This excerpt taken from the VLG 10-K filed Sep 28, 2006.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and Cash Equivalents The carrying amount approximates fair value due to the short maturity of those instruments.
Long-Term Debt The fair value of long-term debt bearing interest at floating rates is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
The estimated fair values of the Companys financial instruments as of June 30, 2005 and 2006 are as follows:
The fair values and carrying amounts of the Companys term notes and revolving note are deemed to be approximately equivalent as they bear interest at floating rates, which are based upon current market rates.
Valley utilizes interest rate swap agreements to reduce the potential impact of increases in interest rates on floating-rate long-term debt. Counterparties to these contracts are major financial institutions. Valley has established counterparty credit guidelines and only enters into transactions with financial institutions of investment grade or better. Management believes the risk of incurring losses related to credit risk is remote, and any losses would be immaterial to financial results.
In accordance with the provisions of SFAS No. 133, as amended, Valley recognizes all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, Valley generally designates the derivative as a hedge of the variability of cash flows to be paid related to a recognized liability (cash flow hedge). In determining effectiveness, Valley considers the notional amount, the basis of the interest rate and the fair market value of the derivative in comparison to Valleys bank financed debt. Changes in the fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. These changes are recorded on a quarterly basis and
resulted in a decrease in interest expense of $189,630 and $134,863 for fiscal years ended June 30, 2004 and 2005, respectively, and an increase in interest expense of $1,266 for fiscal year 2006. At June 30, 2006 and 2005, Valley had interest rate swap agreements outstanding that effectively convert a notional amount of $25.0 million from floating rates to fixed rates. The agreements outstanding at June 30, 2006 mature at various times between July 2007 and December 2007. Valley would have received $499,771 at June 30, 2006 and paid $196,740 at June 30, 2005 to settle its interest rate swap agreements which represents the fair value of these agreements. The carrying value equals the fair value for these contracts at June 30, 2006 and 2005. Fair value was estimated based on the mark-to market value of the contracts, which closely approximates the amount Valley could receive or pay to terminate the agreements at year end.