Fair Value of Financial Instruments
The estimated fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and borrowings under the bank term facility approximate their respective carrying values given their short-term maturities.
The fair value of derivative financial instruments is measured using the discounted value of the difference between the contract's value at maturity based on the contracted foreign exchange rate and the contract's value at maturity based on the comparable foreign exchange rate at period end under the same conditions. The financial institution's credit risk is also taken into consideration in determining fair value. The valuation is determined using Level 2 inputs which are observable inputs or inputs which can be corroborated by observable market data for substantially the full term of the asset or liability.
The fair value of senior debentures as at December 31, 2012 was $144,078 (carrying value of $135,883). The fair value was determined using the discounted cash flow method, a generally accepted valuation technique. The discounted factor is based on market rates for debt with similar terms and remaining maturities and based on Toromont's credit risk. The Company has no plans to prepay these instruments prior to maturity. The valuation is determined using Level 2 inputs which are observable inputs or inputs which can be corroborated by observable market data for substantially the full term of the asset or liability.
During the year ended December 31, 2012, there were no transfers between Level 1 and Level 2 fair value measurements.
Derivative Financial Instruments and Hedge Accounting
Foreign exchange contracts and options are transacted with financial institutions to hedge foreign currency denominated obligations related to purchases of inventory and sales of products.
The following table summarizes the Company's commitments to buy and sell foreign currencies as at December 31, 2012.
Average Notional Exchange Amount Rate (i) Maturity----------------------------------------------------------------------------Purchase contracts USD 138,973 $ 1.0000 January 2013 to January 2014Sell contracts GBP 440 $ 1.5935 June 2013 to March 2014(i) CDN $ required to purchase one denominated unit
Management estimates that a loss of $349 would be realized if the contracts were terminated on December 31, 2012. Certain of these forward contracts are designated as cash flow hedges, and accordingly, an unrealized loss of $260 has been included in OCI. These losses are not expected to affect net earnings as the losses will be reclassified to net earnings within the next 12 months and will offset gains recorded on the underlying hedged items, namely foreign denominated accounts payable. A loss of $89 on forward contracts not designated as hedges is included in net earnings which offsets a gain recorded on the foreign-denominated items, namely accounts payable.
All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.
13.FINANCIAL INSTRUMENTS - RISK MANAGEMENT
In the normal course of business, Toromont is exposed to financial risks that may potentially impact its operating results in one or all of its operating segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates. The Company does not enter into derivative financial agreements for speculative purposes.