FAIR VALUE MEASUREMENTS

Fair Value Measurements on a Recurring Basis

The following tables summarize the bases used to measure certain assets and liabilities at fair value on a recurring basis:



Basis of Fair Value Measurements on a Recurring Basis at December 31, 2013 In millions	Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting (1)			Total
Assets at fair value:
Cash equivalents (2)	$	—	$	2,912	$	—	$	—		$	2,912
Interests in trade accounts receivable conduits (3)	—		—		1,227		—			1,227
Equity securities (4)	760		37		—		—			797
Debt securities: (4)
Government debt (5)	—		564		—		—			564
Corporate bonds	—		695		—		—			695
Derivatives relating to: (6)
Commodities	3		11		—		(3		)	11
Foreign currency	—		65		—		(20		)	45
Total assets at fair value	$	763	$	4,284	$	1,227	$	(23	)	$	6,251
Liabilities at fair value:
Long-term debt (7)	$	—	$	19,467	$	—	$	—		$	19,467
Derivatives relating to: (6)
Interest rates	—		5		—		—			5
Commodities	4		2		—		(4		)	2
Foreign currency	—		33		—		(20		)	13
Total liabilities at fair value	$	4	$	19,507	$	—	$	(24	)	$	19,487


(1)	Cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.


(2)	Treasury Bills and money market funds included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.


(3)	Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 15 for additional information on transfers of financial assets.


(4)	The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.


(5)	U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.


(6)	See Note 10 for the classification of derivatives in the consolidated balance sheets.


(7)	See Note 10 for information on fair value measurements of long-term debt.



Basis of Fair Value Measurements on a Recurring Basis at December 31, 2012 In millions	Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting (1)			Total
Assets at fair value:
Cash equivalents (2)	$	—	$	1,953	$	—	$	—		$	1,953
Interests in trade accounts receivable conduits (3)	—		—		1,057		—			1,057
Equity securities (4)	702		38		—		—			740
Debt securities: (4)
Government debt (5)	—		565		—		—			565
Corporate bonds	—		756		—		—			756
Derivatives relating to: (6)
Interest rates	—		1		—		—			1
Commodities	9		22		—		(5		)	26
Foreign currency	—		55		—		(21		)	34
Total assets at fair value	$	711	$	3,390	$	1,057	$	(26	)	$	5,132
Liabilities at fair value:
Long-term debt (7)	$	—	$	23,762	$	—	$	—		$	23,762
Derivatives relating to: (6)
Interest Rates	—		6		—		—			6
Commodities	16		11		—		(20		)	7
Foreign currency	—		41		—		(21		)	20
Total liabilities at fair value	$	16	$	23,820	$	—	$	(41	)	$	23,795


(1)	Cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.


(2)	Treasury Bills and money market funds included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.


(3)	Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 15 for additional information on transfers of financial assets.


(4)	The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.


(5)	U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.


(6)	See Note 10 for the classification of derivatives in the consolidated balance sheets.


(7)	See Note 10 for information on fair value measurements of long-term debt.

Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding liabilities. The Company posted cash collateral of $5 million at December 31, 2013 ($20 million of cash collateral at December 31, 2012).

For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.

For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.

For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.

For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models. See Note 10 for further information on the types of instruments used by the Company for risk management.

There were transfers of $4 million between Levels 1 and 2 during the year ended December 31, 2013 and no transfers in the year ended December 31, 2012.

For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade receivable conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rate and prepayments are not factors in determining the fair value of the interests. See Note 15 for further information on assets classified as Level 3 measurements.

The following table summarizes the changes in fair value measurements using Level 3 inputs for the years ended December 31, 2013 and 2012:



Fair Value Measurements Using Level 3 Inputs for Interests Held in Trade Receivable Conduits (1)	2013			2012
In millions	2013			2012
Balance at January 1	$	1,057		$	1,141
Gain included in earnings (2)	—			8
Purchases	1,198			2,558
Settlements	(1,028		)	(2,650		)
Balance at December 31	$	1,227		$	1,057


(1)	Included in “Accounts and notes receivable – Other” in the consolidated balance sheets.


