Financial Instruments and Fair Value Measurements

6 Months Ended

Dec. 31, 2018

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Measurements

NOTE 9. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

In accordance with ASC 820, “Fair Value Measurements” (“ASC 820”) fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

• Level 2 — Observable inputs other than quoted prices included in Level 1. The Company could value assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. For the Company, this primarily includes the use of forecasted financial information and other valuation related assumptions such as discount rates and long term growth rates in the income approach as well as the market approach which utilizes certain market and transaction multiples.

Under ASC 820, certain assets and liabilities are required to be remeasured to fair value at the end of each reporting period. The following table summarizes those assets and liabilities measured at fair value on a recurring basis:

	As of December 31, 2018								As of June 30, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
Assets:
Foreign currency derivatives—cash flow hedges	$	—	$	5	$	—	$	5	$	—	$	3	$	—	$	3
Cross currency interest rate derivatives—fair value hedges		—		26		—		26		—		29		—		29
Cross currency interest rate derivatives—economic hedges		—		12		—		12		—		10		—		10
Cross currency interest rate derivatives—cash flow hedges		—		105		—		105		—		76		—		76
Equity securities(a)		66		—		115		181		93		—		—		93
Total assets	$	66	$	148	$	115	$	329	$	93	$	118	$	—	$	211
Liabilities:
Interest rate derivatives—cash flow hedges	$	—	$	18	$	—	$	18	$	—	$	20	$	—	$	20
Mandatorily redeemable noncontrolling interests		—		—		12		12		—		—		12		12
Cross currency interest rate derivatives—cash flow hedges		—		12		—		12		—		12		—		12
Total liabilities	$	—	$	30	$	12	$	42	$	—	$	32	$	12	$	44

(a) See Note 5 —Investments.

There have been no transfers between levels of the fair value hierarchy during the periods presented.

Equity securities

The fair values of equity securities with quoted prices in active markets are determined based on the closing price at the end of each reporting period. These securities are classified as Level 1 in the fair value hierarchy outlined above. The fair values of equity securities without readily determinable fair market values are determined based on cost, less any impairment, plus or minus changes in fair value resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. These securities are classified as Level 3 in the fair value hierarchy outlined above.

A rollforward of the Company’s equity securities classified as Level 3 is as follows:

	For the six months ended December 31,
	2018
	(in millions)
Balance—beginning of period(a)	$	127
Purchases		6
Sales		(10	)
Foreign exchange and other		(8	)
Balance—end of period	$	115

(a) Includes impact from the adoption of ASU 2016-01. See Note 1 — Description of Business and Basis of Presentation.

Mandatorily redeemable noncontrolling interests

The Company has liabilities recorded in its Balance Sheets for its mandatorily redeemable noncontrolling interests. These liabilities represent management’s best estimate of the amounts expected to be paid in accordance with the contractual terms of the underlying acquisition agreements. The fair values of these liabilities are based on the contractual payout formulas included in the acquisition agreements taking into account the expected performance of the business. Any remeasurements or accretion related to the Company’s mandatorily redeemable noncontrolling interests are recorded through Interest (expense) income, net in the Statements of Operations. As the fair value does not rely on observable market inputs, the Company classifies these liabilities as Level 3 in the fair value hierarchy.

A rollforward of the Company’s mandatorily redeemable noncontrolling interest liabilities classified as Level 3 is as follows:

	For the six months ended December 31,
	2018		2017
	(in millions)
Balance—beginning of period	$	12	$	79
Additions		—		12
Accretion		—		2
Balance—end of period	$	12	$	93

Derivative Instruments

The Company is directly and indirectly affected by risks associated with changes in certain market conditions. When deemed appropriate, the Company uses derivative instruments to mitigate the potential impact of these market risks. The primary market risks managed by the Company through the use of derivative instruments include:

• foreign currency exchange rate risk: arising primarily through Foxtel Group borrowings denominated in U.S. dollars and payments for license fees; and

• interest rate risk: arising from fixed and floating rate Foxtel Group borrowings.

The Company formally designates qualifying derivatives as hedge relationships (“hedges”) and applies hedge accounting when considered appropriate. For economic hedges where no hedge relationship has been designated, changes in fair value are included as a component of net income in each reporting period within Other, net in the Statements of Operations. The Company does not use derivative financial instruments for trading or speculative purposes.

Hedges are classified as current or non-current in the Balance Sheets based on their maturity dates. Refer to the table below for further details:

		Fair value as of
	Balance Sheet Location	December 31, 2018			June 30, 2018
		(in millions)
Foreign currency derivatives—cash flow hedges	Other current assets	$	5		$	3
Cross currency interest rate derivatives—fair value hedges	Other current assets		8			—
Cross currency interest rate derivatives—economic hedges	Other current assets		12			—
Cross currency interest rate derivatives—cash flow hedges	Other current assets		32			—
Cross currency interest rate derivatives—fair value hedges	Other non-current assets		18			29
Cross currency interest rate derivatives—cash flow hedges	Other non-current assets		73			76
Cross currency interest rate derivatives—economic hedges	Other non-current assets		—			10
Interest rate derivatives—cash flow hedges	Other current liabilities		(4	)		—
Interest rate derivatives—cash flow hedges	Other non-current liabilities		(14	)		(20	)
Cross currency interest rate derivatives—cash flow hedges	Other non-current liabilities		(12	)		(12	)

Cash flow hedges

The Company utilizes a combination of foreign currency derivatives, interest rate derivatives and cross currency interest rate derivatives to mitigate currency exchange and interest rate risk in relation to payments for license fees and future interest payments.

