Fair Value Measurements

12 Months Ended

Feb. 02, 2013

Fair Value Measurements

Fair Value Measurements

Note 8. Fair Value Measurements

As defined in ASC 820, Fair Value Measurements, fair value is 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. ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

· Level 1—Quoted prices for identical instruments in active markets

· Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable and

· Level 3—Instruments with significant unobservable inputs

In fiscal 2009, we purchased an interest rate derivative with the objective to cap our exposure to interest rate increases on our senior secured term loan facility that result from fluctuations in the three-month LIBOR. The interest rate cap is measured using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value of the interest rate cap is determined using the market methodology of discounting the future expected variable cash receipts that would occur if variable interest rates rise above the strike rate of the cap. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These factors are considered Level 2 inputs within the fair value hierarchy. As of February 2, 2013, the fair value of the cap was immaterial. See Note 7 for additional information on our derivative instruments.

In 2010, the Company acquired Scrap HD, an online scrapbooking business.  In connection with the acquisition, there was a contingent cash obligation based on operating performance through fiscal 2012.  As a result of negative operating results, we estimated the fair value of ScrapHD to be zero as of February 2, 2013, which resulted in a reduction in the fair value of our contingent consideration liability from an immaterial amount as of January 28, 2012 to zero as of February 2, 2013. The minimal gain from the change in the fair value of the contingent consideration is recorded in Selling, general, and administrative expense on the Consolidated Statements of Comprehensive Income. Due to the previously discussed factors, we recorded an impairment charge in fiscal 2012 of $7 million for long-lived assets associated with our online scrapbooking business and a goodwill impairment charge of $1 million, which represents the carrying amount of ScrapHD’s goodwill.

Long-lived assets held for use consists of our stores tested for impairment as a result of our impairment review, as more fully described in Note 1. The inputs used to measure the fair value of these long-lived are considered Level 3 inputs within the fair value hierarchy. As a result of our impairment review, we did not record an impairment charge in fiscal 2012, and recorded less than $1 million in impairment charges in fiscal 2011 and fiscal 2010.

We have also performed the required impairment review related to goodwill, as more fully described in Note 1, for our Michaels reporting unit. Based on our review at February 2, 2013, we do not believe it is more likely than not that the carrying amount of our Michaels reporting unit exceeds its fair value.

The table below provides the carrying and fair values of our senior secured term loan and notes as of February 2, 2013. The fair value of our senior secured term loan was determined based on quoted market prices which are considered Level 2 inputs within the fair value hierarchy. The fair value of our notes was determined based on recent trades which are considered Level 1 inputs within the fair value hierarchy.

	Carrying Value		Fair Value
	(In millions)
Senior secured term loan	$	1,640	$	1,655
Senior notes	1,007		1,101
Senior subordinated notes	393		412