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FAIR VALUE OF FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2018
Disclosure of detailed information about financial instruments [abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables list the company’s financial instruments by their respective classification as at June 30, 2018 and December 31, 2017:
 
2018
 
2017
AS AT JUN. 30, 2018 AND DEC. 31, 2017
(MILLIONS)
Carrying 
Value 

 
Fair Value 

 
Carrying 
Value 

 
Fair Value 

Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,913

 
$
5,913

 
$
5,139

 
$
5,139

Other financial assets
 
 
 
 
 
 
 
Government bonds
55

 
55

 
49

 
49

Corporate bonds
840

 
840

 
643

 
643

Fixed income securities and other
726

 
726

 
662

 
662

Common shares and warrants
2,447

 
2,447

 
1,832

 
1,832

Loans and notes receivable
1,521

 
1,543

 
1,614

 
1,657

 
5,589


5,611


4,800


4,843

Accounts receivable and other
10,067

 
10,067

 
9,616

 
9,616

 
$
21,569


$
21,591


$
19,555


$
19,598

Financial liabilities
 
 
 
 
 
 
 
Corporate borrowings
$
6,424

 
$
6,511

 
$
5,659

 
$
6,087

Property-specific borrowings
70,638

 
71,547

 
63,721

 
65,399

Subsidiary borrowings
8,107

 
8,174

 
9,009

 
9,172

Accounts payable and other
18,330

 
18,330

 
17,965

 
17,965

Subsidiary equity obligations
3,894

 
3,894

 
3,661

 
3,661

 
$
107,393


$
108,456


$
100,015


$
102,284


Fair Value Hierarchy Levels
The following table categorizes financial assets and liabilities, which are carried at fair value, based upon the fair value hierarchy levels:
 
2018
 
2017
AS AT JUN. 30, 2018 AND DEC. 31, 2017
(MILLIONS)
Level 1

 
Level 2

 
Level 3

 
Level 1

 
Level 2

 
Level 3

Financial assets
 
 
 
 
 
 
 
 
 
 
 
Other financial assets
 
 
 
 
 
 
 
 
 
 
 
Government bonds
$
—

 
$
55

 
$
—

 
$
—

 
$
49

 
$
—

Corporate bonds
—

 
820

 
—

 
127

 
508

 
—

Fixed income securities and other
22

 
289

 
415

 
20

 
233

 
409

Common shares and warrants
1,882

 
255

 
310

 
1,586

 
—

 
246

Loans and notes receivables
—

 
23

 
1

 
—

 
62

 
1

Accounts receivable and other
14

 
1,599

 
110

 
15

 
1,155

 
213

 
$
1,918

 
$
3,041

 
$
836

 
$
1,748

 
$
2,007

 
$
869

Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and other
$
89

 
$
2,284

 
$
874

 
$
134

 
$
3,003

 
$
704

Subsidiary equity obligations
—

 
30

 
1,690

 
—

 
—

 
1,559

 
$
89

 
$
2,314

 
$
2,564

 
$
134

 
$
3,003

 
$
2,263


During the three and six months ended June 30, 2018 and 2017, there were no transfers between Level 1, 2 or 3.
Fair values of financial instruments are determined by reference to quoted bid or ask prices, as appropriate. If bid and ask prices are unavailable, the closing price of the most recent transaction of that instrument is used. In the absence of an active market, fair values are determined based on prevailing market rates for instruments with similar characteristics and risk profiles or internal or external valuation models, such as option pricing models and discounted cash flow analysis, using observable market inputs.
The following table summarizes the valuation techniques and key inputs used in the fair value measurement of Level 2 financial instruments:
(MILLIONS)
Type of Asset/Liability
 
Carrying Value
Jun. 30, 2018

 
Valuation Techniques and Key Inputs
Derivative assets/Derivative liabilities (accounts receivable/accounts payable)
 
$
1,599
/
 
Foreign currency forward contracts – discounted cash flow model – forward exchange rates (from observable forward exchange rates at the end of the reporting period) and discounted at credit adjusted rate
 
Interest rate contracts – discounted cash flow model – forward interest rates (from observable yield curves) and applicable credit spreads discounted at a credit adjusted rate
 
Energy derivatives – quoted market prices, or in their absence internal valuation models, corroborated with observable market data
 
(2,284
)
 
Other financial assets ..................
 
