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FAIR VALUE MEASUREMENTS
6 Months Ended
Dec. 31, 2016
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

 

NOTE 8 — FAIR VALUE MEASUREMENTS

 

The Company records certain of its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.  The accounting for fair value measurements must be applied to nonfinancial assets and nonfinancial liabilities that require initial measurement or remeasurement at fair value, which principally consist of assets and liabilities acquired through business combinations and goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment.  The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of inputs that may be used to measure fair value are as follows:

 

Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instrument’s valuation.

 

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

56 

 

$

 

$

56 

 

Interest rate-related derivatives

 

 

11 

 

 

11 

 

Interest rate swap contracts

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

430 

 

 

430 

 

Foreign government and agency securities

 

 

87 

 

 

87 

 

Corporate notes and bonds

 

 

508 

 

 

508 

 

Time deposits

 

 

280 

 

 

280 

 

Other securities

 

 

28 

 

 

28 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

1,401 

 

$

 

$

1,401 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

11 

 

$

 

$

11 

 

Interest rate swap contracts

 

 

 

 

 

Contingent consideration

 

 

 

200 

 

200 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

16 

 

$

200 

 

$

216 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

48 

 

$

 

$

48 

 

Interest rate swap contracts

 

 

18 

 

 

18 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

563 

 

 

563 

 

Foreign government and agency securities

 

 

61 

 

 

61 

 

Corporate notes and bonds

 

 

457 

 

 

457 

 

Time deposits

 

 

390 

 

 

390 

 

Other securities

 

 

33 

 

 

33 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

1,570 

 

$

 

$

1,570 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

26 

 

$

 

$

26 

 

Contingent consideration

 

 

 

196 

 

196 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

26 

 

$

196 

 

$

222 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The estimated fair values of the Company’s financial instruments are as follows:

 

 

 

December 31

 

June 30

 

 

 

2016

 

2016

 

(In millions)

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Nonderivatives

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,262

 

$

1,262

 

$

914

 

$

914

 

Available-for-sale securities

 

1,333

 

1,333

 

1,504

 

1,504

 

Current and long-term debt

 

4,033

 

4,120

 

2,242

 

2,482

 

Additional purchase price payable

 

37

 

37

 

37

 

37

 

Contingent consideration

 

200

 

200

 

196

 

196

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts - asset (liability), net

 

45

 

45

 

22

 

22

 

Interest rate-related derivatives - asset

 

11

 

11

 

 

 

Interest rate swap contracts - asset (liability), net

 

(4

)

(4

)

18

 

18

 

 

The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments for which it is practicable to estimate that value:

 

Cash and cash equivalents — Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, money market funds and time deposits. The carrying amount approximates fair value, primarily because of the short maturity of cash equivalent instruments.

 

Available-for-sale securities — Available-for-sale securities are classified within Level 2 of the valuation hierarchy and are valued using third-party pricing services, and for time deposits, the carrying amount approximates fair value. To determine fair value, the pricing services use market prices or prices derived from other observable market inputs such as benchmark curves, credit spreads, broker/dealer quotes, and other industry and economic factors.

 

Foreign currency forward contracts — The fair values of the Company’s foreign currency forward contracts were determined using an industry-standard valuation model, which is based on an income approach.  The significant observable inputs to the model, such as swap yield curves and currency spot and forward rates, were obtained from an independent pricing service.  To determine the fair value of contracts under the model, the difference between the contract price and the current forward rate was discounted using LIBOR for contracts with maturities up to 12 months, and swap yield curves for contracts with maturities greater than 12 months.

 

Interest rate-related derivatives and swap contracts — The fair values of the Company’s interest rate-related derivatives and swap contracts were determined using an industry-standard valuation model, which is based on the income approach.  The significant observable inputs to the model, such as treasury yield curves, swap yield curves, and LIBOR forward rates, were obtained from independent pricing services.

 

Current and long-term debt — The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities.  To a lesser extent, debt also includes capital lease obligations for which the carrying amount approximates the fair value.  The Company’s debt is classified within Level 2 of the valuation hierarchy.

 

Additional purchase price payable — The Company’s additional purchase price payable represents fixed minimum additional purchase price that was discounted using the Company’s incremental borrowing rate, which was approximately 1%.  The additional purchase price payable is classified within Level 2 of the valuation hierarchy.

 

Contingent consideration — Contingent consideration obligations consist of potential obligations related to the Company’s acquisitions in previous years. The amounts to be paid under these obligations are contingent upon the achievement of stipulated financial targets by the business subsequent to acquisition. The fair values of the contingent consideration related to certain acquisition earn-outs were estimated using a probability-weighted discount model that considers the achievement of the conditions upon which the respective contingent obligation is dependent (“Monte Carlo Method”).  The Monte Carlo Method has various inputs into the valuation model that include, at December 31, 2016, the risk-adjusted projected future operating results of the acquired entity, a risk-adjusted discount rate ranging from 1.8% to 2.5%, a measure of revenue volatility ranging from 5.1% to 13.4%, an asset volatility ranging from 29.6% to 33.0% and a revenue/earnings before income tax, depreciation and amortization correlation factor of 80%.  Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement.  Changes to the discount rate, volatility or correlation factors would have a lesser effect.  The implied rates are deemed to be unobservable inputs and, as such, the Company’s contingent consideration is classified within Level 3 of the valuation hierarchy.

 

Changes in the fair value of the contingent consideration obligations for the six months ended December 31, 2016 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows:

 

(In millions)

 

Fair Value

 

Contingent consideration at June 30, 2016

 

$

196 

 

Change in fair value

 

 

 

 

 

 

Contingent consideration at December 31, 2016

 

$

200