O'Reilly Auto Parts 2009 Annual Report Download - page 77

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63
The table below represents unrealized losses related to derivative amounts included in “Accumulated other comprehensive loss” for the
years ended December 31, (in thousands):
Balance in
Accumulated Other
Comprehensive Loss
Contract Type 2009 2008
Interest Rate Swaps $ 13,053 $ 18,874
NOTE 9 – FAIR VALUE MEASUREMENTS
The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial
instruments. 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 measurement). The three levels of the fair value
hierarchy are set forth below:
• Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active
markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
• Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or
indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or
other valuation methodologies. These models are primarily industry-standard models that consider various assumptions,
including time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as
other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the
full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions
are executed in the marketplace.
• Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs
may be used with internally developed methodologies that result in management’s best estimate of fair value from the
perspective of a market participant.
The fair value of the interest rate swap transactions are based on the discounted net present value of the swap using third party quotes
(level 2). Changes in fair market value are recorded in other comprehensive income (loss), and changes resulting from ineffectiveness
are recorded in current earnings.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are
identified in the table below and are as follows:
a) Market approach – prices and other relevant information generated by market transactions involving identical or comparable
assets or liabilities
b) Cost approach – amount that would be required to replace the service capacity of an asset (replacement cost)
c) Income approach – techniques to convert future amounts to a single present amount based on market expectations (including
present value techniques, option-pricing and excess earnings models)