Everpure, Inc. Fair Value Disclosure
Note 3. Fair Value Measurements
We define fair value as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
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Level I—Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities; |
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Level II—Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and |
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Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation. |
We classify our money market funds within Level I because they are valued using quoted market prices. We classify our restricted cash within Level II because they are valued using inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded.
The following tables set forth the fair value of our financial assets measured at fair value on a recurring basis as of January 31, 2015 and 2016 using the above input categories (in thousands):
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January 31, 2015 |
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Level I |
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Level II |
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Level III |
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Total |
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Financial Assets: |
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Cash and cash equivalents: |
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Money market funds |
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$ |
190,621 |
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$ |
— |
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$ |
— |
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$ |
190,621 |
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Restricted cash: |
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Certificates of deposit |
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— |
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4,648 |
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— |
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4,648 |
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Total assets measured at fair value |
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$ |
190,621 |
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$ |
4,648 |
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$ |
— |
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$ |
195,269 |
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January 31, 2016 |
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Level I |
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Level II |
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Level III |
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Total |
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Financial Assets: |
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Cash and cash equivalents: |
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Money market funds |
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$ |
45,614 |
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$ |
— |
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$ |
— |
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$ |
45,614 |
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Restricted cash: |
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Certificates of deposit |
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— |
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7,132 |
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— |
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7,132 |
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Total assets measured at fair value |
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$ |
45,614 |
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$ |
7,132 |
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$ |
— |
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$ |
52,746 |
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About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.