Fair value measurements

(a) Financial instruments recorded at fair value

The following tables summarize the valuation of Belmond’s assets and liabilities by the fair value hierarchy at December 31, 2018 and 2017:



	Level 1	Level 2		Level 3		Total
December 31, 2018	$'000	$'000		$'000		$'000

Assets at fair value:
Derivative financial instruments	—	3,253		—		3,253

Total assets	—	3,253		—		3,253

Liabilities at fair value:
Derivative financial instruments	—	(1,498	)	(13,000	)	(14,498	)

Total net liabilities	—	1,755		(13,000	)	(11,245	)



	Level 1	Level 2		Level 3	Total
December 31, 2017	$'000	$'000		$'000	$'000

Assets at fair value:
Derivative financial instruments	—	1,348		—	1,348

Total assets	—	1,348		—	1,348

Liabilities at fair value:
Derivative financial instruments	—	(430	)	—	(430	)

Total net assets	—	918		—	918

During the years ended December 31, 2018 and 2017, there were no transfers between levels of the fair value hierarchy.

Level 3 amounts relate to the estimated costs to terminate the right of first refusal and purchase option as described in Note 23. An assessment of the fair value of any potential payment due on a change of control of the Company has been made based on the relative probabilities of a change of control and of the various possible outcomes. Unobservable inputs used in the fair value measurement for which there is no market information available include potential future payments based on the likelihood of a change of control within each of the 10 years covered by the agreement and management assumptions behind the relative probabilities of a change of control and of the various possible outcomes. Any change in likelihood of the change in control could result in a higher/(lower) fair value measurement.

Changes in Level 3 liabilities measured at fair value on a recurring basis for the year ended December 31, 2018

January 1, 2018

Fair Value as at July 6, 2018

Realized and Unrealized Gains/(Losses) in Earnings (1)

December 31, 2018

Liabilities

$’000

Contractual liabilities

—

(10,117

)

(2,883

)

(13,000

)

⁽¹⁾Movement in the period is due to the Company entering into the Merger Agreement dated December 13, 2018 with LVMH, Holding, and Merger Sub, pursuant to which LVMH will acquire the Company. See Note 1.

(b) Other financial instruments

Certain methods and assumptions are used to estimate the fair value of each class of financial instruments. The carrying amount of current assets and current liabilities as disclosed on the consolidated balance sheets approximate their fair value due to the short-term nature of those instruments.

The fair value of Belmond's long-term debt, excluding interest rate swaps and caps, is determined using the contractual cash flows and credit-adjusted discount curves. The fair value of the debt is the present value of those contractual cash flows which are discounted at the current market cost of debt and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral.

The estimated carrying values, fair values, and levels of the fair value hierarchy of Belmond's long-term debt as of December 31, 2018 and 2017 were as follows:

December 31, 2018

December 31, 2017

Carrying
amounts
$’000

Fair value
$’000

Carrying
amounts
$’000

Fair value
$’000

Total long-term debt, before deduction of discount on secured term loan and debt issuance costs, excluding obligations under capital leases

Level 3

773,548

768,850

724,208

728,994

See Note 12.

The estimated fair values of Belmond’s non-financial assets measured on a non-recurring basis for the years ended December 31, 2018, 2017 and 2016 were as follows:



		Fair value measurement inputs
	Fair value $’000	Level 1 $’000	Level 2 $’000	Level 3 $’000	Total losses in year ended December 31, 2018 $’000

Property, plant and equipment	—	—	—	—	(4,775	)

Goodwill	—	—	—	—	(4,719	)

Other intangible assets	—	—	—	—	(156	)



		Fair value measurement inputs
	Fair value $’000	Level 1 $’000	Level 2 $’000	Level 3 $’000	Total losses in year ended December 31, 2017 $’000

Property, plant and equipment	5,955	—	—	5,955	(8,216	)

Goodwill	—	—	—	—	(5,500	)



		Fair value measurement inputs
	Fair value $’000	Level 1 $’000	Level 2 $’000	Level 3 $’000	Total losses in year ended December 31, 2016 $’000

Property, plant and equipment	—	—	—	—	(1,007	)

Property, plant and equipment

In the year ended December 31, 2018, property, plant and equipment at Belmond Governor’s Residence and Belmond Road to Mandalay with a combined carrying value of $4,775,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $4,775,000.

In the year ended December 31, 2017, property, plant and equipment at Belmond Road to Mandalay and Belmond Northern Belle with a combined carrying value of $14,171,000 was written down to fair value of $5,955,000, resulting in a non-cash impairment charge of $8,216,000.

In the year ended December 31, 2016, property, plant and equipment at Belmond Orcaella with a carrying amount of $1,007,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $1,007,000.

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

Goodwill

In the year ended December 31, 2018, goodwill at Belmond Governor’s Residence with a carrying value of $2,195,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $2,195,000.

In the year ended December 31, 2018, goodwill at Belmond La Résidence d'Angkor with a carrying value of $1,548,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $1,548,000.

In the year ended December 31, 2018, goodwill at Belmond Villa San Michele with a carrying value of $819,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $819,000.

In the year ended December 31, 2018, goodwill at Belmond Castello di Casole with a carrying value of $157,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $157,000.

In the year ended December 31, 2017, goodwill of Belmond Cap Juluca with a carrying value of $5,500,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $5,500,000.

These impairments are included in earnings from continuing operations in the period incurred. See Note 10.

Other intangible assets

In the year ended December 31, 2018, the favorable lease asset at Belmond Governor’s Residence with a carrying value of $156,000 was written down to fair value of $Nil, resulting in a non-cash impairment charge of $156,000.

These impairments are included in earnings from continuing operations in the period incurred. See Note 11.