Note 4. Fair Value Measures

ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes guidelines and enhances disclosure requirements for fair value measurements.

The accounting guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance also establishes a fair value hierarchy based on the independence of the source and objective evidence of the inputs used. There are three fair value hierarchies based upon the level of inputs that are significant to fair value measurement:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical instruments in active markets;

Level 2—Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3—Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

On a recurring basis, the Company measures the fair value of certain of its assets and liabilities, which include cash equivalents, short-term investments, a non-qualified deferred compensation plan, foreign currency derivative contracts and contingent consideration associated with business combinations.

The Company's cash equivalents and short-term investments are classified within Level 1 or Level 2 because they are valued using quoted market prices in an active market or alternative independent pricing sources and models utilizing market observable inputs.

The assets of the Company's non-qualified deferred compensation plan consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets and are therefore classified within Level 1.

The Company's foreign currency derivative contracts are classified within Level 2 because these contracts are not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments.

During fiscal 2010, the Company recorded a liability for contingent consideration of $7.8 million arising from a business combination which is payable over three years upon achievement of certain milestones. The fair value of the contingent consideration was determined at the acquisition date using the income approach based on the net present value of estimated payments and is re-measured in each reporting period. The contingent consideration was classified within Level 3 as management assumptions for the valuation included discount rates and estimated probabilities of achievement of certain technical milestones which are unobservable in the market. Changes in fair value of the contingent consideration due to revisions to the estimated probabilities of achievement of technical milestones are recorded as operating expenses while changes due to time value are recorded in other income, net. The Company recorded a reduction of $3.2 million and $3.4 million during three and six months ended April 30, 2011, respectively, in research and development expenses due to the change in fair value of the liability for contingent consideration. As of April 30, 2011, the fair value of the liability for contingent consideration was estimated at $4.7 million.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below as of April 30, 2011:


			Fair Value Measurement Using
Description	Total as of April 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	386,130	$	386,130	$	—	$	—
Short-term investments:
Municipal securities		146,431		—		146,431		—
Prepaid and other current assets:
Foreign currency derivative contracts		13,127		—		13,127		—
Other long-term assets:
Deferred compensation plan assets		95,144		95,144		—		—

Total assets	$	640,832	$	481,274	$	159,558	$	—

Liabilities
Accounts payable and accrued liabilities:
Foreign currency derivative contracts	$	3,023	$	—	$	3,023	$	—
Contingent consideration		2,289		—		—		2,289
Other long-term liabilities:
Contingent consideration		2,365		—		—		2,365

Total liabilities	$	7,677	$	—	$	3,023	$	4,654

Assets and liabilities measured at fair value on a recurring basis are summarized below as of October 31, 2010:


			Fair Value Measurement Using
Description	Total as of October 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	487,199	$	487,199	$	—	$	—
Short-term investments:
Municipal obligations		163,154		—		163,154		—
Prepaid and other current assets:
Foreign currency derivative contracts		5,680		—		5,680		—
Other long-term assets:
Deferred compensation plan assets		83,330		83,330		—		—

Total assets	$	739,363	$	570,529	$	168,834	$	—

Liabilities
Accounts payable and accrued liabilities:
Foreign currency derivative contracts	$	13,180	$	—	$	13,180	$	—
Contingent consideration		3,121		—		—		3,121
Other long-term liabilities:
Contingent consideration		4,935		—		—		4,935

Total liabilities	$	21,236	$	—	$	13,180	$	8,056

Equity investments in privately-held companies are accounted for under the cost method of accounting. These equity investments (also called non-marketable equity securities) are classified within Level 3 as they are valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgment due to the absence of market price and inherent lack of liquidity. The non-marketable equity securities are measured and recorded at fair value when an event or circumstance which impacts the fair value of these securities indicates an other-than-temporary decline in value has occurred. As of April 30, 2011, the carrying value of these investments was $6.4 million.

The following non-marketable equity securities were measured and recorded at fair value within other long-term assets on a non-recurring basis. The losses of these securities were recorded in other income, net.


	Balance as of April 30, 2011		Significant Unobservable Inputs (Level 3)		Total (losses) during three months ended April 30, 2011			Total (losses) during six months ended April 30, 2011
	(in thousands)
Non-marketable equity securities	$	92	$	92	$	(92	)	$	(999	)

The Company did not recognize any impairment during the six months ended April 30, 2010.