Fair value measurements

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair values of financial instruments

Fair value measurements

Derivatives are recorded in the consolidated balance sheets at fair value.  The valuation process for the derivatives uses observable market data provided by third-party sources. Interest rate swaps are valued by using yield curves derived from observable interest rates to project future swap cash flows and then discount these cash flows back to present values. Interest rate caps are valued using a model that projects the probability of various levels of interest rates occurring in the future using observable volatilities. OEH incorporates credit valuation adjustments to reflect both its own and its respective counterparty’s non-performance risk in the fair value measurements.

In the determination of fair value of derivative instruments, a credit valuation adjustment is applied to OEH’s derivative exposures to take into account the risk of the counterparty defaulting with the derivative in an asset position and, when the derivative is in a liability position, the risk that OEH may default. The credit valuation adjustment is calculated by determining the total expected exposure of the derivatives (incorporating both the current and potential future exposure) and then applying each counterparty’s credit spread to the applicable exposure.  For interest rate swaps, OEH’s own credit spread is applied to the counterparty’s exposure to OEH and the counterparties credit spread is applied to OEH’s exposure to the counterparty, and then the net credit valuation adjustment is reflected in the determination of the fair value of the derivative instrument.  The credit spreads used as inputs in the fair values calculations represent implied credit default swaps obtained from a third-party credit data provider.  Some of the inputs into the credit valuation adjustment are not observable and, therefore, they are considered to be Level 3 inputs.  Where credit valuation adjustment exceeds 20% of the fair value of the derivatives, Level 3 inputs are assumed to have a significant impact on the fair value of the derivatives in their entirety and the derivative is classified as Level 3.  OEH reviews its fair value hierarchy classifications quarterly.  Transfers between levels are made at the fair value on the actual date of the transfer if the event or change in circumstances caused the transfer can be identified.

The following tables summarize the valuation of OEH’s assets and liabilities by the fair value hierarchy at December 31, 2012 and 2011:

	Level 1	Level 2		Level 3	Total
December 31, 2012	$'000	$'000		$'000	$'000
Assets at fair value:
Derivative financial instruments	—	6		—	6
Total assets	—	6		—	6
Liabilities at fair value:
Derivative financial instruments	—	(8,879	)	—	(8,879	)
Total net liabilities	—	(8,873	)	—	(8,873	)

	Level 1	Level 2		Level 3	Total
December 31, 2011	$'000	$'000		$'000	$'000
Assets at fair value:
Derivative financial instruments	—	60		—	60
Total assets	—	60		—	60
Liabilities at fair value:
Derivative financial instruments	—	(10,954	)	—	(10,954	)
Total net liabilities	—	(10,894	)	—	(10,894	)

During the year ended December 31, 2012, there were no transfers between levels of the fair value hierarchy. OEH's policy is to recognize transfers in and transfers out as of the end of each quarterly reporting period. The table below presents a reconciliation of the beginning and ending balances of derivatives having fair value measurements based on significant unobservable inputs (Level 3) for the year ended December 31, 2011:

	Beginning balance at January 1, 2011 $’000		Transfers into/(out of) Level 3 $’000		Realized losses included in earnings $’000	Unrealized gains included in other comprehensive income $’000	Purchases, Sales, Issuances or Settlements $’000	Ending balance at December 31, 2011 $’000
Liabilities at fair value:
Derivative financial instruments	(277	)	(1,473	)	305	1,140	305	—
Total liabilities	(277	)	(1,473	)	305	1,140	305	—

The Level 3 opening balance in 2011 represents new swaps with a fair value close to zero where the credit valuation adjustment is greater than 20% of the fair value.

The amount of total losses for the year ended December 31, 2012 included in earnings that are attributable to the change in unrealized gains or losses relating to those liabilities still held was $Nil (2011 - $Nil; 2010 - $Nil).

