputs as the preferred source of fair value, followed by assumptions based on hypothetical transactions in
the absence of market inputs.
The valuation techniques required by SFAS No. 157 are based upon observable and unobservable inputs. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following
three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1
having the highest priority and Level 3 having the lowest priority.
Available-for-sale securities included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service. To determine the fair
value of our Level 2 investments, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer
quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information.
Over 99% of our Level 2 investments are valued utilizing inputs obtained from a pricing service. The Company reviews the values generated
by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations
from at least one other observable source. The Company has not adjusted the prices obtained from the independent pricing service. The
Company has no available-for-sale securities included in Level 3.
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Level 1 Fair value is determined based upon closing prices for identical instruments that are traded on active exchanges.
Level 2 Fair value is determined based upon quoted prices for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant
value drivers are observable.
Level 3 Fair value is determined based upon significant inputs to the valuation model that are unobservable.