This excerpt taken from the ZUMZ 10-Q filed May 30, 2008.
4. Fair Value Measurements Effective February 3, 2008 (the first day of our 2008 fiscal year), the Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements under SFAS 157 is as follows:
· Level 1 Quoted prices in active markets for identical assets or liabilities;
· Level 2 Quoted prices for similar assets or liabilities in active markets or inputs that are observable;
· Level 3 Inputs that are unobservable.
The following table summarizes assets measured at fair value on a recurring basis at May 3, 2008, as required by SFAS 157:
The $2.0 million in Level 3 marketable securities represents two $1.0 million auction rate securities. One of these $1.0 million securities failed to sell at its scheduled auction in March 2008. The interest rate of this security reset to a rate of 6.55%. Subsequent to May 3, 2008, the remaining $1.0 million security failed to sell at its scheduled auction. The interest rate of this security was reset to 3.20%. The next scheduled auction for these securities is in fiscal 2009. Based on market conditions, the Company changed its valuation methodology for auction rate securities to a valuation method that includes market and income approaches during the first quarter of fiscal 2008. Accordingly, these securities changed from Level 1 to Level 3 within SFAS 157s valuation hierarchy since the Companys initial adoption of SFAS 157 at February 3, 2008.
The Company has reviewed both securities for impairment and has concluded that no impairment exists as of May 3, 2008. These securities have been reclassified from current assets to long-term assets as of May 3, 2008.
The following table presents the changes in the Level 3 fair-value category for the three months ended May 3, 2008. The Company classifies financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments may also rely on a number of inputs that are readily observable either directly or indirectly.