FAIR VALUE MEASUREMENTS

Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes assessments of goodwill and long-lived assets for potential impairment.

Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is based on a fair value hierarchy that distinguishes between observable inputs and unobservable inputs. Observable inputs are based on market data obtained from independent sources. Unobservable inputs require the Company to make its own assumptions about the value placed on an asset or liability by market participants because little or no market data exists. There are three levels within the fair value hierarchy:



Level		Description

1		quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date;

2		quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and

3		unobservable inputs for the asset or liability.

In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair value. Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not required to be reported at fair value under current accounting guidance.

At September 30, 2014 and 2013, and at March 31, 2014, the Company had certain financial assets and financial liabilities that were required to be measured and reported at fair value on a recurring basis. These assets and liabilities are listed in the tables below and are classified based on how their values were determined under the fair value hierarchy:



	September 30, 2014
(in thousands of dollars)	Level 1		Level 2		Level 3		Total

Assets
Money market funds	$	—	$	1,527	$	—	$	1,527
Trading securities associated with deferred compensation plans	20,039		—		—		20,039
Forward foreign currency exchange contracts	—		5,172		—		5,172
Total financial assets measured and reported at fair value	$	20,039	$	6,699	$	—	$	26,738

Liabilities
Guarantees of bank loans to tobacco growers	$	—	$	—	$	1,797	$	1,797
Interest rate swap agreements	—		638		—		638
Forward foreign currency exchange contracts	—		109		—		109
Total financial liabilities measured and reported at fair value	$	—	$	747	$	1,797	$	2,544



	September 30, 2013
(in thousands of dollars)	Level 1		Level 2		Level 3		Total

Assets
Money market funds	$	—	$	1,526	$	—	$	1,526
Trading securities associated with deferred compensation plans	19,174		—		—		19,174
Forward foreign currency exchange contracts	—		8		—		8
Total financial assets measured and reported at fair value	$	19,174	$	1,534	$	—	$	20,708

Liabilities
Guarantees of bank loans to tobacco growers	$	—	$	—	$	4,454	$	4,454
Interest rate swap agreements	—		1,170		—		1,170
Forward foreign currency exchange contracts	—		4,511		—		4,511
Total financial liabilities measured and reported at fair value	$	—	$	5,681	$	4,454	$	10,135



	March 31, 2014
(in thousands of dollars)	Level 1		Level 2		Level 3		Total

Assets
Money market funds	$	—	$	1,527	$	—	$	1,527
Trading securities associated with deferred compensation plans	19,754		—		—		19,754
Forward foreign currency exchange contracts	—		2,074		—		2,074
Total financial assets measured and reported at fair value	$	19,754	$	3,601	$	—	$	23,355

Liabilities
Guarantees of bank loans to tobacco growers	$	—	$	—	$	2,270	$	2,270
Interest rate swap agreements	—		936		—		936
Forward foreign currency exchange contracts	—		3,973		—		3,973
Total financial liabilities measured and reported at fair value	$	—	$	4,909	$	2,270	$	7,179

Money market funds

The fair value of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, is based on net asset value, which is computed based on amortized cost (Level 2). The fair values of these investments approximate cost due to the short-term maturities and the high credit quality of the issuers of the underlying securities.

Trading securities associated with deferred compensation plans

Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices (Level 1) are used to determine the fair values of the mutual funds.

Interest rate swap agreements

The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy.

Forward foreign currency exchange contracts

The fair values of forward foreign currency exchange contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy.

Guarantees of bank loans to tobacco growers

The Company guarantees bank loans to tobacco growers in Brazil for crop financing and has previously guaranteed loans to those growers for the construction of curing barns or other tobacco producing assets, as well as loans to growers in Malawi for crop financing. In the event that the farmers default on their payments to the banks, the Company would be required to perform under the guarantees. The Company regularly evaluates the likelihood of farmer defaults based on an expected loss analysis and records the fair value of its guarantees as an obligation in its consolidated financial statements. The fair value of the guarantees is determined using the expected loss data for all loans outstanding at each measurement date. The present value of the cash flows associated with the estimated losses is then calculated at a risk-adjusted interest rate that is aligned with the expected duration of the liability and includes an adjustment for nonperformance risk. This approach is sometimes referred to as the “contingent claims valuation method.” Although historical loss data is an observable input, significant judgment is required in applying this information to the portfolio of guaranteed loans outstanding at each measurement date and in selecting a risk-adjusted interest rate. Significant increases or decreases in the risk-adjusted interest rate may result in a significantly higher or lower fair value measurement. The guarantees of bank loans to tobacco growers are therefore classified within Level 3 of the fair value hierarchy.

A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level 3) for the six months ended September 30, 2014 and 2013 is provided below.



	Six Months Ended September 30,
(in thousands of dollars)	2014			2013

Balance at beginning of year	$	2,270		$	4,235
Payments under the guarantees and transfers to allowance for loss on direct loans to farmers (removal of prior crop year loans from portfolio)	(2,392		)	(5,202		)
Provision for loss or transfers from allowance for loss on direct loans to farmers (addition of current crop year loans)	2,022			5,498
Change in discount rate and estimated collection period	36			25
Currency remeasurement	(139		)	(102		)
Balance at end of period	$	1,797		$	4,454

During the six months ended September 30, 2013, additional loss provisions related to guaranteed loans in Malawi were recorded, and payments were made to third-party banks under those guarantees.

Long-term Obligations

The fair value of the Company’s long-term obligations, including the current portion, was approximately $350 million at September 30, 2014, $393 million at September 30, 2013, and $360 million at March 31, 2014. The Company estimates the fair value of its long-term obligations using Level 2 inputs which are based upon quoted market prices for the same or similar issues or on the current interest rates available to the Company for debt of similar terms and maturities.