Charles Schwab 2015 Annual Report Download - page 86

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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)
- 66 -
x 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.
The Company’s policy is to recognize transfers of financial instruments between levels as of the beginning of the reporting
period in which a transfer occurs.
Assets and liabilities measured at fair value on a recurring basis
The Company’s assets and liabilities measured at fair value on a recurring basis include certain cash equivalents, certain
investments segregated and on deposit for regulatory purposes, other securities owned, and securities available for sale. 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.
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.
Fair value of other financial instruments
Descriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are
described below. The Company’s financial instruments not recorded at fair value but for which fair value can be
approximated and disclosed include:
x Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair
value.
x 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 values of these financial instruments approximate their fair values.
x Receivables from/payables to brokers, dealers, and clearing organizations are short-term in nature, recorded at
contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these
financial instruments approximate fair values.
x 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 the carrying values of these financial
instruments approximate their fair values.
x Securities held to maturity – The fair values of securities held to maturity are obtained using an independent third-
party pricing service similar to investment assets recorded at fair value as discussed above.
x Bank loans – The fair values of the Company’s First Mortgages and HELOCs are estimated based on prices of
mortgage-backed securities collateralized by similar types of loans. PALs are non-purpose revolving lines of credit
secured by eligible assets; accordingly, the carrying values of these loans approximate their fair values.