1,442

 
Valuation models based on observable market data
Redeemable fund units (subsidiary equity obligations)
 
(30
)
 
Aggregated market prices of underlying investments

Fair values determined using valuation models requiring the use of unobservable inputs (Level 3 financial assets and liabilities) include assumptions concerning the amount and timing of estimated future cash flows and discount rates. In determining those unobservable inputs, the company uses observable external market inputs such as interest rate yield curves, currency rates and price and rate volatilities, as applicable, to develop assumptions regarding those unobservable inputs.
The following table summarizes the valuation techniques and significant unobservable inputs used in the fair value measurement of Level 3 financial instruments:
(MILLIONS)
Type of Asset/Liability
 
Carrying Value
Jun. 30, 2018

 
Valuation
Techniques
 
Significant
Unobservable Inputs
 
Relationship of Unobservable
Inputs to Fair Value
Fixed income securities and other
 
$
415

 
Discounted cash flows
 
•  Future cash flows

 
•  Increases (decreases) in future cash flows increase (decrease) fair value
 
 
 
 
 
 
•  Discount rate

 
•  Increases (decreases) in discount rate decrease (increase) fair value

Warrants (common shares and warrants)
 
310

 
Black-Scholes model
 
•  Volatility







 
•  Increases (decreases) in volatility increase (decreases) fair value
 
 
 
 
 
 
•  Term to maturity

 
•  Increases (decreases) in term to maturity increase (decrease) fair value
 
 
 
 
 
 
•  Risk free interest rate

 
•  Increases (decreases) in the risk-free interest rate increase (decrease) fair value

Limited-life funds (subsidiary equity obligations)
 
(1,690
)
 
Discounted cash flows
 
•  Future cash flows
 
•  Increases (decreases) in future cash flows increase (decrease) fair value
 
 
 
 
 
 
•  Discount rate
 
•  Increases (decreases) in discount rate decrease (increase) fair value

 
 
 
 
 
 
•  Terminal capitalization rate
 
•  Increases (decreases) in terminal capitalization rate decrease (increase) fair value
 
 
 
 
 
 
•  Investment horizon
 
•  Increases (decreases) in the investment horizon decrease (increase) fair value
Derivative assets/Derivative liabilities (accounts receivable/payable)
 
110
/
  
Discounted cash flows
  
•  Future cash flows

  
•  Increases (decreases) in future cash flows increase (decrease) fair value
 
(874
)
 
 
 
 
 
 
 
•  Forward exchange rates (from observable forward exchange rates at the end of the reporting period)
 
•  Increases (decreases) in the forward exchange rate increase (decrease) fair value
 
 
 
 
 
 
•  Discount rate
 
•  Increases (decreases) in discount rate decrease (increase) fair value

The following table presents the changes in the balance of financial assets and liabilities classified as Level 3 for the three and six month periods ended June 30, 2018:
 
Three Months Ended
 
Six Months Ended
AS AT AND FOR THE PERIODS ENDED JUN. 30, 2018
(MILLIONS)
Financial Assets

 
Financial Liabilities

 
Financial 
Assets 

 
Financial 
Liabilities 

Balance, beginning of period
$
865

 
$
2,597

 
$
869

 
$
2,263

Fair value changes in net income
(56
)
 
18

 
(106
)
 
(4
)
Fair value changes in other comprehensive income1
1

 
(17
)
 
—

 
(18
)
Additions, net of disposals
26

 
(34
)
 
73

 
323

Balance, end of period
$
836

 
$
2,564

 
$
836

 
$
2,564


1.
Includes foreign currency translation