The total notional value of foreign exchange contract derivatives designated for hedging was $51 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to foreign currency fluctuations is to June 2019.

The total notional value of interest rate swap derivatives designated as cash flow hedges was approximately A$700 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to September 2022.

The total notional value of the cross currency interest rate swaps that were designated as cash flow hedges was approximately A$400 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024.

The following tables present the impact that changes in the fair values of derivatives designated as cash flow hedges had on Accumulated other comprehensive loss and the Statement of Operations during the three and six months ended December 31, 2018. The Company did not have any such hedges in the three and six months ended December 31, 2017.

	(Gain) loss recognized in Accumulated Other Comprehensive Loss for the three months ended December 31,					Gain (loss) reclassified from Accumulated Other Comprehensive Loss for the three months ended December 31,					Income statement location
	2018			2017		2018			2017
	(in millions)
Derivative instruments designated as cash flow hedges:
Foreign currency derivatives—cash flow hedges	$	(2	)	$	—	$	1		$	—		Operating expenses
Cross currency interest rate derivatives—cash flow hedges		(30	)		—		26			—		Interest (expense) income, net
Interest rate derivatives—cash flow hedges		1			—		(2	)		—		Interest (expense) income, net
Total	$	(31	)	$	—	$	25		$	—
	(Gain) loss recognized in Accumulated Other Comprehensive Loss for the six months ended December 31,					Gain (loss) reclassified from Accumulated Other Comprehensive Loss for the six months ended December 31,					Income statement location
	2018			2017		2018			2017
	(in millions)
Derivative instruments designated as cash flow hedges:
Foreign currency derivatives—cash flow hedges	$	(4	)	$	—	$	2		$	—		Operating expenses
Cross currency interest rate derivatives—cash flow hedges		(16	)		—		12			—		Interest (expense) income, net
Interest rate derivatives—cash flow hedges		2			—		(4	)		—		Interest (expense) income, net
Total	$	(18	)	$	—	$	10		$	—

During the three and six months ended December 31, 2018 the amount recognized in the Statement of Operations for the ineffective portion of derivative instruments designated as cash flow hedges was approximately $1 million and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

As of December 31, 2018, the Company estimates that approximately $5 million of net derivative gains related to its foreign currency derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.

As of December 31, 2018, the Company estimates that approximately $3 million of net derivative gains related to its interest rate swap derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.

As of December 31, 2018, the Company estimates that approximately $1 million of net derivative gains related to its cross currency interest rate swap derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.

Fair value hedges

The Company’s primary interest rate risk arises from its borrowings acquired as a part of the Transaction. Borrowings issued at fixed rates and in U.S. dollars expose new Foxtel to fair value interest rate risk and currency exchange rate risk. The Company manages fair value interest rate risk and currency exchange rate risk through the use of cross currency interest rate swaps under which the Company exchanges fixed interest payments equivalent to the interest payments on the U.S. dollar denominated debt for floating rate Australian dollar denominated interest payments. The changes in fair value of derivatives designated as fair value hedges and the offsetting changes in fair value of the hedged items are recognized in Other, net. As of December 31, 2018, such adjustments increased the carrying value of borrowings by approximately $2 million.

The total notional value of the fair value hedges was approximately A$100 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024.

During the three and six months ended December 31, 2018, the amount recognized in the Statement of Operations on derivative instruments designated as fair value hedges related to the ineffective portion was nil and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

Economic (non-designated) hedges

In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives not designated as accounting hedges to mitigate foreign currency and interest rate risk. These are referred to as economic hedges. The changes in fair value of economic hedges are immediately recognized in the Statement of Operations. The total notional value of these cross currency interest rate derivatives was $75 million as of December 31, 2018, which relate to the U.S. private placement 2009 debt.

Nonrecurring Fair Value Measurements

In addition to assets and liabilities that are remeasured at fair value on a recurring basis, the Company has certain assets, primarily goodwill, intangible assets, equity method investments and property, plant and equipment, that are not required to be remeasured to fair value at the end of each reporting period. On an ongoing basis, the Company monitors whether events occur or circumstances change that would more likely than not reduce the fair values of these assets below their carrying amounts. If the Company determines that these assets are impaired, the Company would write down these assets to fair value. These nonrecurring fair value measurements are considered to be Level 3 in the fair value hierarchy.

In the second quarter of fiscal 2018, the Company recognized non-cash write-downs of certain equity method investments of approximately $13 million. The carrying value of equity method investments decreased from $136 million to $123 million. See Note 5 – Investments.

The Company did not recognize any write-downs on the carrying value of its assets during the six months ended December 31, 2018.

Other Fair Value Measurements

As of December 31, 2018, the carrying value of the Company’s outstanding borrowings approximates the fair value and is classified as Level 3 in the fair value hierarchy.