Dollar Tree 2010 Annual Report Download - page 36

Notes to Consolidated Financial Statements
Financial Instruments
The Company utilizes derivative fi nancial instruments
to reduce its exposure to market risks from changes
in interest rates and diesel fuel costs. By entering into
receive-variable, pay-fi xed interest rate and diesel fuel
swaps, the Company limits its exposure to changes
in variable interest rates and diesel fuel prices. The
Company is exposed to credit-related losses in the
event of non-performance by the counterparty to
these instruments but minimizes this risk by entering
into transactions with high quality counterparties.
Interest rate or diesel fuel cost differentials paid or
received on the swaps are recognized as adjustments
to interest and freight expense, respectively, in the
period earned or incurred. The Company formally
documents all hedging relationships, if applicable, and
assesses hedge effectiveness both at inception and on
an ongoing basis. The interest rate swaps that qualify
for hedge accounting are recorded at fair value in the
accompanying consolidated balance sheets as a compo-
nent of “other liabilities”. Changes in the fair value of
these interest rate swaps are recorded in “accumulated
other comprehensive loss”, net of tax, in the accom-
panying consolidated balance sheets. The Company
entered into diesel fuel swaps in the fourth quarter of
2009 that do not qualify for hedge accounting. The
fair values of these diesel fuel swaps are recorded in
the accompanying consolidated balance sheets as a
component of “other current assets”.
Fair Value Measurements
In 2008, the Financial Accounting Standards Board
(FASB) released new guidance which delayed the
effective date to value all non-fi nancial assets and
non-fi nancial liabilities, except those that are recog-
nized or disclosed at fair value on a recurring basis (at
least annually) until 2009. The adoption of the new
guidance did not have a signifi cant impact on the
Consolidated Financial Statements.
Fair value is defi ned as an exit price, representing
the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a
market-based measurement that should be determined
based on assumptions that market participants would
use in pricing an asset or liability. As a basis for
considering such assumptions, a fair value hierarchy
has been established that prioritizes the inputs used
to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurement)
and the lowest priority to unobservable inputs (level
3 measurements). The three levels of the fair value
hierarchy are as follows:
Level 1 - Quoted prices in active markets for identical
assets or liabilities;
Level 2 - Quoted prices for similar instruments in
active markets; quoted prices for identical or
similar instruments in markets that are not
active; and
Level 3 - Unobservable inputs in which there is little or
no market data which require the reporting
entity to develop its own assumptions.
The Company’s cash and cash equivalents, short-
term investments, restricted investments and interest
rate and diesel fuel swaps represent the fi nancial
assets and liabilities that were accounted for at fair
value on a recurring basis as of January 29, 2011. As
required, fi nancial assets and liabilities are classifi ed
in their entirety based on the lowest level of input
that is signifi cant to the fair value measurement.
The Company’s assessment of the signifi cance of a
particular input to the fair value measurement requires
judgment, and may affect the valuation of fair value
assets and liabilities and their placement within the fair
value hierarchy levels. The fair value of the Company’s
cash and cash equivalents, short-term investments
and restricted investments was $311.2 million, $174.8
million and $72.1 million, respectively at January 29,
2011. These fair values were determined using Level
1 measurements in the fair value hierarchy. The fair
value of the interest rate swap as of January 29, 2011
was a liability of $0.6 million, while the fair value of
the diesel fuel swap was an asset of $0.2 million as
of January 29, 2011. These fair values were estimated
using Level 2 measurements in the fair value hierarchy.
These estimates used discounted cash fl ow calculations
based upon forward interest-rate yield and diesel cost
curves. The curves were obtained from independent
pricing services refl ecting broker market quotes.
The carrying value of the Company’s long-term
debt approximates its fair value because the debt’s
interest rate varies with market interest rates.
Certain assets and liabilities are measured at fair
value on a nonrecurring basis; that is, the assets and
liabilities are not measured at fair value on an ongoing
basis but are subject to fair value adjustments in
certain circumstances (e.g., when there is evidence of
34 DOLLAR TREE, INC. ♦ 2010 Annual Report