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Fair Value Measurements
 6 Months Ended
Jan. 28, 2012
Fair Value Measurements

8. Fair Value Measurements

 

Fair Value Measurements of Financial Instruments

 

Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes market data or assumptions that it believes market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs to the valuation technique.

 

In evaluating the fair value measurement techniques for recording certain financial assets and liabilities, there is a three-level valuation hierarchy under which financial assets and liabilities are designated. The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the inputs used in valuation as of the measurement date. Valuations based on observable or market-based inputs for identical assets or liabilities (Level 1 measurement) are given the highest level of priority, whereas valuations based on unobservable or internally derived inputs (Level 3 measurement) are given the lowest level of priority. The three levels of the fair value hierarchy are defined as follows:

 

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 Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments.  The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

 

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis:

 

  January 28,
2012		     July 30,
2011		  
Financial assets carried at fair value:   (millions)  
Municipal bonds(a)   $ 183.1     $ 179.2  
Auction rate securities(b)     8.9       12.0  
Total   $ 192.0     $ 191.2  

 

 

(a)   Based on Level 1 measurements.

(b)   Based on Level 3 measurements.

                                

Financial assets utilizing Level 3 inputs consist of ARS. The fair value measurements for items in Level 3 have been estimated using an income-approach model. The model considers factors that reflect assumptions market participants would use in pricing, including, among others: the collateralization underlying the investments; the creditworthiness of the counterparty; expected future cash flows, including the next time the security is expected to have a successful auction; and risks associated with the uncertainties in the current market.

 

The following table provides a reconciliation of the beginning and ending balances of the investment securities measured at fair value using significant unobservable inputs (Level 3):

    Three Months Ended     Six Months Ended  
Level 3 (Unobservable inputs)   January 28, 2012     January 29, 2011     January 28, 2012     January 29,  2011  
    (millions)  
Balance at beginning of period   $ 8.9     $ 15.9     $ 12.0     $ 22.7  
Change in temporary valuation adjustment included in other comprehensive income     --       0.8       0.3       0.9  
Redemptions at par     --       (2.6 )     (3.4 )     (9.5 )
Balance at end of period   $ 8.9     $ 14.1     $ 8.9     $ 14.1  
                                 
                                 

 

Cash, cash equivalents and restricted cash are recorded at carrying value, which approximates fair value. Available-for-sale investments in debt securities, which consist primarily of municipal bonds and ARS, are recorded at fair value, which was lower than the related cost basis in the investments by approximately $2.0 million at January 28, 2012 and $2.4 million at July 30, 2011.

 

The Company’s non-financial instruments, which primarily consist of goodwill, intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be recoverable (and at least annually for goodwill), non-financial instruments are assessed for impairment and, if applicable, written-down to (and recorded at) fair value.