Note 5 – Fair Value of Financial Instruments

ASC 820, Fair Value Measurements, states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tiered fair value hierarchy, which prioritizes which inputs should be used in measuring fair value, is comprised of: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than quoted prices in active markets that are observable either directly or indirectly and (Level III) unobservable inputs for which there is little or no market data. The fair value hierarchy requires the use of observable market data when available in determining fair value. Our assets and liabilities that were measured at fair value on a recurring basis were as follows (in thousands):

	December 31, 2017								December 31, 2016
	Fair Value		Level I		Level II		Level III		Fair Value		Level I		Level II		Level III
Money market funds	$	2,163,459	$	2,163,459	$	—	$	—	$	2,226,322	$	2,226,322	$	—	$	—
Interest rate swaps, net		59		—		59		—		1,490		—		1,490		—
Total	$	2,163,518	$	2,163,459	$	59	$	—	$	2,227,812	$	2,226,322	$	1,490	$	—

All of our cash equivalents were classified within Level I of the fair value hierarchy because they were valued using quoted prices in active markets. Our interest rate swaps were classified within Level II of the fair value hierarchy because they were valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates. During the years ended December 31, 2017 and 2016, there were no transfers between the levels of the fair value hierarchy.

Cash Flow Hedges

In November 2015, we implemented a program to hedge the foreign currency exposure risk related to certain forecasted inventory purchases denominated in Japanese yen. The derivative instruments that we used were foreign currency forward contracts, which were designated as cash flow hedges with maturity dates of 12 months or less. We did not enter into any derivative contracts for trading or speculative purposes.

We documented each hedging relationship and assessed its initial effectiveness on each inception date. We measured its subsequent effectiveness on a quarterly basis using regression analysis. During the term of each effective hedge contract, we recorded gains and losses to accumulated other comprehensive income (loss). We reclassified these gains and losses to cost of automotive sales revenue when the related finished goods inventory was sold or to cost of automotive leasing revenue over the depreciation period when the related finished goods inventory was leased. All of our hedge contracts were effective, and we recorded no amounts related to hedge ineffectiveness during the years ended December 31, 2017, 2016 and 2015.

No hedge contracts were outstanding as of December 31, 2016 or thereafter. The net gain of $5.6 million in accumulated other comprehensive income (loss) as of December 31, 2016 was fully reclassified to the consolidated statement of operations during the year ended December 31, 2017. During the year ended December 31, 2016, we reclassified $44.9 million of net gains from accumulated other comprehensive income (loss) to the consolidated statement of operations. No amounts were reclassified from accumulated other comprehensive income (loss) to the consolidated statement of operations during the year ended December 31, 2015.

Interest Rate Swaps

We enter into fixed-for-floating interest rate swap agreements to swap variable interest payments on certain debt for fixed interest payments, as required by certain of our lenders. We do not designate our interest rate swaps as hedging instruments. Accordingly, our interest rate swaps are recorded at fair value on the consolidated balance sheets within other assets or other long-term liabilities, with any changes in their fair values recognized as other income (expense), net, in the consolidated statements of operations and with any cash flows recognized as investing activities in the consolidated statements of cash flows. As of December 31, 2016, the aggregate notional amount of our interest rate swaps, their gross asset at fair value and their gross liability at fair value were $789.6 million, $10.6 million and $12.1 million, respectively. During the year ended December 31, 2016, we recognized $7.0 million of gains related to our interest rate swaps. Our interest rate swaps outstanding were as follows as of December 31, 2017 (in thousands):

Aggregate Notional

Amount

Gross Asset at Fair

Value

Gross Liability at

Fair Value

Gross Gains

Gross Losses

Interest rate swaps

496,544

5,304

5,245

7,192

13,082

Disclosure of Fair Values

Our financial instruments that are not re-measured at fair value include accounts receivable, MyPower customer notes receivable, rebates receivable, accounts payable, accrued liabilities, customer deposits, convertible senior notes, the 5.30% Senior Notes due in 2025, the participation interest, solar asset-backed notes, solar loan-backed notes, Solar Bonds and long-term debt. The carrying values of these financial instruments other than the convertible senior notes, the 5.30% Senior Notes due in 2025, the participation interest, the solar asset-backed notes and the solar loan-backed notes approximate their fair values.

We estimate the fair value of the convertible senior notes and the 5.30% Senior Notes due in 2025 using commonly accepted valuation methodologies and market-based risk measurements that are indirectly observable, such as credit risk (Level II). In addition, we estimate the fair value of the participation interest, the solar asset-backed notes and the solar loan-backed notes based on rates currently offered for instruments with similar maturities and terms (Level III). The following table presents the estimated fair values and the carrying values (in thousands):

	December 31, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible senior notes	$	3,722,673	$	4,488,651	$	2,957,288	$	3,205,641
Senior notes	$	1,775,550	$	1,732,500	$	—	$	—
Participation interest	$	17,545	$	17,042	$	16,713	$	15,025
Solar asset-backed notes	$	880,415	$	898,145	$	442,764	$	428,551
Solar loan-backed notes	$	236,844	$	248,149	$	137,024	$	132,129