Charles Schwab 2013 Annual Report Download - page 72

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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 61 -
based on market pricing data obtained from sources independent of the Company. A quoted price in an active market
provides the most reliable evidence of fair value and is generally used to measure fair value whenever available.
Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset
or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset
or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.
Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the
objectivity of the inputs as follows:
Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that
the Company has the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets,
and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark
yields, issuer spreads, new issue data, and collateral performance.
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any,
market activity for the asset or liability.
Assets and liabilities recorded at fair value
The Company uses the market and income approaches to determine the fair value of assets and liabilities. When available, the
Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data
and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices
do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of
investment assets. The Company generally obtains prices from at least three independent pricing sources for assets recorded
at fair value and may obtain up to five prices on assets with higher risk of limited observable information, such as non-agency
residential mortgage-backed securities. The Company’s primary independent pricing service provides prices based on
observable trades and discounted cash flows that incorporate observable information such as yields for similar types of
securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-
issued” securities. The Company compares the prices obtained from its primary independent pricing service to the prices
obtained from the additional independent pricing services to determine if the price obtained from the primary independent
pricing service is reasonable. The Company does not adjust the prices received from independent third-party pricing services
unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.
Financial instruments not recorded at fair value
Descriptions of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not
recorded at fair value are described below. The Company’s financial instruments not recorded at fair value but for which fair
value can be approximated and disclosed include:
Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair
value.
Cash and investments segregated and on deposit for regulatory purposes include cash and securities purchased
under resale agreements. Securities purchased under resale agreements are short-term in nature and are backed by
collateral that both exceeds the carrying value of the resale agreement and is highly liquid in nature. Accordingly,
the carrying value approximates fair value.
Receivables from/payables to brokers, dealers, and clearing organizations are recorded at contractual amounts and
historically have been settled at those values and are short-term in nature, and therefore approximate fair value.
Receivables from/payables to brokerage clients — net are recorded at contractual amounts and historically have
been settled at those values and are short-term in nature, and therefore approximate fair value.