Fair Value Measurements
We currently do not have any financial instruments that must be measured on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") 820-10 Fair Value Measurements and Disclosures—Overall; however, we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures—Overall—Subsequent Measurement, for our nonfinancial assets which include our held for sale and held for use hotels. We measure these assets using inputs from Level 3 of the fair value hierarchy.
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 includes unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.
During the three months ending March 31, 2011 and June 30, 2011, Level 3 inputs were used to determine impairment losses of $474,000 on nine held for sale hotels and $2.1 million on twelve held for sale hotels, respectively. During the three months ended March 31, 2011 the Company also recorded recovery of previously recorded impairment of $25,000 on one hotel at the time of sale. During the three months ended June 30, 2011, the Company recorded recovery of previously recorded impairment of $108,000 on two held for sale hotels for which fair value exceeded management's previous estimates. An impairment loss of $2.8 million was also recorded on one held for use hotel during the second quarter of 2011.
During the three months ended March 31, 2010, Level 3 inputs were also used to determine an impairment loss of $120,000 for one hotel held for sale. During the three months ended June 30, 2010, we recorded impairment charges of approximately $2.4 million for 12 hotels held for sale.
In accordance with ASC 360-10-35 Property Plant and Equipment—Overall—Subsequent Measurement, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.
The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. As of June 30, 2011, the carrying value and estimated fair value of the Company's debt, excluding debt related to hotel properties held for sale, was $142.3 million and $146.0 million, respectively. As of December 31, 2010, the carrying value and estimated fair value of the Company's debt, excluding debt related to hotel properties held for sale, was $142.8 million and $146.7 million, respectively. The carrying value of the Company's other financial instruments approximates fair value due to the short-term nature of these financial instruments.