Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Note 3 – Fair Value Measurements

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 are classified using the fair value hierarchy in the table below:


	Total		Level 1		Level 2
	(In millions)
Assets
Cash equivalents:
Money market funds	$	59	$	59	$	—
Term deposits	112		—		112
U.S. treasury securities	150		150		—
Derivatives:
Foreign currency forward contracts	2		—		2
Investments:
Term deposits	23		—		23
Marketable equity securities	61		61		—
Total assets	$	407	$	270	$	137

Financial assets measured at fair value on a recurring basis as of December 31, 2019 are classified using the fair value hierarchy in the table below:


	Total		Level 1		Level 2
	(In millions)
Assets
Cash equivalents:
Money market funds	$	36	$	36	$	—
Term deposits	865		—		865
U.S. treasury securities	10		10		—


Investments:
Term deposits	526		—		526
Marketable equity securities	129		129		—
Total assets	$	1,566	$	175	$	1,391

Liabilities
Derivatives:
Foreign currency forward contracts	$	8	$	—	$	8

We classify our cash equivalents and investments within Level 1 and Level 2 as we value our cash equivalents and investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets, a Level 2 input.

As of September 30, 2020 and December 31, 2019, our cash and cash equivalents consisted primarily of U.S. treasury securities and term deposits with maturities of three months or less and bank account balances.

We hold term deposit investments with financial institutions. Term deposits with original maturities of less than three months are classified as cash equivalents and those with remaining maturities of less than one year are classified within short-term investments.

Our marketable equity securities consist of our investment in Despegar, a publicly traded company, which is included in long-term investments and other assets in our consolidated balance sheets. During the nine months ended September 30, 2020 and 2019, we recognized a loss of approximately $68 million and $10 million within other, net in our consolidated statements of operations related to the fair value changes of this equity investment.

Derivative instruments are carried at fair value on our consolidated balance sheets. We use foreign currency forward contracts to economically hedge certain merchant revenue exposures, foreign denominated liabilities related to certain of our loyalty programs and our other foreign currency-denominated operating liabilities. Our goal in managing our foreign exchange

risk is to reduce, to the extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. Our foreign currency forward contracts are typically short-term and, as they do not qualify for hedge accounting treatment, we classify the changes in their fair value in other, net. As of September 30, 2020, we were party to outstanding forward contracts hedging our liability and revenue exposures with a total net notional value of $1.3 billion. We had a net forward asset of $2 million ($13 million gross forward asset) as of September 30, 2020 recorded in prepaid expenses and other current assets and a net forward liability of $8 million ($30 million gross forward liability) as of December 31, 2019 recorded in accrued expenses and other current liabilities. We recorded $(1) million and $15 million in net gains (losses) from foreign currency forward contracts during the three months ended September 30, 2020 and 2019 as well as $99 million and $3 million in net gains from foreign currency forward contracts during the nine months ended September 30, 2020 and 2019.

Assets Measured at Fair Value on a Non-recurring Basis

Our non-financial assets, such as goodwill, intangible assets and property and equipment, as well as equity method investments, are adjusted to fair value when an impairment charge is recognized or the underlying investment is sold. Such fair value measurements are based predominately on Level 3 inputs. We measure our minority investments that do not have readily determinable fair values at cost less impairment, adjusted by observable price changes with changes recorded within other, net on our consolidated statements of operations.

Goodwill. During the three and nine months ended September 30, 2020, we recognized goodwill impairment charges of $14 million and $799 million. For the nine months ended September 30, 2020, $559 million related to our Retail segment, primarily our Vrbo reporting unit, and $240 million related to our trivago segment. Due to the severe and persistent negative effect COVID-19 has had on global economies, the travel industry and our business, as well as the uncertainty and high variability in anticipated versus actual rates of recovery, we deemed it necessary to perform interim assessments of goodwill. During the first quarter of 2020, we recognized goodwill impairment charges of $765 million. During the second quarter of 2020, we recognized goodwill impairment charges of $20 million related to a decision to streamline operations for a smaller brand within our Retail segment. During the third quarter of 2020, we recognized an additional goodwill impairment charge of $14 million related to our trivago segment.

During our interim assessments, we compared the fair value of the reporting units to their carrying value. The fair value estimates for all reporting units except trivago were based on a blended analysis of the present value of future discounted cash flows and market value approach, Level 3 inputs. The significant estimates used in the discounted cash flows model included our weighted average cost of capital, projected cash flows and the long-term rate of growth. Our assumptions were based on the actual historical performance of the reporting unit and took into account operating result trends, the anticipated duration of COVID-19 impacts and rates of recovery, and implied risk premiums based on market prices of our equity and debt as of the assessment dates. Our significant estimates in the market approach model included identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples in estimating the fair value of the reporting unit. The fair value estimate for the trivago reporting unit was based on trivago’s stock price, a Level 1 input, adjusted for an estimated control premium. The excess of the reporting unit's carrying value over our estimate of the fair value was recorded as the goodwill impairment charge in each of the periods. As of September 30, 2020, the applicable reporting units within our Retail segment had $2.2 billion goodwill remaining after these impairments and our trivago segment had $322 million goodwill remaining.

Intangible Assets. During the first quarter of 2020, also as a result of the significant negative impact related to COVID-19, which has had a severe effect on the entire global travel industry, we recognized intangible asset impairment charges of $121 million. The impairment charges were primarily related to indefinite-lived trade names within our Retail segment and resulted from changes in estimated future revenues of the related brands. The assets, classified as Level 3 measurements, were valued using the relief-from-royalty method, which includes unobservable inputs, including royalty rates and projected revenues. During the second quarter of 2020, we recognized intangible impairment charges of $10 million primarily related to supplier relationship assets that were entirely written off in connection with our recent decision to streamline a smaller brand within our Retail segment. In addition, during the third quarter of 2020, with the persistence of the pandemic and in conjunction with another interim impairment test, we recognized $41 million of additional intangible impairment charges within our Retail segment primarily related to indefinite-lived trade names as well as intangible assets related to held-for-sale assets.

The full duration and total impact of COVID-19 remains uncertain and it is difficult to predict how the recovery will unfold (in general and versus our expectations) for global economies, the travel industry or our business. Additionally, as the stock of our trivago segment is publicly traded, it is difficult to predict market dynamics and the extent or duration of any stock price declines. As a result, we may continue to record impairment charges in the future due to the potential long-term economic impact and near-term financial impacts of the COVID-19 pandemic.

Minority Investments without Readily Determinable Fair Values. As of September 30, 2020 and December 31, 2019, the carrying values of our minority investments without readily determinable fair values totaled $331 million and $467 million.

During the nine months ended September 30, 2020, we recorded $134 million of impairment losses related to a minority investment, which had recent observable and orderly transactions for similar investments, using an option pricing model that utilizes judgmental inputs such as discounts for lack of marketability and estimated exit event timing. As of September 30, 2020, total cumulative adjustments made to the initial cost bases of these investments included $103 million in unrealized downward adjustments (including impairments). During the three and nine months ended September 30, 2019, we had no material gains or losses recognized related to these minority investments.