In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157—Fair Value Measurements, or SFAS 157, which, for financial assets, is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. In part, SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. The new standard provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. The standard also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
The Company uses several valuation methodologies to estimate fair value, which generally results in a range of fair values from which the Company derives a single estimate of fair value of the portfolio company. In determining the fair value of a portfolio company, the Company analyzes the portfolio company's historical and projected financial results, as well as key market value factors. Described below is an overview of the methods the Company uses to determine fair value for those investments in its portfolio that are not traded actively. In determining fair value the Company assumes that the securities in its portfolio would be exchanged in an orderly transaction at the measurement date.
Level 1 —inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 —inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and
Level 3 —inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect the Company's own assumptions that market participants would use to price the asset or liability based upon the best available information.
Valuation of Majority-Owned Control Investments — Majority-owned control investments are composed of equity and debt securities for which the Company holds a majority ownership position and, in most cases, control the portfolio company's board of directors. Market quotations are not readily available for our control investments. As a result, the Company determines the fair value of these investments, using a combination of market and income approaches. Typically, private companies are bought and sold based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value. Generally, the Company applies multiples that it has observed for other comparable companies to relevant financial data for the portfolio company. The Company also uses income approaches to determine the fair value of these securities, based on our projections of the discounted future free cash flows that the portfolio company will likely generate, as well as industry derived capital costs. The valuation approaches for the Company's majority-owned investments estimates the value of the investment if the Company were to sell, or exit, the investment, assuming the highest and best use of the investment by market participants. In addition these valuation approaches consider the value associated with its ability to control the capital structure of the portfolio company, as well as the timing of a potential exit.
Valuation of Non-Majority Owned Control Investments and Non-Control Investments —Non-majority owned control investments are composed of debt and equity securities for which the Company has control, but are not the majority owner. Non-control investments are composed of debt and equity securities for which the Company does not have a controlling interest and for which a quoted market price is not readily available, which includes both affiliate and non-affiliate investments. For the Company's non-majority owned control equity investments and its non-control equity investments, the Company uses the market and income approaches used for our control investments. For non-majority owned control debt investments and non-control debt investments, the Company determines the fair value, primarily using a yield approach that analyzes the discounted cash flows of interest and principal for the debt security to maturity, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments.
Valuation of Thinly Traded and Over the Counter Securities —Securities that are traded in the over-the-counter market or on a stock exchange, including broadly syndicated securities, generally will be valued at the average of the prevailing bid and ask price on the date of the relevant period end. However, restricted or thinly traded public securities may be valued at discounts from the public market value due to the transferable restrictions on sale.
Fair Value Measurements for Nonfinancial Assets and Liabilities —On February 12, 2008, FASB Staff Position No. FAS 157-2—Effective Date of FASB No. 157 , or FAS 157-2, was issued, which deferred the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, with early adoption permitted in certain cases. FAS 157-2 did not, however, defer the effective date for the adoption of SFAS 157 for financial assets and liabilities. The Company adopted SFAS 157 for its financial assets effective January 1, 2008, but has deferred the adoption of SFAS 157 for its nonfinancial assets. Currently, the Company is evaluating the impact that adoption of SFAS 157 for its non-financial assets and liabilities will have on its financial position and results of operations.
As part of its valuation analyses, the Company also includes relevant key events that could affect the value of the securities, events, including private mergers and acquisitions, purchase transactions, public offerings, or subsequent debt or equity sales. In addition, our fair value analyses also factor in other relevant data, such as market changes and industry valuation benchmarks. The independent valuations and reviews are considered by our board of directors in its determination of the fair value of our portfolio companies. The Company has utilized, and intends to continue to utilize, independent valuation firms to obtain additional support in the preparation of its internal valuation analyses each quarter.