28.

Fair value measurements

Fair value reflects the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the assets or liabilities.

The Group applies a fair value hierarchy that requires an entity 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 significant to the fair value measurement. This guidance specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

Level 1—Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

Level 2—Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

Level 3—Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair value guidance describes three main approaches to measure 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.

When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. The Group did not have any other financial instruments that were required to be measured at fair value on a recurring basis as of December 31, 2017 except for three available-for-sale investments and short-term investments.

The following table summarizes the Company’s assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy as of December 31, 2016 and December 31, 2017:

As of December 31, 2016

Level 1

Level 2

Level 3

Total

Items

Investment - Available-for-sale securities

182,480

6,117

188,597

	As of December 31, 2017
	Level 1		Level 2		Level 3		Total

Items
Short-term investments		29,570		94,980		-		124,550
Investment - Available-for-sale securities		138,251		-		1,961		140,212
		167,821		94,980		1,961		264,762

Short-term investments represented the investments issued by commercial banks with a variable interest rate indexed to the performance of underlying assets within one year. For the instruments whose fair value is provided by banks at the end of each period, the Company classifies the valuation techniques that use these inputs as Level 1 of fair value measurements. For the instruments whose fair value is estimated based on quoted prices of similar products provided by banks at the end of each period, the Company classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.

The available-for-sale securities classified as Level 1 of fair value measurements is reported at fair value using a market approach based on its stock price. As of December 31, 2017, the accumulated unrealized income representing a change in fair value of RMB87,802 was recorded in accumulated other comprehensive income (loss) in the consolidated balance sheets.

The available-for-sale securities classified in Level 3 represented investment in the redeemable preferred shares of a private company.

The roll forward of Level 3 investments are as following:

	Level 3 Available-for-sale securities

Fair value as at January 1, 2016 and January 1, 2017		6,117
Other than temporary impairment		(6,117)
Addition		2,033
Foreign currency translation adjustment		(72)
Fair value as at December 31, 2017		1,961

Apart from the short-term investments and available-for-sale securities, the Company’s other financial instruments consist principally of cash and cash equivalents, short-term deposits, restricted short-term deposits, accounts receivable, other receivables, amounts due to/from related parties, accounts payable, certain accrued expenses and convertible bonds. The recorded values of cash and cash equivalents, short-term deposits, restricted short-term deposits, accounts receivable, other receivables, amounts due to/from related parties, accounts payable, certain accrued expenses and convertible bonds are recorded at cost which approximates fair value. The fair value of convertible bonds is within Level 2 of the fair value hierarchy.