Note D: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability (an exit price), in an orderly transaction between market participants at the measurement date. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability, as follows:
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Level 1 valuations are based on quoted prices in active markets for identical instruments that the Company can access at the measurement date. |
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Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are observable for the instrument, either directly or indirectly, for substantially the full term of the asset or liability including the following: |
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quoted prices for similar, but not identical, instruments in active markets; |
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quoted prices for identical or similar instruments in markets that are not active; |
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inputs other than quoted prices that are observable for the instrument; or |
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inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
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Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement. |
The carrying values of cash and cash equivalents, including money market securities, accounts receivable, net of allowance for doubtful accounts, and accounts payable approximate fair value due to the short maturities of these instruments. Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as available-for-sale and are recorded at fair value on a recurring basis. Money market securities are classified as level 1 in the fair value hierarchy.
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
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November 30, 2012 |
In millions |
Carrying
value
(Fair value)
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Quoted
prices in
active
markets
(Level 1)
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Significant
other
observable
inputs
(Level 2)
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Significant
unobservable
inputs
(Level 3)
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Assets: |
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Available-for-sale securities: |
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General obligation municipal bonds |
$ |
1,410.8 |
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$ |
— |
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$ |
1,410.8 |
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$ |
— |
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Pre-refunded municipal bonds |
234.5 |
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— |
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234.5 |
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— |
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Revenue municipal bonds |
638.8 |
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— |
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638.8 |
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— |
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Variable rate demand notes |
723.8 |
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— |
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723.8 |
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— |
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Total available-for-sale securities |
$ |
3,007.9 |
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$ |
— |
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$ |
3,007.9 |
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$ |
— |
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Other securities |
$ |
10.4 |
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$ |
10.4 |
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$ |
— |
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$ |
— |
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Liabilities: |
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Other long-term liabilities |
$ |
10.4 |
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$ |
10.4 |
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$ |
— |
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$ |
— |
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May 31, 2012 |
In millions |
Carrying
value
(Fair value)
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Quoted
prices in
active
markets
(Level 1)
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Significant
other
observable
inputs
(Level 2)
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Significant
unobservable
inputs
(Level 3)
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Assets: |
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Available-for-sale securities: |
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General obligation municipal bonds |
$ |
1,333.9 |
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$ |
— |
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$ |
1,333.9 |
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$ |
— |
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Pre-refunded municipal bonds |
334.3 |
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— |
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334.3 |
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— |
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Revenue municipal bonds |
501.0 |
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— |
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501.0 |
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— |
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Variable rate demand notes |
889.8 |
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— |
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889.8 |
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— |
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Total available-for-sale securities |
$ |
3,059.0 |
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$ |
— |
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$ |
3,059.0 |
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$ |
— |
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Other securities |
$ |
9.2 |
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$ |
9.2 |
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$ |
— |
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$ |
— |
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Liabilities: |
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Other long-term liabilities |
$ |
9.2 |
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$ |
9.2 |
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$ |
— |
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$ |
— |
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In determining the fair value of its assets and liabilities, the Company predominately uses the market approach. Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Company’s Level 2 investments, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The Company reviews the values generated by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations from at least one other observable source for a sample of securities. The Company has not adjusted the prices obtained from the independent pricing service.
Other securities are mutual fund investments, consisting of participants’ eligible deferral contributions under the Company’s non-qualified and unfunded deferred compensation plans. The related liability is reported as other long-term liabilities. The mutual funds are valued based on quoted market prices in active markets.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.