THQ 2009 Annual Report Download - page 79

We used the following methods and assumptions to estimate the fair value of the investment securities
included in the table above:
• Level 1—Quoted prices in active markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date. As required by FAS 157, we do not adjust the
quoted prices for these investments.
• Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
• Level 3—Discounted cash flow analysis using unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or liabilities, as discussed
further below.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis
in accordance with FAS 157 as of March 31, 2009:
Level 1 Level 2 Level 3 Total
Cash Equivalents:
Money market funds ................. $38,234 $ — $ — $38,234
Short-term investments:
Municipal securities ................. — 6,399 — 6,399
Corporate securities ................. 1,343 1,062 — 2,405
Long-term investments:
Municipal securities ................. — — 31,102 31,102
Put option ........................ — — 4,541 4,541
Investment in Yuke’s ................. 3,847 — — 3,847
Total ........................... 43,424 7,461 35,643 86,528
Level 3 assets primarily consist of ARS, the majority of which are AAA/Aaa rated and collateralized by
student loans guaranteed by the U.S. government under the Federal Family Education Loan Program.
Most of the remaining securities are backed by monoline bond insurance companies. We have historically
invested in these securities for short periods of time as part of our cash management program. However,
the recent uncertainty in the credit markets has prevented us and other investors from selling these
securities. As such, we classified $35.6 million of these investments as long-term as of March 31, 2009 to
reflect the current lack of liquidity. We believe we have the ability to, and intend to, hold the ARS
classified as available-for-sale until the auction process recovers. All of the securities are investment grade
securities, and we have no reason to believe that any of the underlying issuers of these ARS are presently
at risk or that the underlying credit quality of the assets backing these ARS has been impacted by the
reduced liquidity of these investments. We have continued to receive interest payments on these ARS
according to their terms.
We have estimated the fair value of these ARS using a discounted cash flow analysis that considered the
following key inputs: i) credit quality, ii) estimates on the probability of the issue being called or sold prior
to final maturity, iii) current market rates, and iv) estimates of the next time the security is expected to
have a successful auction. The contractual terms of these securities do not permit the issuer to call, prepay
or otherwise settle the securities at prices less than the stated par value of the security.
We have elected fair value accounting for the put option pursuant to FAS 159, recorded in connection with
an ARS settlement agreement signed with UBS as discussed above. This election was made in order to
mitigate volatility in earnings caused by accounting for the put option and underlying ARS under different
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