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Fair Value Measurements
 12 Months Ended
Dec. 31, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements

13. Fair Value Measurements

We determine a fair value measurement based on the assumptions a market participant would use in pricing an asset or liability. The fair value measurement guidance established a three level hierarchy making a distinction between market participant assumptions based on (i) unadjusted quoted prices for identical assets or liabilities in an active market (Level 1), (ii) quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (Level 2), and (iii) prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (Level 3).

We had an ineffective interest rate swap that terminated in March of fiscal 2011. The swap was valued using a valuation model with inputs other than quoted market prices that are both observable and unobservable.

We endeavored to utilize the best available information in measuring the fair value of the interest rate swap. The interest rate swap was classified in its entirety based on the lowest level of input that is significant to the fair value measurement. To determine fair value of the interest rate swap we used the discounted estimated future cash flows methodology. Assumptions critical to our fair value in the period were: (i) the present value factors used in determining fair value (ii) projected LIBOR, and (iii) the risk of non-performance. These and other assumptions are impacted by economic conditions and expectations of management. We determined that the fair value of our interest rate swap was a level 3 measurement in the fair value hierarchy. The level 3 measurement was the risk of counterparty non-performance on the interest rate swap liability that was not secured by cash collateral. The risk of counterparty non-performance did not affect the fair value at January 1, 2011, the last period prior to termination of the ineffective interest rate swap, due to the fact that the risk of counterparty non-performance was nominal. The fair value of the interest rate swap was a liability of $2.2 million at January 1, 2011. This balance is included in “Other current liabilities” and “Other non-current liabilities” on the Consolidated Balance Sheets.

The following table presents a reconciliation of the level 3 interest rate swap liability measured at fair value on a recurring basis as of December 31, 2011 (in thousands):

 

      September 30,  

Fair value at January 1, 2011

   $ (2,195 ) 

Unrealized gains included in earnings, net

     2,195  
   

 

 

  

Fair value at December 31, 2011

   $ —    
   

 

 

  

The $2.2 million unrealized gain is included in “Interest expense” in the Consolidated Statements of Operations.

Carrying amounts for our financial instruments are not significantly different from their fair value, with the exception of our mortgage. The difference between carrying value and fair value is primarily related to differences between the fixed interest rate of the mortgage and current market rates. To determine the fair value of our mortgage, we used a discounted cash flow model. We believe the mortgage fair value valuation to be Level 2 in the fair value hierarchy, as the valuation model has inputs that are observable for substantially the full term of the liability. Assumptions critical to our fair value in the period were present value factors used in determining fair value and an interest rate. At December 31, 2011, the carrying value and fair value of our mortgage was $243.3 million and $243.1 million, respectively.