The Company’s financial instruments consist of cash and cash equivalents, trade and other receivables, trade and other payables, employee benefit obligations, short term advances, loans, notes payable and bank indebtedness, deferred consideration and the Company’s earn-out obligation. The fair values of these financial instruments, except the notes payable balances, the deferred consideration and the earn-out obligation, approximate carrying value because of their short-term nature. The earn-out obligation is recorded at fair value. The fair value of the notes payable and bank indebtedness, which is comprised of the JP Morgan Facility, approximates carrying value as it is a floating rate instrument. The Company’s deferred consideration relating to its Austin Gastroenterology Anesthesia Associates LLC (“AGAA”) acquisition in 2016 was initially measured at fair value and is being accreted to its face value over a period of four years from the acquisition date. Additionally, the Company has included amounts within deferred compensation relating to payments under its TSA and CCAA transactions; these amounts are repayable within one year. See note 4.

An established fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

Liabilities

December 31,

2019

Level 1

Level 2

Level 3

Earn-out obligation

1,063,060

—

1,063,060

Total

1,063,060

—

1,063,060

Liabilities

December 31,

2018

Level 1

Level 2

Level 3

Earn-out obligation

2,920,583

—

2,920,583

Total

2,920,583

—

2,920,583

The Company’s earn-out obligation is measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The earn-out obligation relates to the Company’s Gastroenterology Anesthesia Associates LLC acquisition, which was acquired in 2014. As part of the business combination, the Company is required to pay consideration contingent on the post-acquisition earnings of the acquired asset. In the year ended December 31, 2019, the Company paid $4,795,822 as partial payment of the amount owing under its earn-out obligation; the Company expects to pay the remaining obligation of $1,063,060 within one year, and expects payment in the second quarter of 2020. The Company measures the fair value of the earn-out obligation based on its best estimate of the cash outflows payable in respect of the earn-out obligation. This valuation technique includes inputs relating to estimated cash outflows under the arrangement. The Company evaluates the inputs into the valuation technique at each reporting period. During the year ended December 31, 2019, the Company revised its estimate underlying the remaining amount to be paid under the earn-out obligation. The amendment of the cash outflow estimates underlying the earn-out resulted in an increase of $2,861,204 for the year ended December 31, 2019 to the fair value of the earn-out obligation. The impact of this adjustment was recorded through finance expense in the period.

During the year ended December 31, 2019, the Company recorded accretion expense of $77,095 (2018 - $73,531), in relation to this liability, reflecting the change in fair value of the liabilities that is attributable to credit risk.

	Earn-out obligation
Balance as at January 1, 2019	$	2,920,583
Payment		(4,795,822	)
Recorded in finance expense:
Accretion expense		77,095
Fair value adjustment	$	2,861,204
Balance as at December 31, 2019	$	1,063,060

The Company’s financial instruments are exposed to certain financial risks, including credit risk, and market risk.

Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s cash and cash equivalents and trade receivables. The carrying amount of the financial assets represents the maximum credit exposure.

The Company limits its exposure to credit risk on cash and cash equivalents by placing these financial instruments with high-credit quality financial institutions and only investing in liquid, investment grade securities.

The Company has a number of individual customers and no one customer represents a concentration of credit risk.

No one customer accounts for more than 10% of the Company’s consolidated revenue. The Company establishes a provision for losses on accounts receivable if it is determined that all or part of the outstanding balance is uncollectable. Collectability is reviewed regularly and an allowance is established or adjusted, as necessary, using a combination of the specific identification method, historic collection patterns and existing economic conditions. Estimates of allowances are subject to change as they are impacted by the nature of healthcare collections, which may involve delays and the current uncertainty in the economy.

Market risk is the risk that changes in market prices, such as interest rates, will affect the Company’s income or the value of the financial instruments held.

As at December 31, 2019, the Company’s only interest bearing liability is its JP Morgan Facility. With respect to the Company’s Facility, with all other variables held constant, a 10% point increase in the interest rate would have reduced net income by approximately $329,000 (2018 - $295,000) for the year ended December 31, 2019. There would be an equal and opposite impact on net income with a 10% point decrease.