SIMULATION SOLUTIONS
MSC SOFTWARE CORPORATION**
Notes to Consolidated Financial Statements (in Part)
December 31, 2008
NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (in Part)
Fair Values of Financial Instruments
At December 31, 2007 and 2008, our financial instruments included cash and cash equivalents, trade receivables, marketable securities and accounts payable. Our subordinated notes outstanding at December 31, 2007, were repaid in December 2008. The carrying amount of cash and cash equivalents, trade receivables, and accounts payable approximates fair value due to the short term maturities of these instruments. The estimated fair values of financial assets were determined based on quoted market prices at year end. The estimated fair value of the subordinated notes payable was determined based on the present value of its future cash flows using a discount rate that approximates our current borrowing rate.
NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2008, we adopted SFAS No. 157, ‘‘Fair Value Measurements,’’ except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis pursuant to FSP 157 2. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The carrying value of cash and cash equivalents, accounts receivable, and trade payables approximates the fair value due to their short term maturities
For recognition purposes, we measure our marketable equity securities at fair value on a recurring basis, as determined using quoted prices in active markets (Level 1) and/or significant unobservable inputs (Level 3) as presented in the table below. In May 2008, we sold our remaining investments in marketable equity securities of GSSL.
For disclosure purposes only, we are required to measure the fair value of outstanding debt on a recurring basis. The fair value of our subordinated notes payable represents the net present value of discounted cash flows. Our subordinated notes payable is reported at amortized cost in accordance with SFAS No. 107, ‘‘Disclosure about Fair Value of Financial Instruments,’’ and was $6,936,000 at December 31, 2007. The fair value of our subordinated notes payable was $7,455,000 at December 31, 2007. In December 2008, we repaid the remaining principal balance of the subordinated notes payable.
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Fair Value Measurements Using |
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Carrying |
Quoted Prices |
Significant |
Significant |
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At December 31, 2007 |
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Financial Assets: |
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Investment in Marketable Equity |
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Securities of GSSL |
$4,953 |
$4,953 |
$— |
$— |
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Marketable Equity Securities Held in |
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Supplemental Retirement Plan |
$1,869 |
$1,249 |
$— |
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Marketable Equity Securities Held in Life |
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Insurance Contracts |
$625 |
$625 |
$— |
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Financial liability: |
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Subordinated Notes Payable |
$6,936 |
$ — |
$— |
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At December 31, 2008 |
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Financial Assets: |
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Marketable Equity Securities Held in |
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Supplemental Retirement Plan |
$1,341 |
$741 |
$— |
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Marketable Equity Securities Held in Life |
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Insurance Contracts |
$338 |
$338 |
$— |
$— |
The fair values of the recurring financial assets and liabilities measured using Level 3 inputs
changed during the year ended December 31, 2008 as follows (in thousands):
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Marketable Equity |
Subordinated |
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Balance at December 31, 2007 |
$620 |
$7,455 |
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Total Realized and Unrealized Gains or Losses |
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Included in Earnings or Changes in Net Assets |
18 |
255 |
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Currency Translation Included in Other |
45 |
— |
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Comprehensive Income |
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Purchases, Issuances, and Settlements |
7 |
7,200 |
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Transfer In and / or Out of Level 3 |
— |
— |
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Balance at December 31, 2008 |
$600 |
$ — |
On a nonrecurring basis, we use fair value measures when analyzing asset impairment. Long lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. During 2008, we recorded an impairment charge of $253,000 related to developed technologies. Refer to Note 4—Goodwill and Other Intangible Assets for further discussion. Goodwill and indefinite lived intangibles are tested for impairment annually or whenever events or circumstances make it more likely than not that impairment may have occurred. During 2008, we recorded an impairment charge of $9,698,000 related to trademarks and tradenames. Refer to Note 4—Goodwill and Other Intangible Assets for further discussion.
Required
a. The carrying amount of cash and cash equivalents, trade receivables and accounts payable approximates fair value. Why?
b. December 31, 2007
1. Why are investments in marketable equity securities of GSSL classified as fair value measurements under Level 1?
c. December 31, 2007 and December 31, 2008
i. Why are marketable equity securities held in supplemental retirement plans partially classified under Level 1 and partially under Level 3?
ii. Why are marketable equity securities held in life insurance contracts classified under Level 1?
d. During 2008, an impairment charge of $253,000 was made related to developed technologies. Why?