Fair Value Measurements

6 Months Ended

Jun. 30, 2014

11. FAIR VALUE MEASUREMENTS

ASC 820 – Fair Value Measurements and Disclosures (“ASC 820”) provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that Lionbridge uses to measure fair value, as well as the assets and liabilities that the Company values using those levels of inputs.


Level 1:		Quoted prices in active markets for identical assets or liabilities. Lionbridge did not have any financial assets and liabilities as of June 30, 2014 designated as Level 1.

Level 2:		Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. As a result of the PRI acquisition in 2012 Lionbridge acquired a $2.0 million promissory note, using an interest rate similar to quoted market rates for a similar liability, to be paid in three installments and matures in June 2015.
Level 3:		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Lionbridge has contingent and deferred consideration assumed as a result of the VSI and E5 acquisition of $2.0 million and $3.1 million designated as Level 3 as of June 30, 2014 and December 31, 2013, respectively. The Company’s contingent purchase consideration is valued by probability weighting expected payment scenarios and then applying a discount based on the present value of the future cash flow streams. This liability is classified as Level 3 because the probability weighting of future payment scenarios is based on assumptions developed by management. The Company determined a probability weighting that is weighted towards VSI achieving the revenue target at the time of acquisition and the discount rate that is based on the company’s weighted average cost of capital which is then adjusted for the time value of money. The probability weighting has been adjusted during the six months ended June 30, 2014 as the actual results provide the Company with more reliable information to weight the probability scenarios. This adjustment resulted in a $99 thousand increase to the contingent consideration during the six months ended June 30, 2014. The actual results have been consistent with the original assumptions. The discount rate and factor have remained consistent during the six months ended June 30, 2014. The Company believes that any probable changes during future periods to these assumptions will not have a material effect on the contingent considerations. On June 30, 2014 the former owners of E5 agreed to the satisfaction in full of the Company’s contingent payment obligations. This resulted in a $133 thousand decrease to the contingent consideration during the six months ended June 30, 2014.

The following table provides the liabilities carried at fair value measured on a recurring basis at June 30, 2014 and December 31, 2013 (in thousands):


	As of June 30, 2014 Using
	Level 1		Level 2		Level 3		Total
Other accrued expenses and other current liabilities:
Accrued acquisition payments	$	—	$	657	$	1,299	$	1,956

Other long-term liabilities:
Accrued acquisition payments, long-term portion		—		—		724		724

Total liabilities carried at fair value	$	—	$	657	$	2,023	$	2,680


	As of December 31, 2013 Using
	Level 1		Level 2		Level 3		Total
Other accrued expenses and other current liabilities:
Accrued acquisition payments	$	—	$	789	$	1,389	$	2,178

Other long-term liabilities:
Accrued acquisition payments, long-term portion		—		595		1,691		2,286

Total	$	—	$	1,384	$	3,080	$	4,464

Changes in the fair value of the Company’s Level 3 acquisition related obligations during the six months ended June 30, 2014 were as follows (in thousands):


Fair value at January 1, 2014	$	3,080
Changes in the fair value of acquisition consideration obligations		(34	)
Payments of deferred consideration obligations		(1,023	)

Fair value at June 30, 2014	$	2,023

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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