Note 18. Fair value measurements

Our financial assets and liabilities are summarized below as of March 31, 2017 and December 31, 2016 with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivable and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.


	Carrying Value		Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2017
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		$ 4,641		$ 4,641		$ 3,187		$ 1,454		$ —
States, municipalities and political subdivisions		1,105		1,105		—		1,105		—
Foreign governments		8,669		8,669		6,835		1,834		—
Corporate bonds		7,467		7,467		—		7,405		62
Mortgage-backed securities		1,051		1,051		—		1,051		—
Investments in equity securities		135,020		135,020		135,012		8		—
Investment in Kraft Heinz common stock		15,431		29,553		29,553		—		—
Other investments		18,412		18,412		—		—		18,412
Loans and finance receivables		13,365		13,639		—		14		13,625
Derivative contract assets ⁽¹⁾		128		128		1		20		107
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		156		156		3		127		26
Equity index put options		2,430		2,430		—		—		2,430
Notes payable and other borrowings:
Insurance and other		27,416		28,022		—		28,022		—
Railroad, utilities and energy		60,925		67,655		—		67,655		—
Finance and financial products		15,615		16,064		—		15,725		339

December 31, 2016
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		$ 4,527		$ 4,527		$ 3,099		$1,428		$ —
States, municipalities and political subdivisions		1,216		1,216		—		1,216		—
Foreign governments		9,001		9,001		7,237		1,764		—
Corporate bonds		7,604		7,604		—		7,540		64
Mortgage-backed securities		1,117		1,117		—		1,117		—
Investments in equity securities		122,032		122,032		122,031		—		1
Investment in Kraft Heinz common stock		15,345		28,418		28,418		—		—
Other investments		17,256		17,256		—		—		17,256
Loans and finance receivables		13,300		13,717		—		13		13,704
Derivative contract assets ⁽¹⁾		142		142		5		43		94
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		145		145		3		114		28
Equity index put options		2,890		2,890		—		—		2,890
Notes payable and other borrowings:
Insurance and other		27,175		27,712		—		27,712		—
Railroad, utilities and energy		59,085		65,774		—		65,774		—
Finance and financial products		15,384		15,825		—		15,469		356

⁽¹⁾

Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities.

The fair values of substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the fair values presented are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative market assumptions and/or estimation methodologies may have a material effect on the estimated fair value. The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.

Level 1—Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

Level 2—Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.

Level 3—Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets or liabilities.

Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the three months ending March 31, 2017 and 2016 follow (in millions).


	Investments in fixed maturity securities				Investments in equity securities and other investments			Net derivative contract liabilities
Three months ending March 31, 2017
Balance at December 31, 2016		$	64		$	17,257		$	(2,824	)
Gains (losses) included in:
Earnings			—			—			499
Other comprehensive income			1			1,156			(2	)
Regulatory assets and liabilities			—			—			1
Acquisitions, dispositions and settlements			(3	)		—			(23	)
Transfers into/out of Level 3			—			(1	)		—

Balance at March 31, 2017		$	62		$	18,412		$	(2,349	)

Three months ending March 31, 2016
Balance at December 31, 2015		$	100		$	21,403		$	(3,785	)
Gains (losses) included in:
Earnings			—			—			(766	)
Other comprehensive income			2			(1,920	)		(6	)
Regulatory assets and liabilities			—			—			(6	)
Acquisitions, dispositions and settlements			4			—			(14	)
Transfers into/out of Level 3			(1	)		—			—

Balance at March 31, 2016		$	105		$	19,483		$	(4,577	)

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are primarily related to changes in the values of derivative contracts and settlement transactions. Gains and losses included in other comprehensive income are primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings, as appropriate in our Consolidated Statements of Comprehensive Income.

Quantitative information as of March 31, 2017, with respect to assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).


	Fair Value	Principal Valuation Techniques	Unobservable Inputs	Weighted Average
Other investments:

Preferred stocks	$ 7,730	Discounted cash flow	Expected duration		7 years

			Discount for transferability restrictions and subordination		145 basis points

Common stock warrants	10,682	Warrant pricing model	Discount for transferability and hedging restrictions		4%
Net derivative liabilities:

Equity index put options	2,430	Option pricing model	Volatility		19%

Our other investments currently include preferred stocks and common stock warrants that we acquired in private placement transactions. These investments are subject to contractual restrictions on transferability and may contain provisions that prevent us from economically hedging our investments. In applying discounted estimated cash flow techniques in valuing the preferred stocks, we made assumptions regarding the expected durations of the investments, as the issuers may have redemption rights. We also made estimates regarding the impact of subordination, as the preferred stocks have a lower priority in liquidation than debt instruments of the issuers. In valuing the common stock warrants, we used a warrant valuation model. While most of the inputs to the model are observable, we are subject to the aforementioned contractual restrictions and we have applied discounts with respect to such restrictions. Increases or decreases to these inputs would result in decreases or increases to the fair values of the investments.

Our equity index put option contracts are illiquid and contain contract terms that are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and certain of the contracts have relatively long durations. For these and other reasons, we classified these contracts as Level 3. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.

We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshire non-performance input) which are observable. However, we believe that the valuation of long-duration options using any model is inherently subjective and, given the lack of observable transactions and prices, acceptable values may be subject to wide ranges. Volatility inputs represent our expectations, which consider the remaining duration of each contract and assume that the contracts will remain outstanding until the expiration dates. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.