(a)    Fair value of financial instruments

Certain methods and assumptions were used to estimate the fair value of each class of financial instruments. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and working capital facilities approximates fair value because of the short maturity of those instruments.

The fair value of OEH’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to OEH for debt of the same remaining maturities. The fair value of debt incorporates a credit valuation adjustment to take account of OEH’s credit risk.

The estimated fair values of OEH’s financial instruments (other than derivative financial instruments) as of December 31, 2012 and 2011 are as follows:

December 31, 2012	Carrying amounts $’000	Fair value $’000
Cash and cash equivalents	93,382	93,382
Accounts receivable	36,533	36,533
Working capital facilities	—	—
Accounts payable	25,182	25,182
Accrued liabilities	77,519	77,519
Long-term debt, including current portion, excluding obligations under capital leases	521,494	533,783
Long-term debt, including current portion, held by consolidated variable interest entities	97,945	99,656

December 31, 2011	Carrying amounts $’000	Fair value $’000
Cash and cash equivalents	90,104	90,104
Accounts receivable	44,599	44,599
Working capital facilities	—	—
Accounts payable	28,998	28,998
Accrued liabilities	87,617	87,617
Long-term debt, including current portion, excluding obligations under capital leases	538,730	509,866
Long-term debt, including current portion, held by consolidated variable interest entities	90,529	89,525

(b)    Non-financial assets measured at fair value on a non-recurring basis

The estimated fair values of OEH’s non-financial assets measured on a non-recurring basis at December 31, 2012, 2011 and 2010 are as follows:

		Fair value measurements using
	Fair Value (1) at December 31, 2012 $’000	Quoted prices in active markets for identical assets (Level 1) $’000	Significant other observable inputs (Level 2) $’000	Significant unobservable inputs (Level 3) $’000	Total losses in year ended December 31, 2012 $’000
Assets of discontinued operations held for sale	22,040	—	—	22,040	(3,166	)
Property, plant and equipment	3,521	—	—	3,521	(2,538	)
Goodwill	7,515	—	—	7,515	(2,055	)
Other assets	—	—	—	—	(1,299	)

		Fair value measurements using
	Fair Value (1) at December 31, 2011 $’000	Quoted prices in active markets for identical assets (Level 1) $’000	Significant other observable inputs (Level 2) $’000	Significant unobservable inputs (Level 3) $’000	Total losses in year ended December 31, 2011 $’000
Assets of discontinued operations held for sale	63,522	—	—	63,522	(65,144	)
Property, plant and equipment	6,000	—	—	6,000	(8,153	)
Goodwill	—	—	—	—	(11,907	)

		Fair value measurements using
	Fair Value (1) at December 31, 2010 $’000	Quoted prices in active markets for identical assets (Level 1) $’000	Significant other observable inputs (Level 2) $’000	Significant unobservable inputs (Level 3) $’000	Total losses in year ended December 31, 2010 $’000
Assets of discontinued operations held for sale	108,155	—	—	108,155	(30,900	)
Property, plant and equipment	22,912	—	—	22,912	(6,386	)
Goodwill	—	—	—	—	(5,895	)
Other intangible assets	1,020	—	—	1,020	(1,070	)

 (1)   Excludes costs to sell.

Assets of discontinued operations held for sale

For the year ended December 31, 2012, assets of discontinued operations held for sale related to Porto Cupecoy real estate assets with a carrying value of $25,206,000 were written down to fair value of $22,040,000, resulting in a non-cash impairment charge of $3,166,000. 

