XML 59 R11.htm IDEA: XBRL DOCUMENT

Fair Value Measurements

9 Months Ended

Sep. 30, 2014

4. FAIR VALUE MEASUREMENTS

A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, respectively (millions):

	September 30, 2014								December 31, 2013
		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
										(recast)
Assets:
Trading securities:
Diversified equity securities^(a)	$	233	$	5	$	-	$	238	$	254	$	5	$	-	$	259
Available-for-sale securities:
Equity securities		25		-		-		25		56		-		-		56
Debt securities		-		61		-		61		-		40		-		40
Derivatives:
Foreign exchange contracts		-		16		-		16		-		10		-		10
Other		-		-		159		159		6		-		8		14
Liabilities:
Derivatives:
Foreign exchange contracts		-		-		-		-		-		(17)		-		(17)
Other		-		-		(6)		(6)		-		-		(7)		(7)
Total	$	258	$	82	$	153	$	493	$	316	$	38	$	1	$	355
__________

(a) Consists of investments related to deferred compensation.

The Company primarily applies the market approach for valuing recurring fair value measurements.

The balance as of September 30, 2014 of assets and liabilities valued using significant unobservable inputs (Level 3) primarily related to an asset of $154 million related to warrants to purchase shares of CME Class A common stock. The Company estimates the fair value of these warrants using a Monte Carlo Simulation model. Significant unobservable inputs used in the fair value measurement at September 30, 2014 are an expected term of 2.94 years and an expected volatility of approximately 83%. As of both September 30, 2014 and 2013, the other Level 3 assets and liabilities consisted of assets related to equity instruments held by employees of former subsidiaries of the Company, liabilities for contingent consideration and options to redeem securities.

The following table reconciles the beginning and ending balances of net derivative assets and liabilities classified as Level 3 and identifies the total gains (losses) the Company recognized during the nine months ended September 30, 2014 and 2013 on such assets and liabilities that were included in the Consolidated Balance Sheet as of September 30, 2014 and 2013 (millions):

	September 30, 2014		September 30, 2013

Balance as of the beginning of the period	$	1	$	7
Included in other loss, net		(58)		12
Purchases		213		-
Settlements		(19)		(13)
Issuances		16		(2)
Transfers in and/or out of Level 3		-		-
Balance as of the end of the period	$	153	$	4

Net gain (loss) for the period included in net income related to assets and liabilities
still held as of the end of the period	$	(57)	$	10

Other Financial Instruments

The Company's other financial instruments, including debt, are not required to be carried at fair value. Based on the interest rates prevailing at September 30, 2014, the fair value of Time Warner's debt exceeded its carrying value by approximately $3.706 billion and, based on interest rates prevailing at December 31, 2013, the fair value of Time Warner's debt exceeded its carrying value by approximately $2.754 billion. The fair value of Time Warner's debt was considered a Level 2 measurement as it was based on observable market inputs such as current interest rates and, where available, actual sales transactions. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized in the consolidated financial statements unless the debt is retired prior to its maturity.

Information about the Company's investments in CME that are not required to be carried at fair value on a recurring basis is as follows (millions):


	Carrying Value		Fair Value		Fair Value Hierarchy

Class A common stock^(a)	$	45	$	163		Level 1
Series B convertible redeemable preferred shares		227		204		Level 2
Senior secured notes		222		364		Level 2
__________

(a) Includes one share of Series A convertible preferred stock.

The fair values of the Company's investments in CME's Class A common stock (including Series A convertible preferred stock) and Series B convertible redeemable preferred shares are primarily determined by reference to the September 30, 2014 closing price of CME's common stock. The fair value of the Company's investment in CME's Senior Secured Notes is primarily determined by reference to observable sales transactions.

The carrying value for the majority of the Company's other financial instruments approximates fair value due to the short-term nature of the financial instruments or because the financial instruments are of a longer-term nature and are recorded on a discounted basis.

Non-Financial Instruments

The majority of the Company's non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value.

During the nine months ended September 30, 2014, the Company performed impairment reviews of certain intangible assets at international subsidiaries of Turner and Home Box Office. As a result, the Company recorded noncash impairments of $5 million to write down the value of these assets to $7 million. During the three and nine months ended September 30, 2013, the Company performed impairment reviews of certain intangible assets at international subsidiaries of Turner. As a result, the Company recorded noncash impairments of $5 million and $17 million, respectively, to write down the value of these assets to zero. The resulting fair value measurements were considered to be Level 3 measurements and were determined using a discounted cash flow (“DCF”) methodology with assumptions for cash flows associated with the use and eventual disposition of the assets.

In determining the fair value of its theatrical films, the Company employs a DCF methodology that includes cash flow estimates of a film's ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on the weighted average cost of capital of the respective business (e.g., Warner Bros.) plus a risk premium representing the risk associated with producing a particular theatrical film. The fair value of any theatrical film and television production that management plans to abandon is zero. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement. The following table presents certain theatrical film and television production costs, which were recorded as inventory in the Consolidated Balance Sheet, that were written down to fair value (millions):

	Carrying value before write down		Carrying value after write down

Fair value measurements made during the three months ended September 30,:
2014	$	46	$	-
2013		70		45

Fair value measurements made during the nine months ended September 30,:
2014	$	234	$	140
2013		105		49

- 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.

+ References+ Details