HCA Holdings 2012 Annual Report Download - page 134

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HCA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 — FINANCIAL INSTRUMENTS (continued)
Credit-risk-related Contingent Features (continued)
collateral related to these agreements. If we had breached these provisions at December 31, 2012, we would have
been required to settle our obligations under the agreements at their aggregate, estimated termination value of
$471 million.
NOTE 9 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”)
emphasizes fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value
measurement should be determined based on the assumptions market participants would use in pricing the asset
or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820
utilizes a fair value hierarchy that distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs classified within Levels 1 and 2 of
the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. 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 may include quoted prices for similar assets and liabilities in active markets,
as well as inputs observable for the asset or liability (other than quoted prices), such as interest rates, foreign
exchange rates, and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any,
related market activity. In instances where the determination of the fair value measurement is based on inputs
from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input significant to the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability.
Cash Traded Investments
Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy
because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources
with reasonable levels of price transparency. Certain types of cash traded instruments are classified within
Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price
transparency. Such instruments include auction rate securities (“ARS”) and limited partnership investments. The
transaction price is initially used as the best estimate of fair value.
Our wholly-owned insurance subsidiaries had investments in tax-exempt ARS, which are backed by student
loans substantially guaranteed by the federal government, of $68 million ($74 million par value) at December 31,
2012. We do not currently intend to attempt to sell the ARS as the liquidity needs of our insurance subsidiaries
are expected to be met by other investments in their investment portfolios. During 2012 and 2011, certain issuers
and their broker/dealers redeemed or repurchased $65 million and $112 million, respectively, of our ARS at par
value. The valuation of these securities involved management’s judgment, after consideration of market factors
and the absence of market transparency, market liquidity and observable inputs. Our valuation models derived a
fair market value compared to tax-equivalent yields of other student loan backed variable rate securities of
similar credit worthiness and similar effective maturities.
F-26