Fair Value Measurements

6 Months Ended

Jun. 30, 2020

7. FAIR VALUE MEASUREMENTS

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Include observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Unobservable inputs which are supported by little or no market activity.

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

Assets and Liabilities Measured or Disclosed at Fair Value on a recurring basis

In accordance with ASC 820, the Company measures equity investments with readily determinable fair value, investments accounted for at fair value,

available-for-sale

debt investments and derivatives instruments at fair value on a recurring basis. The fair value of time deposits are determined based on the prevailing interest rates in the market. The fair values of the Company’s

held-to-maturity

debt investments as disclosed are determined based on the discounted cash flow model using the discount curve of market interest rates. The fair value of the Company’s short-term

available-for-sale

debt investments are measured using the income approach, based on quoted market interest rates of a similar instrument and other significant inputs derived from or corroborated by observable market data. The fair values of the Company’s equity investments in the equity securities of publicly listed companies are measured using quoted market prices. The fair value of derivative instruments of interest rate swaps are based on broker quotes. The fair value of financial liability is based on quoted market price of a similar asset to the underlying assets. Investments accounted for at fair value are equity investments in unlisted companies held by consolidated investment companies, these investments and long-term

available-for-sale

debt investments do not have readily determinable market value, which were categorized as Level 3 in the fair value hierarchy. The Company uses a combination of valuation methodologies, including market and income approaches based on the Company’s best estimate, which is determined by using information including but not limited to the pricing of recent rounds of financing, future cash flow forecasts, liquidity factors and multiples of a selection of comparable companies.

The fair value of the Company’s notes payable are extracted directly from their quoted market prices. The fair value of the convertible senior notes are based on broker quotes. The Company carries the convertible senior notes at face value less unamortized debt discount and issuance costs on

the condensed

consolidated balance sheets, and presents the fair value for disclosure purposes only. For further information on the convertible senior notes see Note 1


			Fair value measurement or disclosure at December 31, 2019 using
	Total fair value at December 31, 2019		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	RMB		RMB		RMB		RMB
			(In millions)
Fair value disclosure
Cash equivalents
Time deposits		10,848				10,848
Money market fund		1,719		1,719
Short-term investments
Held-to-maturity debt investments		107,654				107,654
Long-term investments:
Held-to-maturity debt investment		491				491
Long-term notes payable		45,282				45,282
Convertible senior notes		14,142				14,142
Fair value measurements on a recurring basis
Short-term investments
Available-for-sale debt investments		5,637				5,637
Long-term investments
Equity investments at fair value with readily determinable fair value		11,334		11,334
Investments accounted for at fair value		1,819						1,819
Available-for-sale debt investments		3,970						3,970
Other non-current assets
Derivative instruments		24				24

Total assets measured at fair value		22,784		11,334		5,661		5,789

Accounts payable and accrued liabilities
Derivative instruments		125						125
Amounts due to related parties, current
Financial liability		401				401

Total liabilities measured at fair value		526		—		401		125

Assets and liabilities measured at fair value on a recurring basis or disclosed at fair value are summarized below:


					Fair value measurement or disclosure at June 30, 2020 using
	Total fair value at June 30, 2020				Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	RMB		USD		RMB		RMB		RMB
	(In millions)
	(unaudited)
Fair value disclosure
Cash equivalents
Time deposits		5,465		774				5,465
Money market funds		1,062		150		1,062
Short-term investments
Held-to-maturity debt investments		126,071		17,844				126,071
Long-term investments
Held-to-maturity debt investments		513		73				513
Long-term notes payable		49,241		6,970				49,241
Convertible senior notes		14,243		2,016				14,243
Fair value measurement on a recurring basis
Short-term investments
Available-for-sale debt investments		7,152		1,012				7,152
Long-term investments:
Equity investments at fair value with readily determinable fair value		12,469		1,765		12,469
Investment accounted for at fair value		1,831		259						1,831
Available-for-sale debt investments		3,601		510						3,601

Total assets measured at fair value		25,053		3,546		12,469		7,152		5,432

Amounts due to related parties, current
Financial liability		344		49				344
Other non-current liabilities
Derivative instruments		85		12				85

Total liabilities measured at fair value		429		61				429

Reconciliations of assets categorized within Level 3 under the fair value hierarchy are as follow:

Investment accounted for at fair value:


	Amounts
	RMB
	(In millions)
	(unaudited)
Balance at December 31, 2019		1,819
Additions		129
Disposals		(14	)
Net unrealized fair value decrease recognized in earning		(110	)
Foreign currency translation adjustments		7

Balance at June 30, 2020		1,831

Balance at June 30, 2020, in US$		259

Available-for-sale

debt investments:


	Amounts
	RMB
	(In millions)
	(unaudited)
Balance at December 31, 2019		3,970
Additions		5
Disposal		(500	)
Reclassification		67
Net unrealized fair value increase recognized in other comprehensive income		18
Accrued interest		32
Foreign currency translation adjustments		9

Balance at June 30, 2020		3,601

Balance at June 30, 2020, in US$		510

Assets measured at fair value on a

non-recurring

basis

The Company measures

non-financial

assets such as certain equity investments on a nonrecurring basis when impairment charges are recognized due to declining financial performances and changes in business circumstances of these investees. The Company’s

non-financial

long-lived assets, such as intangible assets, goodwill and fixed assets, would be measured at fair value only if they were determined to be impaired on an other-than-temporary basis.

The Company uses a combination of valuation methodologies, including market and income approaches based on the Company’s best estimate to determine the fair value of these

non-financial

assets. Inputs used in these methodologies primarily included future cash flows, discount rate and expected volatility. The fair values of the Company’s equity method investments in publicly listed companies are measured using quoted market prices.

For equity securities accounted for under the measurement alternative, when there are observable price changes in orderly transactions for identical or similar investments of the same issuer, the investments are

re-measured

to fair value (Note 4). The

non-recurring

fair value measurements to the carrying amount of an investment usually requires management to estimate a price adjustment for the different rights and obligations between a similar instrument of the same issuer with an observable price change in an orderly transaction and the investment held by the Company. These

non-recurring

fair value measurements were measured as of the observable transaction dates. The valuation methodologies involved require management to use the observable transaction price at the transaction date and other unobservable inputs (level 3) such as volatility of comparable companies and probability of exit events as it relates to liquidation and redemption preferences.

The following table summarizes our assets held as of December 31, 2019 and June 30, 2020 for which a

non-recurring

fair value measurement was recorded during the year ended December 31, 2019 and period ended June 30, 2020:


	Total fair value				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Fair value adjustment					Impairment
	RMB		US$		RMB		RMB		RMB		RMB			US$		RMB			US$
	(In millions)
Fair value measurements on a non-recurring basis
For the year ended December 31, 2019
Long-term investments		22,778		—		14,105		358		8,315		(230	)		—		(9,989	)		—
Intangible assets		76		—		—		—		76		—			—		(406	)		—
For the six months ended June 30, 2020 (unaudited)
Long-term investments (i)		10,120		1,432		—		—		10,120		1,302			184		(2,460	)		(348	)
Intangible assets		62		9		—		—		62		—			—		(335	)		(47	)

(i)	The Company recognized impairment charges of long-term investments during the three months ended March 31, 2020 and June 30, 2020, due to the outbreak of COVID-19 resulting declined financial performances and changes in business circumstances of theses investees.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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