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Fair Value Measurements

6 Months Ended

Mar. 31, 2020

NOTE E – FAIR VALUE MEASUREMENTS

As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value. Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows.

Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include Ashland’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived using fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.

The following table summarizes financial instruments subject to recurring fair value measurements as of March 31, 2020.

	Carrying		Total fair		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(In millions)	value		value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	353	$	353	$	353	$	—	$	—
Restricted investments (a)		301		301		301		—		—
Investment of captive insurance company (b)		7		7		7		—		—
Foreign currency derivatives		6		6		—		6		—
Total assets at fair value	$	667	$	667	$	661	$	6	$	—
Liabilities
Foreign currency derivatives	$	5	$	5	$	—	$	5	$	—

(a)

Included in restricted investments is $24 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets.

(b)

Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.

The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2019.

	Carrying		Total fair		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(In millions)	value		value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	232	$	232	$	232	$	—	$	—
Restricted investments (a)		334		334		334		—		—
Investment of captive insurance company (b)		5		5		5		—		—
Foreign currency derivatives		2		2		—		2		—
Total assets at fair value	$	573	$	573	$	571	$	2	$	—
Liabilities
Foreign currency derivatives	$	2	$	2	$	—	$	2	$	—

(a)

Included in restricted investments is $24 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets.

(b)

Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.

Restricted investments

Investment income and realized gains and losses on these company-restricted investments are reported within the net interest and other expense caption on the Statements of Consolidated Comprehensive Income (Loss). The following table provides a summary of the activity within the investment portfolio as of March 31, 2020 and September 30, 2019:

(In millions)	March 31 2020			September 30 2019
Original cost	$	335		$	335
Accumulated adjustments, net (a)		(30	)		(47	)
Adjusted cost, beginning of year		305			288
Investment income (b)		7			10
Net unrealized gain (c)		6			29
Realized gains (c)		—			32
Settlement funds		2			7
Disbursements		(19	)		(32	)
Fair value	$	301		$	334

(a)

The accumulated adjustments include investment income, realized gains, disbursements and settlements recorded in previous periods.

(b)

Investment income for the demand deposit includes interest income as well as dividend income transferred from the equity and corporate bond mutual funds.

(c)

Presented under the original cost method.

The following table presents gross unrealized gains and losses for the restricted investment securities as of March 31, 2020 and September 30, 2019:

			Gross		Gross
(In millions)	Adjusted Cost		Unrealized Gain		Unrealized Loss			Fair Value
As of March 31, 2020
Demand deposit	$	7	$	—	$	—		$	7
Equity mutual fund		116		11		(12	)		115
Fixed income mutual fund		173		6		—			179
	$	296	$	17	$	(12	)	$	301

As of September 30, 2019
Demand deposit	$	9	$	—	$	—		$	9
Equity mutual fund		120		24		(2	)		142
Fixed income mutual fund		176		7		—			183
	$	305	$	31	$	(2	)	$	334

The following table presents the investment income, net gains and losses realized and disbursements related to the investments within the portfolio for the three and six months ended March 31, 2020 and 2019.

	Three months ended						Six months ended
	March 31						March 31
(In millions)	2020			2019			2020			2019
Investment income	$	3		$	2		$	7		$	5
Net gains (losses) unrealized (a)		(32	)		27			(23	)		(3	)
Disbursements		(9	)		(12	)		(19	)		(20	)

(a)

Ashland determined that all unrealized gains and losses were related to equity securities with readily determinable fair values. Due to the new accounting guidance adopted in the first quarter of fiscal 2019, the net unrealized gains (losses) during the three months ended December 31, 2018 and forward were recorded within the net interest and other expense caption in the Statements of Consolidated Comprehensive Income (Loss).

Foreign currency derivatives

Ashland conducts business in a variety of foreign currencies. Accordingly, Ashland regularly uses foreign currency derivative instruments to manage exposure on certain transactions denominated in foreign currencies to curtail potential earnings volatility effects on certain assets and liabilities, including short-term inter-company loans, denominated in currencies other than Ashland’s functional currency of an entity. These derivative contracts generally require exchange of one foreign currency for another at a fixed rate at a future date and generally have maturities of less than twelve months. All contracts are valued at fair value with net changes in fair value recorded within the selling, general and administrative expense caption. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in non-functional currencies. The following table summarizes the net gains and losses recognized during the three and six months ended March 31, 2020 and 2019 within the Statements of Consolidated Comprehensive Income (Loss).

	Three months ended				Six months ended
	March 31				March 31
(In millions)	2020		2019		2020		2019
Foreign currency derivative gains (losses)	$	3	$	3	$	4	$	4

The following table summarizes the fair values of the outstanding foreign currency derivatives as of March 31, 2020 and September 30, 2019 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.

	March 31		September 30
(In millions)	2020		2019
Foreign currency derivative assets	$	6	$	2
Notional contract values		169		271

Foreign currency derivative liabilities	$	5	$	2
Notional contract values		300		168

Other financial instruments

At March 31, 2020 and September 30, 2019, Ashland's long-term debt (including the current portion and excluding debt issuance cost discounts) had a carrying value of $1,550 million and $1,513 million, respectively, compared to a fair value of $1,567 million and $1,680 million, respectively. The fair values of long-term debt are based on quoted market prices or, if market prices are not available, the present values of the underlying cash flows discounted at Ashland’s incremental borrowing rates.

- 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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