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Fair Value Measurements
 3 Months Ended
Mar. 31, 2013
Fair Value Measurements
4.

Fair Value Measurements

 

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2013:

 

(dollars in millions)    Level 1 (1)     Level 2 (2)     Level 3 (3)     Total  

Assets:

         

Short-term investments:

         

Equity securities

    $ 338      $ –      $ –      $ 338  

Fixed income securities

      –        322        –        322  

Other assets:

         

Fixed income securities

      –        841        –        841  

Cross currency swaps and other

      –        66        –        66  
  

 

 

  

Total

    $ 338      $ 1,229      $ –      $     1,567  
  

 

 

  

Liabilities:

         

Other liabilities:

         

Cross currency swaps

    $ –      $ 13      $ –      $ 13  
  

 

 

  

Total

    $ –      $ 13      $ –      $ 13  
  

 

 

  

(1) quoted prices in active markets for identical assets or liabilities

(2) observable inputs other than quoted prices in active markets for identical assets and liabilities

(3) no observable pricing inputs in the market

Equity securities consist of investments in common stock of domestic and international corporations measured using quoted prices in active markets.

Fixed income securities consist primarily of investments in municipal bonds that do not have quoted prices in active markets. For these securities, we use alternative matrix pricing resulting in these debt securities being classified as Level 2.

Derivative contracts are valued using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.

We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the fair value hierarchy during the three months ended March 31, 2013.

 

Fair Value of Short-term and Long-term Debt

The fair value of our debt is determined using various methods, including quoted prices for identical terms and maturities, which is a Level 1 measurement, as well as quoted prices for similar terms and maturities in inactive markets and future cash flows discounted at current rates, which are Level 2 measurements. The fair value of our short-term and long-term debt, excluding capital leases, was as follows:

 

     At March 31, 2013      At December 31, 2012  
  

 

 

  
(dollars in millions)    Carrying
Amount		      Fair Value      Carrying
Amount		      Fair Value  

Short- and long-term debt, excluding capital leases

    $ 52,598      $ 59,943      $ 51,689      $     61,552  

Derivative Instruments

We enter into derivative transactions to manage our exposure to fluctuations in foreign currency exchange rates, interest rates, and equity and commodity prices. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, foreign currency and prepaid forwards and collars, interest rate swap agreements, commodity swap and forward agreements and interest rate locks. We do not hold derivatives for trading purposes.

We measure all derivatives, including derivatives embedded in other financial instruments, at fair value and recognize them as either assets or liabilities on our condensed consolidated balance sheets. Changes in the fair values of derivative instruments not qualifying as hedges or any ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with changes in the fair value of the hedged item. Changes in the fair value of the effective portions of cash flow hedges are reported in Other comprehensive income and recognized in earnings when the hedged item is recognized in earnings.

Interest Rate Swaps

We have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on the London Interbank Offered Rate, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. We record the interest rate swaps at fair value on our condensed consolidated balance sheets as assets and liabilities. The fair value of these contracts was not material at March 31, 2013 or December 31, 2012. As of March 31, 2013, the total notional amount of these interest rate swaps was $1.3 billion. During April 2013, these interest rate swaps matured and the impact to our condensed consolidated financial statements was not material.

Cross Currency Swaps

Verizon Wireless previously entered into cross currency swaps designated as cash flow hedges to exchange approximately $1.6 billion of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. A portion of the gains and losses recognized in Other comprehensive income was reclassified to Other income and (expense), net to offset the related pretax foreign currency transaction gain or loss on the underlying debt obligations. The fair value of the outstanding swaps was not material at March 31, 2013 or December 31, 2012. During the three months ended March 31, 2013 and 2012, a pretax loss of $0.1 billion and a pretax gain of $0.1 billion were recognized in Other comprehensive income, respectively.