SAE INTERNATIONAL AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Continued) Note 1 - Summary of Significant Accounting Policies (Continued) O. Derivative Financial Instruments The Organization uses derivatives to manage risk related to interest rate movements. The Organization's interest rate risk management strategy is to stabilize cash flow requirements by maintaining interest rate contracts to convert variable-rate debt to a fixed rate. The Organization is exposed to credit losses from counterparty (its lending bank) nonperformance, but does not anticipate any losses from its agreements, which are with a major financial institution. measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial Derivative financial instruments are to be recognized in the financial statements and instruments used for hedging purposes by non-profit organizations are recognized periodically in income. Changes in the fair value of the Organization's interest rate swap are included in interest expense on the consolidated statement of activities. P. Fair Value Measurements The Organization defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Organization considers the principal or most advantageous market in which the Organization would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. The Organization applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Page 17 43