Fair Value Measurements of Assets and Liabilities

12 Months Ended

Dec. 31, 2011

Fair Value Measurements of Assets and Liabilities [Abstract]

Fair Value Measurements of Assets and Liabilities

8. FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES

The following financial assets and liabilities are recorded at fair value on a recurring basis (in millions):

	As of December 31, 2011
			Fair Value Measurements at Reporting Date Using:
Description	Recorded Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities
Corporate debt securities	$	324.7	$	–	$	324.7	$	–
U.S. government and agency debt securities		177.2		–		177.2		–
Municipal bonds		1.0		–		1.0		–
Foreign government debt securities		6.8		–		6.8		–
Commercial paper		74.5		–		74.5		–
Certificates of deposit		88.5		–		88.5		–
Total available-for-sale securities		672.7		–		672.7		–
Derivatives, current and long-term
Foreign currency forward contracts and options		18.3		–		18.3		–
Interest rate swaps		27.8		–		27.8		–
	$	718.8	$	–	$	718.8	$	–
Liabilities
Derivatives, current and long-term
Foreign currency forward contracts and options	$	25.2	$	–	$	25.2	$	–
Cross-currency interest rate swaps		8.2		–		8.2		–
	$	33.4	$	–	$	33.4	$	–

ZIMMER HOLDINGS, INC. 2011 FORM 10-K ANNUAL REPORT

Notes to Consolidated Financial Statements (Continued)

	As of December 31, 2010
			Fair Value Measurements at Reporting Date Using:
Description	Recorded Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities
Corporate debt securities	$	203.8	$	–	$	203.8	$	–
U.S. government and agency debt securities		47.9		–		47.9		–
Municipal bonds		1.1		–		1.1		–
Foreign government debt securities		10.3		–		10.3		–
Commercial paper		16.1		–		16.1		–
Certificates of deposit		131.4		–		131.4		–
Total available-for-sale securities		410.6		–		410.6		–
Derivatives, current and long-term
Foreign currency forward contracts and options		34.5		–		34.5		–
Interest rate swaps		1.5		–		1.5		–
	$	446.6	$	–	$	446.6	$	–
Liabilities
Derivatives, current and long-term
Foreign currency forward contracts and options	$	40.0	$	–	$	40.0	$	–
	$	40.0	$	–	$	40.0	$	–

We value our available-for-sale securities using a market approach based on broker prices for identical assets in over-the-counter markets and assess counterparty credit risk.

We value our foreign currency forward contracts and foreign currency options using a market approach based on foreign currency exchange rates obtained from active markets and perform ongoing assessments of counterparty credit risk.

We value our interest rate swaps using a market approach based on publicly available market yield curves and the terms of our swaps and assess counterparty credit risk.

We value our cross-currency interest rate swaps using a market approach based upon publicly available market yield curves, foreign currency exchange rates obtained from active markets and the terms of our swaps. We also perform ongoing assessments of counterparty credit risk.

The following nonfinancial assets were measured at fair value on a nonrecurring basis (in millions):

			Fair Value Measurements Using:
Description	Year Ended December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses
Goodwill	$	137.0	$	–	$	–	$	137.0	$	204.0
	$	137.0	$	–	$	–	$	137.0	$	204.0

			Fair Value Measurements Using:
Description	Year Ended December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses
Goodwill	$	342.9	$	–	$	–	$	342.9	$	73.0
	$	342.9	$	–	$	–	$	342.9	$	73.0

In 2010, goodwill relating to our U.S. Spine reporting unit with a carrying amount of $341.0 million was written down to its implied fair value of $137.0 million, resulting in an impairment charge of $204.0 million. The implied fair value of goodwill equals the estimated fair value of a reporting unit minus the fair value of the reporting unit’s net assets. In determining the implied fair value of the U.S. Spine reporting unit’s goodwill, we used unobservable inputs to estimate the fair value of the reporting unit and its assets and liabilities. Fair value was determined using an equal weighting of income and market approaches. Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting unit. Fair value under the market approach utilized the comparable transaction methodology, which uses valuation indicators determined from sales of other businesses that are similar to our U.S. Spine reporting unit. In estimating the future cash flows of the reporting unit, we utilized a combination of market and company specific inputs that a market participant would use in assessing the fair value of the reporting unit. The primary market input was revenue growth rates. These rates were based upon historical trends and estimated future growth drivers such as an aging global population, obesity and more active lifestyles. Significant company specific inputs included assumptions regarding how the reporting unit could leverage operating expenses as revenue grows and the impact any new products will have on revenues. Under the comparable transaction methodology, we took into consideration when the comparable transaction occurred and the differences that may exist due to changes in the economic environment. We also took into consideration differences between the comparable companies and our U.S. Spine reporting unit that could affect fair value, such as cash and debt levels.

ZIMMER HOLDINGS, INC. 2011 FORM 10-K ANNUAL REPORT

Notes to Consolidated Financial Statements (Continued)

The fair value of the reporting unit’s assets and liabilities was determined by using the same methods that are used in business combination purchase accounting. See Note 9 for further information regarding this goodwill impairment.

In 2009, the implied fair value of goodwill was determined using the same methodologies utilized in the 2010 valuation.