DTE Energy 2010 Annual Report Download - page 16

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Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires
details of transfers in and out of Level 1 and 2 fair value measurements and the gross presentation of activity within the Level 3 fair
value measurement roll forward. The new disclosures are required of all entities that are required to provide disclosures about
recurring and nonrecurring fair value measurements. The Company adopted ASU 2010-06 effective January 1, 2010, except for the
gross presentation of the Level 3 fair value measurement roll forward which is effective for annual reporting periods beginning after
December 15, 2010 and for interim reporting periods within those years.
NOTE 4 — FAIR VALUE
Fair value is defined as 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 a principal or most advantageous market. Fair value is a market-based measurement
that is determined based on inputs, which refer broadly to assumptions that market participants’ use in pricing assets or liabilities.
These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company makes certain
assumptions it believes that market participants would use in pricing assets or liabilities, including assumptions about risk, and the
risks inherent in the inputs to valuation techniques. Credit risk of the Company and its counterparties is incorporated in the valuation
of assets and liabilities through the use of credit reserves, the impact of which is immaterial at December 31, 2010 and 2009. The
Company believes it uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of
unobservable inputs.
A fair value hierarchy has been established, which prioritizes the inputs to valuation techniques used to measure fair value in three
broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might
fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the
lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input
may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its
placement within the fair value hierarchy. The Company classifies fair value balances based on the fair value hierarchy defined as
follows:
•
Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability
to access as of the reporting date.
•
Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability
or indirectly observable through corroboration with observable market data.
•
Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed
models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at
the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit
constraints.
The following table presents assets measured and recorded at fair value on a recurring basis as of December 31, 2010:
(in Millions)
Level 1
Level 2
Level 3
Balance at
December 31, 2010
Assets:
Investments (1)
$ 1
$ —
$ —
$ 1
Net Assets December 31, 2010
$ 1
$ —
$ —
$ 1
(1) Excludes cash surrender value of life insurance investments.