Avis 2012 Annual Report Download - page 68

F-12
Fair Value Measurements
The Company measures its assets and liabilities at fair value at the time of acquisition and revalues its derivative assets
and liabilities on a recurring basis. Financial assets and liabilities are classified as follows: Level 1, which refers to assets
and liabilities valued using quoted prices from active markets for identical assets or liabilities; Level 2, which refers to
assets and liabilities for which significant other observable market inputs are readily available; and Level 3, which are
valued based on significant unobservable inputs.
Derivative Instruments
Derivative instruments are used as part of the Company’s overall strategy to manage exposure to market risks associated
with fluctuations in currency exchange rates, interest rates and gasoline costs. As a matter of policy, derivatives are not
used for trading or speculative purposes.
All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated
as hedging instruments are recognized currently in earnings within the same line item as the hedged item (principally
vehicle interest, net). The effective portion of changes in fair value of derivatives designated as cash flow hedging
instruments is recorded as a component of other comprehensive income. The ineffective portion is recognized currently
in earnings within the same line item as the hedged item, including vehicle interest, net or interest related to corporate
debt, net. Amounts included in other comprehensive income are reclassified into earnings in the same period during
which the hedged item affects earnings. Generally, all amounts related to our derivative instruments are recognized in the
Consolidated Statements of Cash Flows consistent with the nature of the hedged item (principally operating activities).
Valuation Techniques. Derivatives entered into by the Company are typically executed over-the-counter and are valued
using internal valuation techniques, as no quoted market prices exist for such instruments. The valuation technique and
inputs depend on the type of derivative and the nature of the underlying exposure. The Company principally uses
discounted cash flows to value these instruments. These models take into account a variety of factors including, where
applicable, maturity, commodity prices, interest rate yield curves of the Company and counterparties, credit curves,
counterparty creditworthiness and currency exchange rates. These factors are applied on a consistent basis and are based
upon observable inputs where available.
Investments
The Company determines the appropriate classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance sheet date. Common stock investments in affiliates over
which the Company has the ability to exercise significant influence but not a controlling interest are carried on the equity
method of accounting. Available-for-sale securities are carried at current fair value with unrealized gains or losses
reported net of taxes as a separate component of stockholders’ equity. Trading securities are recorded at fair value with
realized and unrealized gains and losses reported currently in earnings. As of December 31, 2012, the Company has
investments in available-for-sale securities with a fair value of $7 million.
Joint venture investments are typically accounted for under the equity method of accounting. Under this method, the
Company records its proportional share of the joint venture’s net income or loss within operating expenses in the
Consolidated Statements of Operations. As of December 31, 2012, the Company had investments in several joint
ventures with a carrying value of $34 million, recorded within non-current assets on the Consolidated Balance Sheets.
Aggregate realized gains and losses on investments and dividend income are recorded within operating expenses on the
Consolidated Statements of Operations. During 2012 and 2011, the Company realized a gain of $2 million and $1
million, respectively, from the sale of certain equity investments. There were no net realized gains or losses in 2010.
Self-Insurance Reserves
The Consolidated Balance Sheets include $407 million and $409 million of liabilities associated with retained risks of
liability to third parties as of December 31, 2012 and 2011, respectively. Such liabilities relate primarily to public
liability and third-party property damage claims, as well as claims arising from the sale of ancillary insurance products
including but not limited to supplemental liability, personal effects protection and personal accident insurance. These
obligations represent an estimate for both reported claims not yet paid and claims incurred but not yet reported. The
estimated reserve requirements for such claims are recorded on an undiscounted basis utilizing actuarial methodologies
and various assumptions which include, but are not limited to, the Company’s historical loss experience and projected