Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements

Fair Value Measurements

11. Fair Value Measurements

The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under GAAP. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions.

Valuation inputs are classified into the following hierarchy:

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

· Level 2 Inputs— 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 inputs are observable or whose significant value

· Level 3 Inputs— Instruments with primarily unobservable value drivers.

Valuation policies and procedures for fair value measurements using level 3 inputs are established by finance management reporting to our chief financial officer. We corroborate level 3 inputs with historical and market information where possible and appropriate and we may engage third-party valuation firms to assist us in determining certain fair value measurements.

We do not have any material assets or liabilities measured at fair value on a recurring basis.

The fair values of cash, receivables, accounts payable, accrued expenses and other current liabilities approximate their carrying amounts because of their short-term nature.

Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances.  These assets can include long-lived and intangible assets that have been reduced to fair value when they are impaired and long-lived assets that are held for sale. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a non-recurring basis (in thousands):

	Year ended December 31, 2012
	Level 1	Level 2	Level 3		Total		Total Losses
Specific-store leasehold improvements	—	—	$	195	$	195	$	559

	Year ended December 31, 2011
	Level 1		Level 2		Level 3		Total		Total Losses
Direct response goodwill, net of accumulated impairment losses	$	—	$	—	$	—	$	—	$	107,026
Direct response trademarks and trade names	—		—		11,500		11,500		32,500
Direct response customer relationship intangible asset	—				6,800		6,800		13,461
Specific-store leasehold improvements	—		—		745		745		1,294

We estimate the fair value of goodwill using a combination of income-based and market-based approaches using level 3 inputs. We estimate the fair value of other intangible assets using an income-based approach with level 3 inputs. The methods and assumptions used to measure the fair value of goodwill are discussed in Note 2.

We estimate the fair value of our customer relationship intangible assets using a discounted cash flow analysis, specifically the excess earnings method. This approach uses unobservable inputs, including projected revenue and net cash flows related to our existing customer relationships, our estimates of future customer retention and our internal cost of capital.

We estimate the fair values of indefinite-lived trademarks and trade names using a discounted cash flow analysis, specifically the relief-from-royalty method. This approach uses unobservable inputs, including projected revenue and our internal cost of capital. This approach also uses market observations about royalty rates.

We estimate the fair value of specific-store leasehold improvements using an income-based approach, considering the cash flows expected over the remaining lease term for each location.  The income-based approach uses unobservable inputs, including projected free cash flow and internal cost of capital and accordingly these fair value measurements have been classified as level 3 in the fair value hierarchy.

The following tables present quantitative information about level 3 inputs used in our fair value measurements:

Fair Value Measurement	Fair Value at December 31, 2012(in thousands)		Valuation technique(s)	Unobservable input	Range
Specific-store leasehold improvements	$	195	Discounted cash flow	Weighted-average cost of capital	9.8%
				Long-term revenue growth rate	3.0%
Fair Value Measurement	Fair Value at December 31, 2011(in thousands)		Valuation technique(s)	Unobservable input	Range
Direct response trademarks and trade names	$	11,500	Discounted cash flow	Weighted-average cost of capital	16.5%
				Long-term revenue growth rate	1.0%
				Royalty rates	0.5% - 1.5%
Direct response customer relationship intangible asset	6,800		Discounted cash flow	Weighted-average cost of capital	17.5%
				Customer attrition rate	59.9% - 25.0%
Specific-store leasehold improvements	745		Discounted cash flow	Weighted-average cost of capital	10.9%
				Long-term revenue growth rate	3.0%

The following table presents the difference between the carrying amount and estimated fair value of our long-term debt (in thousands):

	December 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Guitar Center
Senior secured asset-based revolving credit facility	$	—	$	—	$	—	$	—
Senior secured term loan	621,762		600,000		621,762		545,596
Senior unsecured notes	394,890		418,579		375,000		394,542
Capital lease obligations	54		54		700		700
Total Guitar Center	1,016,706		1,018,633		997,462		940,838
Holdings
Senior unsecured PIK notes	564,673		596,965		564,673		609,312
Holdings Consolidated	$	1,581,379	$	1,615,598	$	1,562,135	$	1,550,150

We estimate the fair value of our long-term debt using observable inputs classified as level 2 in the fair value hierarchy. We use present value and market techniques that consider rates of return on similar credit facilities recently initiated by companies with like credit quality in similar industries, quoted prices for similar instruments, and inquiries with certain investment communities.