Rayovac 2012 Annual Report Download - page 118

SPECTRUM BRANDS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(In thousands, except per share amounts)
These foreign exchange contracts are economic hedges of a related liability or asset recorded in the
accompanying Consolidated Statements of Financial Position. The gain or loss on the derivative hedge contracts
is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At
September 30, 2012 and September 30, 2011 the Company had $172,581 and $265,974, respectively, of such
foreign exchange derivative notional value contracts outstanding.
(8) Fair Value of Financial Instruments
ASC Topic 820: “Fair Value Measurements and Disclosures” (“ASC 820”), establishes a framework for
measuring fair value and expands related disclosures. Broadly, the ASC 820 framework requires fair value to be
determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants. ASC 820 establishes market or observable inputs as the preferred source of values, followed
by assumptions based on hypothetical transactions in the absence of market inputs. The Company utilizes
valuation techniques that attempt to maximize the use of observable inputs and minimize the use of unobservable
inputs. The determination of the fair values considers various factors, including closing exchange or
over-the-counter market pricing quotations, time value and credit quality factors underlying options and
contracts. The fair value of certain derivative financial instruments is estimated using pricing models based on
contracts with similar terms and risks. Modeling techniques assume market correlation and volatility, such as
using prices of one delivery point to calculate the price of the contract’s different delivery point. The nominal
value of interest rate transactions is discounted using applicable forward interest rate curves. In addition, by
applying a credit reserve which is calculated based on credit default swaps or published default probabilities for
the actual and potential asset value, the fair value of the Company’s derivative financial instrument assets reflects
the risk that the counterparties to these contracts may default on the obligations. Likewise, by assessing the
requirements of a reserve for non-performance which is calculated based on the probability of default by the
Company, the Company adjusts its derivative contract liabilities to reflect the price at which a potential market
participant would be willing to assume the Company’s liabilities. The Company has not changed its valuation
techniques in measuring the fair value of any financial assets and liabilities during the year.
The valuation techniques required by ASC 820 are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect
market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:
Level 1 - Unadjusted quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations whose inputs are
observable or whose significant value drivers are observable.
Level 3 - Significant inputs to the valuation model are unobservable.
The Company maintains policies and procedures to value instruments using the best and most relevant data
available. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its
entirety falls must be determined based on the lowest level input that is significant to the fair value measurement.
The Company’s 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. In addition, the Company has risk
management teams that review valuation, including independent price validation for certain instruments. Further,
in other instances, the Company retains independent pricing vendors to assist in valuing certain instruments.
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