(2)	Included in "Selling, general and administrative expenses" in the consolidated statements of income.

Fair Value Measurements on a Nonrecurring Basis

The following table summarizes the basis used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated balance sheets in 2013, 2012 and 2011:



Basis of Fair Value Measurements on a Nonrecurring Basis	Significant Other Unobservable Inputs		Total Losses
In millions	(Level 3)		Total Losses
2013
Assets at fair value:
Long-lived assets, other assets and equity method investments	$	127	$	(178	)
2012
Assets at fair value:
Long-lived assets, other assets and equity method investments	$	45	$	(693	)
Goodwill	$	—	$	(220	)
2011
Assets at fair value:
Long-lived assets, other assets and equity method investments	$	—	$	(27	)

2013 Fair Value Measurements on a Nonrecurring Basis

As a result of Dow's announcement of its new market-driven growth strategy, the Company recognized a $178 million asset impairment charge in the fourth quarter of 2013, including charges for manufacturing plant shutdowns. The charge was included in "Cost of sales" ($175 million) and "Amortization of intangibles" ($3 million) in the consolidated statements of income and impacted the following businesses/operating segments: Dow Building and Construction business, part of the Coatings and Infrastructure Solutions segment ($61 million); Dow Formulated Systems, Dow Plastics Additives and Epoxy businesses, part of the Performance Materials segment ($36 million); Chlor-Alkali/Chlor-Vinyl, part of the Feedstocks and Energy segment ($66 million); and Corporate ($15 million).

The assets, classified as Level 3 measurements, were valued at $127 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included projected cash flows. The carrying value by segment was as follows: Coatings and Infrastructure Solutions assets were valued at $100 million; Performance Materials assets were written down to zero; Feedstocks and Energy assets were valued at $9 million; and Corporate assets were valued at $18 million.

2012 Fair Value Measurements on a Nonrecurring Basis

As part of the 1Q12 Restructuring plan that was approved on March 27, 2012, the Company shut down a number of manufacturing facilities during 2012. The manufacturing assets and facilities associated with this plan were written down to zero in the first quarter of 2012 and a $94 million impairment charge was included in "Restructuring charges (credits)" in the consolidated statements of income. During the fourth quarter of 2012, the Company reduced the 1Q12 Restructuring reserve by $4 million. See Note 3 for additional information.

In the second half of 2012, a $27 million asset impairment charge was recognized in the Performance Materials segment. The assets, classified as Level 3 measurements, were valued at $12 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included projected cash flows.

As part of the 4Q12 Restructuring plan that was approved on October 23, 2012, the Company will shut down a number of manufacturing facilities during the next two years. The manufacturing assets and facilities associated with this plan were written down to zero in the fourth quarter of 2012. In addition, an equity investment was impaired. The equity investment, classified as a Level 3 measurement, was valued at $33 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the investment, which included projected cash flows. These impairment charges, totaling $576 million, were included in "Restructuring charges (credits)" in the consolidated statements of income. See Note 3 for additional information.

In the fourth quarter of 2012, the Company performed its annual goodwill impairment testing utilizing a discounted cash flow methodology as its valuation technique. As a result of this testing, the Company recognized a $220 million goodwill impairment charge related to its Dow Formulated Systems reporting unit (part of the Performance Materials segment), which was included in "Goodwill impairment loss" in the consolidated statements of income. See Note 9 for additional information.

2011 Fair Value Measurements on a Nonrecurring Basis

After evaluating expected future investments in conjunction with expected future cash flows, a $27 million asset impairment charge was recognized in the fourth quarter of 2011 related to a manufacturing facility in Brazil aligned with the Polyurethanes business. The long-lived assets and supplies associated with this facility were written down to zero. The charge was included in "Cost of sales" in the consolidated statements of income and reflected in the Performance Materials segment. The decision was made to shut down this facility as part of the 1Q12 Restructuring plan.