Fair Value Measurements

6 Months Ended

Jun. 30, 2016

The Company records certain financial assets and liabilities at fair value in accordance with the provisions of ASC Topic 820 on fair value measurements. As defined in the guidance, fair value, defined as an exit price, represents the amount that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering these assumptions, the guidance defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.


•	Level 1—Unadjusted quoted prices in active, accessible markets for identical assets or liabilities.


•	Level 2—Other inputs that are directly or indirectly observable in the marketplace.


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

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following tables summarize the fair value of financial assets and liabilities that are measured at fair value and the classification by level of input within the fair value hierarchy:



	FAIR VALUE MEASUREMENTS AS OF JUNE 30, 2016
(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash and money market accounts	$	55,621	$	—	$	—	$	55,621
Commercial paper	—		1,498		—		1,498
Government agencies	—		1,400		—		1,400
Total cash and cash equivalents	$	55,621	$	2,898	$	—	$	58,519
Investments:
Certificates of deposit	$	—	$	14,612	$	—	$	14,612
Commercial paper	—		6,494		—		6,494
Corporate bonds	—		27,987		—		27,987
Government agencies	—		4,524		—		4,524
Total investments	$	—	$	53,617	$	—	$	53,617
Total cash, cash equivalents, and investments	$	55,621	$	56,515	$	—	$	112,136



	FAIR VALUE MEASUREMENTS AS OF DECEMBER 31, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash and money market accounts	$	91,060	$	—	$	—	$	91,060
Total cash and cash equivalents	$	91,060	$	—	$	—	$	91,060
Investments:
Certificates of deposit	$	—	$	18,355	$	—	$	18,355
Commercial paper	—		5,966		—		5,966
Corporate bonds	—		32,995		—		32,995
Government agencies	—		1,994		—		1,994
Total investments	$	—	$	59,310	$	—	$	59,310
Total cash, cash equivalents, and investments	$	91,060	$	59,310	$	—	$	150,370

As of June 30, 2016 and December 31, 2015, the estimated fair value of the 2014 Convertible Notes was $124.2 million and $140.1 million, respectively. The estimated fair value of the 2014 Convertible Notes was determined using a scenario analysis and Monte Carlo simulation model to capture the various features of the 2014 Convertible Notes. The scenario analysis and Monte Carlo simulation require the use of Level 3 unobservable inputs and subjective assumptions, including but not limited to the probability of conversion, stock price volatility, the risk free interest rate and credit spread. The decrease in the estimated fair value of the 2014 Convertible Notes was primarily attributable to the change in the closing price of Aerie’s common stock on June 30, 2016 as compared to December 31, 2015. The estimates presented are not necessarily indicative of amounts that could be realized in a current market exchange. The use of alternative market assumptions and estimation methodologies could have a material effect on these estimates of fair value.

- 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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