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Financial Instruments and Fair Value Measurements

3 Months Ended

Sep. 30, 2023

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, 2023								As of June 30, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
Assets:
Interest rate derivatives - cash flow hedges	$	—	$	38	$	—	$	38	$	—	$	41	$	—	$	41
Foreign currency derivatives - cash flow hedges	—		3		—		3		—		2		—		2

Cross-currency interest rate derivatives - fair value hedges	—		—		—		—		—		9		—		9

Cross-currency interest rate derivatives	—		—		—		—		—		37		—		37
Equity securities(a)	80		—		128		208		105		—		130		235
Total assets	$	80	$	41	$	128	$	249	$	105	$	89	$	130	$	324

Liabilities:


Cross-currency interest rate derivatives - fair value hedges	—		—		—		—		—		(1)		—		(1)

Cross-currency interest rate derivatives	—		—		—		—		—		(2)		—		(2)
Total liabilities	$	—	$	—	$	—	$	—	$	—	$	(3)	$	—	$	(3)

(a)See Note 4—Investments.

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,
	2023		2022
	(in millions)
Balance - beginning of period	$	130	$	103
Additions	—		1


Measurement adjustments	—		1
Foreign exchange and other	(2)		(1)
Balance - end of period	$	128	$	104

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, certain programming rights, product development costs and inventory purchases; and

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

During the three months ended September 30, 2023, in connection with the 2024 Foxtel Credit Facility, the Company entered into (i) a cross-currency interest rate swap derivative with a notional amount of $49 million to exchange the U.S. dollar-denominated floating rate interest component of its 2024 Foxtel Credit Facility — Tranche 2 for an Australian dollar-denominated fixed rate of 4.375% and (ii) interest rate swap derivatives with notional amounts totaling A$610 million to exchange the floating rate interest component of the remaining tranches to fixed rates ranging from 4.248% to 4.313%. These cross-currency interest rate swap and interest rate swap derivatives are accounted for as cash flow hedges under ASC 815, “Derivatives and Hedging”.

During the three months ended September 30, 2023, the Company settled its hedges and derivatives related to the 2019 Credit facility and the 2012 U.S. private placement - USD portion - tranche 3. A gain of $5 million was recognized in Other, net related to the settlement of cross-currency interest rate swap derivatives for which hedge accounting was previously discontinued, and a gain of $7 million was recognized within Interest expense, net related to the remaining net derivative gains in Accumulated other comprehensive loss.

The Company formally designates qualifying derivatives as hedge relationships and applies hedge accounting when considered appropriate. The Company does not use derivative financial instruments for trading or speculative purposes.

Derivatives 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, 2023		As of June 30, 2023
		(in millions)
Interest rate derivatives - cash flow hedges	Other current assets	$	16	$	21
Foreign currency derivatives - cash flow hedges	Other current assets	3		2



Cross currency interest rate derivatives	Other current assets	—		1
Interest rate derivatives - cash flow hedges	Other non-current assets	22		20
Cross-currency interest rate derivatives - fair value hedges	Other non-current assets	—		9

Cross-currency interest rate derivatives	Other non-current assets	—		36


Cross-currency interest rate derivatives - fair value hedges	Other current liabilities	—		(1)
Cross-currency interest rate derivatives	Other current liabilities	—		(2)

Cash flow hedges

The Company utilizes a combination of interest rate derivatives, foreign currency derivatives and cross-currency interest rate derivatives to mitigate currency exchange rate risk and interest rate risk in relation to future interest and principal payments and payments for customer premise equipment, certain programming rights, product development costs and inventory purchases.

The total notional value of interest rate swap derivatives designated for hedging was approximately $494 million and A$610 million as of September 30, 2023 for News Corporation and Foxtel Debt Group borrowings, respectively. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2027. As of September 30, 2023, the Company estimates that approximately $16 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 foreign currency contract derivatives designated for hedging was $58 million as of September 30, 2023. The maximum hedged term over which the Company is hedging exposure to foreign currency fluctuations is less than one year. As of September 30, 2023, the Company estimates that approximately $3 million of net derivative gains 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 cross-currency interest rate swap derivatives designated for hedging was approximately $49 million as of September 30, 2023. The maximum hedged term over which the Company is hedging exposure to variability in interest and principal payments is to July 2027. As of September 30, 2023, the Company estimates that approximately nil 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 had on Accumulated other comprehensive loss and the Statements of Operations during the three months ended September 30, 2023 and 2022 for both derivatives designated as cash flow hedges that continue to be highly effective and derivatives initially designated as cash flow hedges but for which hedge accounting was discontinued as of December 31, 2020:


	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
	2023		2022		2023		2022
	(in millions)
Interest rate derivatives - cash flow hedges	$	7	$	22	$	(10)	$	—	Interest expense, net
Foreign currency derivatives - cash flow hedges	2		1		—		(1)		Operating expenses

Cross-currency interest rate derivatives	—		—		(1)		—		Interest expense, net
Total	$	9	$	23	$	(11)	$	(1)

The amount recognized in Other, net in the Statements of Operations resulting from the changes in fair value of cross-currency interest rate derivatives that were discontinued as cash flow hedges due to hedge ineffectiveness as of December 31, 2020 was a gain of approximately $3 million for the three months ended September 30, 2022.

Other Fair Value Measurements

As of September 30, 2023, the carrying value of the Company’s outstanding borrowings approximates the fair value. The 2022 Senior Notes and the 2021 Senior Notes 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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