DTE Energy 2011 Annual Report Download - page 15

13
Other Accounting Policies
See the following notes for other accounting policies impacting the Company's consolidated financial statements:
Note
3
4
6
8
9
14
Title
Fair Value
Financial and Other Derivative Instruments
Asset Retirement Obligation
Regulatory Matters
Income Taxes
Retirement Benefits and Trusteed Assets
NOTE 3 — 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
was immaterial at December 31, 2011 and December 31, 2010. 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, that 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.
Fair Value of Financial Instruments
The fair value of long-term debt is determined by using quoted market prices when available and a discounted cash flow
analysis based upon estimated current borrowing rates when quoted market prices are not available. The table below shows the
fair value and the carrying value for long-term debt securities. Certain other financial instruments, such as notes payable,
customer deposits and notes receivable are not shown as carrying value approximates fair value.