For the year ended December 31, 2011, assets of discontinued operations held for sale related to Keswick Hall with a carrying value of $43,934,000 (including the value of land held for property development) were written down to fair value of $20,000,000, resulting in a non-cash impairment charge of $23,934,000.  In the fourth quarter of 2011, a model home was sold for $1,250,000, reducing the fair value of Keswick Hall (including the value of land held for property development) to $18,750,000.  In addition, assets of discontinued operations held for sale at Bora Bora Lagoon Resort were written down to fair value of $2,850,000, resulting in a non-cash impairment charge of $2,150,000. In addition, real estate assets held for sale at the Porto Cupecoy development were written down to their fair value, resulting in a non-cash impairment charge of $36,868,000 and, as part of an overall impairment calculation, property, plant and equipment at Porto Cupecoy with a carrying value of $1,677,000 were written down to fair value of $Nil. In addition, goodwill of The Westcliff with a carrying value of $515,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $515,000.

For the year ended December 31, 2010, assets of discontinued operations held for sale with a carrying amount of $5,000,000 (net of offsetting amounts within the currency translation adjustments account) of Bora Bora Lagoon Resort were increased to fair value, resulting in a gain of $1,305,000 from foreign currency fluctuations.  Assets of discontinued operations held for sale of Hôtel de la Cité with a carrying value of $18,276,000 were written down to fair value of $12,287,000, resulting in a non-cash impairment charge of $5,989,000. In addition, real estate assets of Porto Cupecoy were written down to fair value, resulting in a non-cash impairment charge of $24,616,000. In addition, real estate assets held for sale of Keswick Hall (model development homes), which were transferred to assets of discontinued operations held for sale, were written down to fair value, resulting in an impairment charge of $1,600,000.

Any gains or losses on movements are included in earnings/(losses) from discontinued operations in the period incurred.  See Note 2.

Property, plant and equipment

For the year ended December 31, 2012, train carriages of OEH's former Great South Pacific Express tourist train which are held in Australia and not in service with a carrying value of $6,059,000 were written down to fair value of $3,521,000, resulting in a non-cash impairment charge of $2,538,000. 

For the year ended December 31, 2011, property, plant and equipment at Casa de Sierra Nevada with a carrying value of $14,153,000 was written down to fair value of $6,000,000, resulting in a non-cash impairment charge of $8,153,000. 

See Note 7 regarding assignment of the purchase and development agreements between OEH and the New York Public Library, including discussion related to put and call options included as part of the contractual provisions under that assignment. Based on terms under negotiation with interested parties in 2010, OEH recorded a non-cash impairment charge of $6,386,000 at December 31, 2010 on land and buildings for the capitalized pre-development expenses incurred in the project.

These impairments are included in earnings from continuing operations in the period incurred. See Note 7.

Goodwill

For the year ended December 31, 2012, goodwill of Reid's Palace hotel with a carrying value of $9,570,000 was written down to fair value of $7,515,000, resulting in a non-cash impairment charge of $2,055,000.

For the year ended December 31, 2011, goodwill of Maroma Resort and Spa, La Residencia and Mount Nelson Hotel with a carrying value of $11,907,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $11,907,000.

For the year ended December 31, 2010, goodwill of La Samanna and Napasai with a carrying value of $5,895,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $5,895,000.

These impairments are included in earnings from continuing operations in the period incurred. See Note 8.

Other assets

For the year ended December 31, 2012, deferred costs associated with Great South Pacific Express with a carrying value of $1,299,000 were written down to fair value of $Nil resulting in a non-cash impairment charge of $1,299,000. These costs were written off as part of OEH's review of the uses of train carriage assets currently not in service in Australia, as described in the property, plant and equipment section above.

There were no impairments to other assets in the years ended December 31, 2011 and 2010.

These impairments are included in earnings from continuing operations in the period incurred. See Note 7.

Other intangible assets

There were no impairments to other intangible assets in the years ended December 31, 2012 and 2011.

For the year ended December 31, 2010, other intangible assets of Internet-based businesses Luxurytravel.com UK Ltd. and O.E. Interactive Ltd. with a carrying value of $2,090,000 were written down to fair value of $1,020,000, resulting in a non-cash impairment charge of $1,070,000.

These impairments are included in earnings from continuing operations in the period incurred. See Note 9.