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DERIVATIVE INSTRUMENTS AND FAIR VALUE
9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND FAIR VALUE

3.       Derivative Instruments and Fair Value

 

Our use of derivative instruments has been to hedge interest rates. These derivative contracts are entered into with a financial institution. We do not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use.

 

We record these derivative financial instruments on the condensed balance sheets at fair value. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

 

Any ineffective portion of the gain or loss on the derivative instrument for a cash flow hedge is recorded in the results of operations immediately. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the results of operations immediately.

 

In March 2012, the Company entered into interest rate swaps with the objective of reducing our exposure to cash flow volatility arising from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and currency of these contracts match those of the underlying debt. The Company has designated these interest rate swap contracts as cash flow hedges. The Company measures ineffectiveness by comparing the cumulative change in the forward contract with the cumulative change in the hedged item. The interest rate swap contract was terminated as of March 24, 2016. The Company paid approximately $4,000 at termination to settle the swap contract.

 

In May 2016, the Company entered into a new interest rate swap with the objective of reducing our exposure to cash flow volatility arising from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and currency of this contract match those of the underlying debt. The Company has designated this interest rate swap contract as a cash flow hedge. The Company measures ineffectiveness by comparing the cumulative change in the forward contact with the cumulative change in the hedged item. As of September 30, 2016, we had a net deferred loss associated with cash flow hedges of approximately $72,000 due to the interest rate swap, which was included in Other Liabilities.

 

As of December 31, 2015, we had a net deferred loss associated with cash flow hedges of approximately $4,500 due to the interest rate swap, which was included in Other Liabilities.

 

Fair Value

 

At September 30, 2016 and December 31, 2015, the fair values of cash, accounts receivable, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these instruments.

 

   September 30, 2016 
   Carrying Amount   Fair Value 
Debt          
Short-term borrowings and long-term debt  $32,359,069   $32,359,069 

 

 

   December 31, 2015 
   Carrying Amount   Fair Value 
Debt          
Short-term borrowings and long-term debt  $25,195,452   $25,195,452 

 

We estimated the fair value of debt using market quotes and calculations based on market rates.

 

The following table presents the fair values of those financial liabilities measured on a recurring basis as of September 30, 2016 and December 31, 2015:

 

       Fair Value Measurements September 30, 2016 
Description   Total    Quoted Prices
in Active
Markets for
Identical assets
(Level 1)
    Significant
Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
 
Interest Rate Swap, net  $72,000       $72,000     
Total  $72,000       $72,000     

 

       Fair Value Measurements December 31, 2015 
Description   Total    Quoted Prices
in Active
Markets for
Identical assets
(Level 1)
    Significant
Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
 
Interest Rate Swap, net  $4,453       $4,453     
Total  $4,453       $4,453     

 

The fair value of the Company’s interest rate swap was determined by comparing the fixed rate set at the inception of the transaction to the “replacement swap rate,” which represents the market rate for an offsetting interest rate swap with the same notional amounts and final maturity date. The market value is then determined by calculating the present value of the interest differential between the contractual swap and the replacement swap.