(15)  Fair Value Measurements

The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value.  The standard is applicable whenever assets and liabilities are measured at fair value.

The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:

Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;

Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and

Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.

Changes in the fair value of the Non-COLI assets held in the deferred supplemental compensation plan are recorded as selling, general and administrative expenses.

We account for our interest rate swap agreements under the provisions of ASC 815, and have determined that our swap agreements qualify as highly effective hedges. Accordingly, the fair value of the swap agreements, which is a liability of approximately $326 thousand and $1.2 million at December 31, 2013 and 2012, respectively, has been reported in accrued expenses.  The offset, net of an income tax effect of approximately $125 thousand and $457 thousand, is included in accumulated other comprehensive loss in the accompanying consolidated balance sheet as of December 31, 2013 and 2012, respectively. The amounts paid and received on the swap agreements will be recorded in interest expense as yield adjustments in the period during which the related floating-rate interest is incurred. We determine the fair value of the swap agreements based on a valuation model using market data inputs.

The Akimeka acquisition required additional payments to be made to the sellers of up to $11 million over a three-year post-closing period ended December 31, 2013 if Akimeka achieved certain financial performance targets during such period. Because Akimeka did not achieve the required financial performance targets for the year ended December 31, 2013, no earn-out was due.  See Note 5, Acquisitions, for the contingent earn-out obligations resulting from the WBI acquisition. WBI earned approximately $219 thousand and $7.1 million based on its financial performance for the earn-out periods ended June 30, 2013 and 2012, respectively. We determined the fair value of the earn-out obligations related to the Akimeka and WBI acquisitions by using a valuation model that included the evaluation of all possible outcomes and the application of an appropriate discount rate.  At the end of each reporting period, the fair value of the contingent consideration is re-measured and any changes are recorded as contract costs. No liability was recorded for the fair value of the Akimeka earn-out obligation at December 31, 2013 and December 31, 2012. There was no change in the fair value of the Akimeka earn-out obligation during 2013. The fair value of the WBI earn-out obligation increased $183 thousand and $802 thousand for the years ended December 31, 2013 and 2012, respectively.