FAIR VALUE MEASUREMENTS

9 Months Ended

Dec. 31, 2015

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs. The following tables present the Company’s financial assets and liabilities measured on a recurring basis using the fair value hierarchy at December 31, 2015 and March 31, 2015 (in thousands):



	Fair Value Measurements at
	December 31, 2015
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	230,521	$	—		$	—		$	230,521
U.S. government and municipal obligations	39,040		89,818			—			128,858
Commercial paper	—		12,970			—			12,970
Corporate bonds	3,885		—			—			3,885
Derivative financial instruments	—		9			—			9
Contingently returnable consideration	$	—	$	—		$	16,687		$	16,687
	$	273,446	$	102,797		$	16,687		$	392,930
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(7,234	)	$	(7,234	)
Derivative financial instruments	—		(467		)	—			(467		)
	$	—	$	(467	)	$	(7,234	)	$	(7,701	)



	Fair Value Measurements at
	March 31, 2015
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	104,893	$	—		$	—		$	104,893
U.S. government and municipal obligations	46,564		98,781			—			145,345
Commercial paper	—		5,095			—			5,095
Corporate bonds	9,524		—			—			9,524
Derivative financial instruments	—		15			—			15
	$	160,981	$	103,891		$	—		$	264,872
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(4,484	)	$	(4,484	)
Derivative financial instruments	—		(1,664		)	—			(1,664		)
	$	—	$	(1,664	)	$	(4,484	)	$	(6,148	)

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including marketable securities and derivative financial instruments.

The Company’s Level 1 investments are classified as such because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency.

The Company’s Level 2 investments are classified as such because fair value is being calculated using data from similar but not identical sources, or a discounted cash flow model using the contractual interest rate as compared to the underlying interest yield curve. The Company's derivative financial instruments consist of forward foreign exchange contracts and are classified as Level 2 because the fair values of these derivatives are determined using models based on market observable inputs, including spot prices for foreign currencies and credit derivatives, as well as an interest rate factor. The Company classifies municipal obligations as level 2 because the fair values are determined using quoted prices from markets the Company considers to be inactive. Commercial paper is classified as Level 2 because the Company uses market information from similar but not identical instruments and discounted cash flow models based on interest rate yield curves to determine fair value. For further information on the Company's derivative instruments refer to Note 9.

The Company's Level 3 asset and liability consist of contingently returnable consideration and contingent purchase consideration, respectively. The Company's contingently returnable consideration represents a contingent right of return from Danaher to reimburse NetScout for cash awards to be paid by NetScout to employees of the Communications Business transferred to Newco (as defined below) for post-combination services on various dates through August 4, 2016 as part of the acquisition of the Communications Business. The contingently returnable consideration is classified as Level 3 because the fair value of the asset was determined using assumptions developed by management in determining the estimated cash awards expected to be paid on August 4, 2016 after applying an assumed forfeiture rate. The contingently returnable consideration of $16.7 million, net of taxes as of December 31, 2015 is included as prepaid expenses and other current assets in the Company’s consolidated balance sheet. During the three months ended December 31, 2015, certain post combination cash retention payments have been disbursed. Danaher will reimburse the Company for those costs and NetScout will reimburse Danaher for the tax benefit. Because the right of offset has not been met, the Company recorded the gross amount of compensation as contingently returnable consideration and the tax benefit of $2.6 million as contingent purchase consideration. For additional information, see Note 7 of the Company's Notes to Consolidated Financial Statements.

The following table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 financial assets and liabilities for the nine months ended December 31, 2015 (in thousands):



	Contingent Purchase Consideration			Contingently Returnable Consideration
Balance at beginning of period	$	(4,484	)	$	—
Increase in fair value and accretion expense (included within research and development expense)	(114		)
Contingently returnable consideration				19,125
Increase in fair value				3,676
Gross presentation of contingently returnable consideration to contingent purchase consideration	(2,636		)	2,636
Payment received				(8,750		)
Balance at end of period	$	(7,234	)	$	16,687

Deal related compensation expense and accretion charges related to the contingent consideration for the nine months ended December 31, 2015 was $114 thousand and was included as part of earnings.

- 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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