L. Financial Instruments and Fair Value Measurements

The FASB authoritative guidance on fair value measurements defines fair value, provides a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. The disclosures focus on the inputs used to measure fair value. The guidance establishes the following hierarchy for categorizing these inputs:

There were no transfers of financial assets or liabilities measured at fair value between Level 1 and Level 2, or transfers into or out of Level 3, during the first three months of either fiscal 2013 or 2012.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and September 30, 2012. The derivatives presented in the table below are presented by derivative type, net of the legal right to offset derivative settlements by each counterparty:


	December 31, 2012		September 30, 2012
	Level 2 Inputs		Level 2 Inputs
	(Dollars in millions)
Assets at fair value:
Guaranteed investment contract⁽¹⁾	$	14	$	14
Derivatives relating to foreign currency⁽²⁾		3		—
Derivatives relating to interest rates⁽²⁾		1		2

Total assets at fair value	$	18	$	16

Liabilities at fair value:
Derivatives relating to foreign currency⁽²⁾	$	32	$	28
Hedged long-term debt⁽³⁾		36		36

Total liabilities at fair value	$	68	$	64

⁽¹⁾	Included in “Other assets” in the Consolidated Balance Sheets.

⁽²⁾	Included in “Prepaid expenses and other current assets” or “Accounts payable and accrued liabilities” in the Consolidated Balance Sheets.

⁽³⁾	Included in “Current portion of long-term debt” in the Consolidated Balance Sheets.

At December 31, 2012 and September 30, 2012, the fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and notes payable to banks approximated their carrying values due to the short-term nature of these instruments. The carrying value and fair value of the long-term fixed rate debt were $1.1 billion and $1.2 billion, respectively, at both December 31, 2012 and September 30, 2012. The fair value of Cabot’s fixed rate long-term debt and capital lease obligations are estimated based on comparable quoted market prices at the respective period ends. The carrying amount of Cabot’s floating rate long-term debt and capital lease obligations approximates its fair value. All such measurements are based on observable inputs and are classified as Level 2 within the fair value hierarchy. The valuation technique used is the discounted cash flow model.

The GAM Notes are classified as Level 3 instruments within the fair value hierarchy because they are valued using a valuation model with significant unobservable inputs. The carrying value and fair value of the GAM Notes were $234 million and $233 million, respectively, at December 31, 2012 and the carrying value and fair value were both $252 million at September 30, 2012. The valuation used is the discounted cash flow model and the significant inputs are the discount rate, Adjusted EBITDA forecast, and timing of expected cash flows from GAM.

Quoted market prices in active markets for identical assets or liabilities

Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs)

Significant unobservable inputs