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FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2019

23. FINANCIAL INSTRUMENTS

In accordance with ASC 825, “Financial Instruments,” the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

Fair Value of Financial Instruments—The estimated fair values of the Company’s financial instruments are as follows:


	December 31, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in millions)
Financial assets
Credit card and loan receivables, net	$	18,292.0	$	19,126.0	$	16,816.7	$	17,472.7
Credit card receivables held for sale		408.0		436.2		1,951.6		1,995.5
Redemption settlement assets, restricted		600.8		600.8		558.6		558.6
Other investments		259.8		259.8		291.3		291.3
Derivative instruments		0.2		0.2		3.8		3.8
Financial liabilities
Derivative instruments		0.3		0.3		0.3		0.3
Deposits		12,151.7		12,303.6		11,793.7		11,768.7
Non-recourse borrowings of consolidated securitization entities		7,284.0		7,333.6		7,651.7		7,626.9
Long-term and other debt		2,849.9		2,878.8		5,725.4		5,755.3

The following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Credit card and loan receivables, net — The Company utilizes a discounted cash flow model using unobservable inputs, including estimated yields (interest and fee income), loss rates, payment rates and discount rates to estimate the fair value measurement of the credit card and loan receivables.

Credit card receivables held for sale — The Company utilizes a discounted cash flow model using unobservable inputs, including forecasted yields and net charge-off estimates to estimate the fair value measurement of the credit card portfolios held for sale, as well as market data as applicable.

Redemption settlement assets, restricted — Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.

Other investments — Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the consolidated balance sheets. Other investments are recorded at fair value based on quoted market prices for the same or similar securities.

Deposits — For money market deposits, carrying value approximates fair value due to the liquid nature of these deposits. For certificates of deposit, the fair value is estimated based on the current observable market rates available to the Company for similar deposits with similar remaining maturities.

Non-recourse borrowings of consolidated securitization entities — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.

Long-term and other debt — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.

Derivative instruments — The Company’s foreign currency cash flow hedges are recorded at fair value based on a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs. The fair value of the foreign currency forward contracts is estimated based on published quotations of spot foreign currency rates and forward points which are converted into implied foreign currency rates.

Financial Assets and Financial Liabilities Fair Value Hierarchy

ASC 820, “Fair Value Measurements and Disclosures,” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

●

Level 1, defined as observable inputs such as quoted prices in active markets;

●

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

●

Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions.

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The use of different techniques to determine fair value of these financial instruments could result in different estimates of fair value at the reporting date.

The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2019 and 2018:


			Fair Value Measurements at
			December 31, 2019 Using
	Balance at
	December 31,
	2019		Level 1		Level 2		Level 3
	(in millions)
Mutual funds ⁽¹⁾	$	25.1	$	25.1	$	—	$	—
Corporate bonds ⁽¹⁾		536.4		—		536.4		—
Marketable securities ⁽²⁾		259.8		26.2		233.6		—
Derivative instruments ⁽³⁾		0.2		—		0.2		—
Total assets measured at fair value	$	821.5	$	51.3	$	770.2	$	—

Derivative instruments ⁽³⁾	$	0.3	$	—	$	0.3	$	—
Total liabilities measured at fair value	$	0.3	$	—	$	0.3	$	—


			Fair Value Measurements at
			December 31, 2018 Using
	Balance at
	December 31,
	2018		Level 1		Level 2		Level 3
	(in millions)
Mutual funds ⁽¹⁾	$	23.2	$	23.2	$	—	$	—
Corporate bonds ⁽¹⁾		491.5		—		491.5		—
Marketable securities ⁽²⁾		266.4		25.0		241.4		—
U.S. Treasury bonds ⁽²⁾		24.9		24.9		—		—
Derivative instruments ⁽³⁾		3.8		—		3.8		—
Total assets measured at fair value	$	809.8	$	73.1	$	736.7	$	—

Derivative instruments ⁽³⁾	$	0.3	$	—	$	0.3	$	—
Total liabilities measured at fair value	$	0.3	$	—	$	0.3	$	—

(1)	Amounts are included in redemption settlement assets in the consolidated balance sheets.

(2)	Amounts are included in other current assets and other non-current assets in the consolidated balance sheets.

(3)	Amounts are included in other current assets and other current liabilities in the consolidated balance sheets.

There were no transfers between Levels 1 and 2 within the fair value hierarchy for the years ended December 31, 2019 and 2018.

Financial Instruments Disclosed but Not Carried at Fair Value

The following tables provide assets and liabilities disclosed but not carried at fair value as of December 31, 2019 and 2018:


	Fair Value Measurements at
	December 31, 2019
	Total		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Credit card and loan receivables, net	$	19,126.0	$	—	$	—	$	19,126.0
Credit card receivables held for sale		436.2		—		—		436.2
Total	$	19,562.2	$	—	$	—	$	19,562.2

Financial liabilities:
Deposits	$	12,303.6	$	—	$	12,303.6	$	—
Non-recourse borrowings of consolidated securitization entities		7,333.6		—		7,333.6		—
Long-term and other debt		2,878.8		—		2,878.8		—
Total	$	22,516.0	$	—	$	22,516.0	$	—


	Fair Value Measurements at
	December 31, 2018
	Total		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Credit card and loan receivables, net	$	17,472.7	$	—	$	—	$	17,472.7
Credit card receivables held for sale		1,995.5		—		—		1,995.5
Total	$	19,468.2	$	—	$	—	$	19,468.2

Financial liabilities:
Deposits	$	11,768.7	$	—	$	11,768.7	$	—
Non-recourse borrowings of consolidated securitization entities		7,626.9		—		7,626.9		—
Long-term and other debt		5,755.3		—		5,755.3		—
Total	$	25,150.9	$	—	$	25,150.9	$	—

- 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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