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Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
Assets and liabilities are measured at fair value according to a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs, such as quoted prices in active markets;
Level 2. Inputs, other than the quoted price in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Our assets and liabilities measured at fair value on a recurring basis consist of short-term investments, which are classified in Level 1 and Level 2 of the fair value hierarchy, derivative contracts used to hedge currency and interest rate risk, which are classified in Level 2 of the fair value hierarchy, and contingent consideration accruals, which are classified in Level 3 of the fair value hierarchy, and are shown in the tables below. In determining fair value for Level 2 instruments, we apply a market approach, using quoted active market prices relevant to the particular instrument under valuation, giving consideration to the credit risk of both the respective counterparty to the contract and the Company. To determine our credit risk we estimated our credit rating by benchmarking the price of outstanding debt to publicly-available comparable data from rated companies. Using the estimated rating, our credit risk was quantified by reference to publicly-traded debt with a corresponding rating. We value contingent consideration liabilities using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. Contingent consideration arrangements obligate us to pay the sellers of an acquired entity if specified future events occur or conditions are met such as the achievement of technological or revenue milestones. We use various key assumptions, such as the probability of achievement of the milestones and the discount rate, to represent the non-performing risk factors and time value when applying the income approach. We regularly review the fair value of the contingent consideration, and reflect any change in the accrual in the consolidated statements of income in the line items commensurate with the underlying nature of milestone arrangements.
The following table presents our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011:
 
 
As of December 31, 2012
 
As of December 31, 2011
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
$
7,989

 
$
82,462

 
$
—

 
$
90,451

 
$
9,290

 
$
45,287

 
$
—

 
$
54,577

Foreign exchange contracts
—

 
833

 
—

 
833

 
—

 
6,147

 
—

 
6,147

 
$
7,989

 
$
83,295

 
$
—

 
$
91,284

 
$
9,290

 
$
51,434

 
$
—

 
$
60,724

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
12,911

 
$
—

 
$
12,911

 
$
—

 
$
2,492

 
$
—

 
$
2,492

Contingent Consideration
—

 
—

 
18,983

 
18,983

 
—

 
—

 
38,646

 
38,646

 
$
—

 
$
12,911

 
$
18,983

 
$
31,894

 
$
—

 
$
2,492

 
$
38,646

 
$
41,138



For liabilities with Level 3 inputs, the following table summarizes the activity as of December 31, 2012:
(in thousands) (unaudited)
 
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3) Contingent Consideration 
BALANCE AT DECEMBER 31, 2010
 
$
22,510

Additions from acquisitions
 
24,885

Payments
 
(9,065
)
Loss included in earnings
 
253

Foreign currency translation
 
63

BALANCE AT DECEMBER 31, 2011
 
$
38,646

Additions from acquisitions
 
16,875

Payments
 
(6,008
)
Gain included in earnings
 
(11,463
)
Reversals
 
(19,129
)
Foreign currency translation
 
62

BALANCE AT DECEMBER 31, 2012
 
$
18,983


For the year ended December 31, 2012, the gain of $11.5 million was recognized in earnings as follows: $6.7 million in cost of sales and $4.8 million in general and administrative, restructuring, integration and other. During 2012, a reduction in the fair value of contingent consideration of $19.1 million was recorded against goodwill shortly after the acquisition and during the measurement period.
The carrying values of financial instruments, including cash and equivalents, accounts receivable, accounts payable and other accrued liabilities, approximate their fair values due to their short-term maturities. The estimated fair value of long-term debt as disclosed in Note 15 was based on current interest rates for similar types of borrowings. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future. There were no fair value adjustments in the years ended December 31, 2012 and 2011 for nonfinancial assets or liabilities required to be measured at fair value on a nonrecurring basis other than the impairment of a cost-method investment as discussed in Note 10.