Coca Cola 2010 Annual Report Download - page 143

NOTE 16: FAIR VALUE MEASUREMENTS
Accounting principles generally accepted in the United States define fair value as 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 at the measurement date. Additionally, the inputs
used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize
the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure
fair value are as follows:
• Level 1 — Quoted prices in active markets for identical assets or liabilities.
• Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities
included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for
similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by
observable market data.
• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies
and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are
required to be recorded at fair value on a recurring basis. For our Company, the only assets and liabilities that are
adjusted to fair value on a recurring basis are investments in equity and debt securities classified as trading or
available-for-sale and derivative instruments.
Investments in Trading and Available-for-Sale Securities
The fair values of our investments in trading and available-for-sale securities were primarily determined using quoted
market prices from daily exchange traded markets. The fair values of these instruments were based on the closing price
as of the balance sheet date and were classified as Level 1.
Derivative Financial Instruments
The fair values of our futures contracts were primarily determined using quoted contract prices on futures exchange
markets. The fair values of these instruments were based on the closing contract price as of the balance sheet date and
were classified as Level 1.
The fair values of our forward contracts and foreign currency options were determined using standard valuation models.
The significant inputs used in these models are readily available in public markets or can be derived from observable
market transactions; and therefore, have been classified as Level 2. Inputs used in these standard valuation models for
both forward contracts and foreign currency options include the applicable exchange rate, forward rates and discount
rates. The standard valuation model for foreign currency options also uses implied volatility as an additional input. The
discount rates are based on the historical U.S. Deposit or U.S. Treasury rates, and the implied volatility specific to
individual foreign currency options is based on quoted rates from financial institutions.
Included in the fair value of derivative instruments is an adjustment for nonperformance risk. The adjustment is based
on the current one-year credit default swap (‘‘CDS’’) rate applied to each contract, by counterparty. We use our
counterparty’s CDS rate when we are in an asset position and our own CDS rate when we are in a liability position.
The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivative
instruments.
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