Dow Chemical 2011 Annual Report Download - page 200

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Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or
exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are
netted with corresponding assets and liabilities. The Company posted cash collateral of $11 million at December 31, 2011
(posted $4 million of cash collateral at December 31, 2010), classified as “Accounts and notes receivable – Other” in the
consolidated balance sheets.
For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), total fair
value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the
exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held
without consideration of transaction costs.
For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets,
fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based
on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability.
Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality
checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial
instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates,
interest rates and implied volatilities obtained from various market sources.
For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value
models, such as a discounted cash flow model or other standard pricing models. See Note J for further information on the types
of instruments used by the Company for risk management.
There were no significant transfers between Levels 1 and 2 during the years ended December 31, 2011 and 2010.
For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including
assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade receivable
conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses
in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables,
discount rate and prepayments are not factors in determining the fair value of the interests. See Note O for further information
on assets classified as Level 3 measurements.
The following table summarizes the changes in fair value measurements using Level 3 inputs for the years ended
December 31, 2011 and 2010:
Fair Value Measurements Using Level 3 Inputs for
Interests Held in Trade Receivable Conduits (1)
In millions
Balance at January 1
Gain included in earnings (2)
Purchases
Settlements
Balance at December 31
2011
$ 1,267
3
1,679
(1,808)
$ 1,141
2010
$ —
8
2,292
(1,033)
$ 1,267
(1) Included in “Accounts and notes receivable – Other” in the consolidated balance
sheets.
(2) Included in "Selling, general and administrative expenses" in the consolidated
statements of income.