3. Fair Value Measurements and Long-term Investments

Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market participant assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair values of assets and liabilities required to be measured at fair value are categorized based upon the level of judgment associated with the inputs used to measure their value in one of the following three categories:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Our Level 1 financial instruments include our investment in NantHealth, Inc. (“NantHealth”) common stock. Refer to Note 11, “Other Comprehensive Income,” for further information regarding our available for sale marketable securities.

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Our Level 2 derivative financial instruments include foreign currency forward contracts valued based upon observable values of spot and forward foreign currency exchange rates. Refer to Note 10, “Derivative Financial Instruments,” for further information regarding these derivative financial instruments.

Level 3: Unobservable inputs that are significant to the fair value of the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Our Level 3 financial instruments include derivative financial instruments comprising the 1.25% Call Option asset and the 1.25% embedded cash conversion option liability that are not actively traded. These derivative instruments were designed with the intent that changes in their fair values would substantially offset, with limited net impact to our earnings. Therefore, we believe the sensitivity of changes in the unobservable inputs to the option pricing model for these instruments is substantially mitigated. Refer to Note 10, “Derivative Financial Instruments,” for further information regarding these derivative financial instruments. Our Level 3 financial instruments also include a third party non-marketable convertible note. The sensitivity of changes in the unobservable inputs to the valuation pricing model used to value these instruments is not material to our consolidated results of operations.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of the respective balance sheet dates:

	Balance Sheet	June 30, 2017										December 31, 2016
(In thousands)	Classifications	Level 1		Level 2		Level 3			Total			Level 1		Level 2		Level 3			Total
NantHealth Common Stock	Available for sale marketable securities	$	63,450	$	0	$	0		$	63,450		$	149,100	$	0	$	0		$	149,100
Non-marketable convertible note	Other assets		0		0		1,152			1,152			0		0		1,156			1,156
1.25% Call Option	Other assets		0		0		32,046			32,046			0		0		17,080			17,080
1.25% Embedded cash conversion option	Other liabilities		0		0		(32,931	)		(32,931	)		0		0		(17,659	)		(17,659	)
Foreign exchange derivative assets	Prepaid expenses and other current assets		0		2,054		0			2,054			0		1,021		0			1,021
Total		$	63,450	$	2,054	$	267		$	65,771		$	149,100	$	1,021	$	577		$	150,698

Long-term Investments

The following table summarizes our long-term equity investments which are included in other assets in the accompanying consolidated balance sheets:

	Number of
	Investees		Original		Carrying Value at
(In thousands, except # of investees)	at June 30, 2017		Investment		June 30, 2017		December 31, 2016
Equity method investments ⁽¹⁾		3	$	1,658	$	3,693	$	2,436
Cost method investments		6		31,284		25,284		26,041
Total equity investments		9	$	32,942	$	28,977	$	28,477

⁽¹⁾

Allscripts share of the earnings of our equity method investees is reported based on a one quarter lag.

As of June 30, 2017, it is not practicable to estimate the fair value of our non-marketable cost and equity method investments primarily because of their illiquidity and restricted marketability. The factors we considered in trying to determine fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and the issuer’s subsequent or planned raises of capital.

Impairment of Long- term Investments

As of June 30, 2017, management assessed each of our investments on an individual basis to determine if the decline in fair value was other than temporary. Based on management's assessment of each individual investment, the Company determined that the decline in fair value of certain of these investments was other than temporary based on a number of factors, including, but not limited to, uncertainty regarding our intent to hold these investments for a period of time that would be sufficient to recover our cost basis in the event of a market recovery, the fact that the fair value of each investment had continued to decline below cost over the period held, and the Company's uncertainty around the near-term prospects for certain of the investments. As a result, the Company recognized other-than-temporary impairment charges of $142.2 million on available for sale marketable securities during the three months ended June 30, 2017. The cost basis of these marketable securities prior to recognizing the impairment charges was approximately $205.6 million. The Company determined the fair value of these securities based on Level 1 inputs. In addition, the Company recognized other-than-temporary impairment charges of $2.1 million on a cost method equity investment during the three months ended June 30, 2017. The aggregate carrying value of this equity investment prior to recognizing the impairment charge was $2.1 million. These impairment charges were recorded in impairment of long-term investments in our consolidated statements of operations.

Long-term Financial Liabilities

Our long-term financial liabilities include amounts outstanding under our senior secured credit facility and Netsmart’s Credit Agreements (as defined in Note 8, “Debt”), with carrying values that approximate fair value since the interest rates approximate current market rates. In addition, the carrying amount of our 1.25% Cash Convertible Senior Notes (the “1.25% Notes”) approximates fair value as June 30, 2017, since the effective interest rate on the 1.25% Notes approximates current market rates. See Note 8, “Debt,” for further information regarding our long-term financial liabilities.