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Financial Instruments and Fair Value Measurements

3 Months Ended

Sep. 30, 2020

Financial Instruments and Fair Value Measurements

NOTE 7. 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 September 30, 2020								As of June 30, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
Assets:

Cross-currency interest rate derivatives - fair value hedges	$	—	$	21	$	—	$	21	$	—	$	24	$	—	$	24

Cross-currency interest rate derivatives - cash flow hedges	—		87		—		87		—		98		—		98
Equity securities(a)	68		—		129		197		54		—		123		177
Total assets	$	68	$	108	$	129	$	305	$	54	$	122	$	123	$	299
Liabilities:
Foreign currency derivatives - cash flow hedges	$	—	$	3	$	—	$	3	$	—	$	3	$	—	$	3
Interest rate derivatives - cash flow hedges	—		15		—		15		—		16		—		16

Cross-currency interest rate derivatives - cash flow hedges	—		18		—		18		—		18		—		18
Total liabilities	$	—	$	36	$	—	$	36	$	—	$	37	$	—	$	37

(a)See Note 4—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 three months ended September 30,
	2020		2019
	(in millions)
Balance - beginning of period	$	123	$	113
Additions	6		—


Foreign exchange and other	—		(1)
Balance - end of period	$	129	$	112

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 Debt Group borrowings denominated in United States (“U.S.”) dollars, payments for customer premise equipment, and certain programming rights; and

•interest rate risk: arising from fixed and floating rate Foxtel Debt 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:


	Balance Sheet Location	As of September 30, 2020		As of June 30, 2020
		(in millions)




Cross-currency interest rate derivatives - fair value hedges	Other non-current assets	$	21	$	24
Cross-currency interest rate derivatives - cash flow hedges	Other non-current assets	87		98
Foreign currency derivatives - cash flow hedges	Other current liabilities	(3)		(3)

Interest rate derivatives - cash flow hedges	Other non-current liabilities	(15)		(16)
Cross-currency interest rate derivatives - cash flow hedges	Other non-current liabilities	(18)		(18)

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 future interest and principal payments and payments for customer premise equipment.

The total notional value of foreign currency contract derivatives designated for hedging was $29 million as of September 30, 2020. The maximum hedged term over which the Company is hedging exposure to foreign currency fluctuations is to February 2021. As of September 30, 2020, the Company estimates that approximately $2 million of net derivative losses related to its foreign currency contract derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statements of Operations within the next 12 months.

The total notional value of interest rate swap derivatives designated as cash flow hedges was approximately A$300 million as of September 30, 2020. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to September 2022. As of September 30, 2020, 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 Statements of Operations within the next 12 months.

The total notional value of cross-currency interest rate swaps that were designated as cash flow hedges was approximately $280 million as of September 30, 2020. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024. As of September 30, 2020, the Company estimates that approximately $2 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 Statements of Operations within the next 12 months.

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 Statements of Operations during the three months ended September 30, 2020 and 2019:


	Gain (loss) recognized in Accumulated Other Comprehensive Loss for the three months ended September 30,				(Gain) loss reclassified from Accumulated Other Comprehensive Loss for the three months ended September 30,				Income statement location
	2020		2019		2020		2019
	(in millions)
Derivative instruments designated as cash flow hedges:
Foreign currency derivatives - cash flow hedges	$	—	$	(1)	$	—	$	(2)	Operating expenses
Cross-currency interest rate derivatives - cash flow hedges	(15)		5		13		(9)		Interest (expense) income, net
Interest rate derivatives - cash flow hedges	—		(4)		1		(6)		Interest (expense) income, net
Total	$	(15)	$	—	$	14	$	(17)

Upon adoption of ASU 2017-12 as of July 1, 2019, the Company reclassified $5 million in gains from Accumulated deficit to Accumulated other comprehensive loss related to amounts previously recorded for the ineffective portion of outstanding derivative instruments designated as cash flow hedges. During the three months ended September 30, 2020 and 2019, the Company excluded the currency basis from the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

Fair value hedges

Borrowings issued at fixed rates and in U.S. dollars expose the Company 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. For the three months ended September 30, 2020, such adjustments increased the carrying value of borrowings by nil.

The total notional value of the fair value hedges was approximately $70 million as of September 30, 2020. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024.

During the three months ended September 30, 2020 and 2019, the amount recognized in the Statements of Operations on derivative instruments designated as fair value hedges related to the ineffective portion was nil and the Company excluded the currency basis from the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

The following sets forth the effect of fair value hedging relationships on hedged items in the Balance Sheets as of September 30, 2020 and June 30, 2020:


	As of September 30, 2020		As of June 30, 2020
	(in millions)
Borrowings:
Carrying amount of hedged item	$	70	$	71
Cumulative hedging adjustments included in the carrying amount	5		6

Other Fair Value Measurements

As of September 30, 2020, the carrying value of the Company’s outstanding borrowings approximates the fair value. The U.S. private placement borrowings are classified as Level 2 and the remaining borrowings are classified as Level 3 in the fair value hierarchy.

- 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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