Fair Value Measurements

The Financial Instruments Topic in the ASC requires disclosures about fair value of financial instruments in annual reports as well as in quarterly reports. For CSX, this statement applies to certain investments, pension plan assets and long-term debt. Also, the Fair Value Measurements and Disclosures Topic in the ASC clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the value of the Company's investments, pension plan assets and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below:


•	Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets;


•	Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.); and


•	Level 3 – significant unobservable inputs (including the Company’s own assumptions about the assumptions market participants would use in determining the fair value of investments).

The valuation methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Investments

The Company's investment assets, valued with assistance from a third-party trustee, consist of certificates of deposits, commercial paper, corporate bonds, government securities and auction rate securities and are carried at fair value on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC. There are several valuation methodologies used for those assets as described below:


•	Certificates of Deposit and Commercial Paper (Level 2): Valued at amortized cost, which approximates fair value;


•	Corporate Bonds and Government Securities (Level 2): Valued using broker quotes that utilize observable market inputs; and


•	Auction Rate Securities (Level 3): Valued using pricing models for which the assumptions utilize management’s estimates of market participant assumptions, because there is currently no active market for trading.

The Company's investment assets are carried at fair value on the consolidated balance sheets as summarized in the table below. Additionally, the amortized cost basis of these investments was $500 million and $920 million as of December 30, 2016 and December 25, 2015, respectively.

NOTE 13. Fair Value Measurements, continued



	Fiscal Years
	2016								2015
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Certificates of Deposit and Commercial Paper	$	—	$	415	$	—	$	415	$	—	$	810	$	—	$	810
Corporate Bonds	—		63		—		63		—		73		—		73
Government Securities	—		22		—		22		—		32		—		32
Auction Rate Securities	—		—		—		—		—		—		4		4
Total investments at fair value	$	—	$	500	$	—	$	500	$	—	$	915	$	4	$	919

These investments have the following maturities and are represented on the consolidated balance sheet within short-term investments for investments with maturities of less than one year, and other long-term assets for investments with maturities of one year and greater:



(Dollars in Millions)	December 2016		December 2015
Less than 1 year	$	417	$	810
1 - 2 years	12		9
2 - 5 years	4		27
Greater than 5 years	67		73
Total investments at fair value	$	500	$	919

Long-term Debt

Long-term debt is reported at carrying amount on the consolidated balance sheets and is the Company's only financial instrument with fair values significantly different from their carrying amounts. The majority of the Company's long-term debt is valued with assistance from a third party that utilizes closing transactions, market quotes or market values of comparable debt. For those instruments not valued by the third party, the fair value has been estimated by applying market rates of similar instruments to the scheduled contractual debt payments and maturities. These market rates are provided by the same third party. All of the inputs used to determine the fair value of the Company's long-term debt are Level 2 inputs.

The fair value of outstanding debt fluctuates with changes in a number of factors. Such factors include, but are not limited to, interest rates, market conditions, credit ratings, values of similar financial instruments, size of the transaction, cash flow projections and comparable trades. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules.

NOTE 13. Fair Value Measurements, continued

The fair value and carrying value of the Company's long-term debt is as follows:



(Dollars in Millions)	December 2016		December 2015
Long-term Debt (Including Current Maturities):
Fair Value	$	12,096	$	11,340
Carrying Value	11,293		10,535

Pension Plan Assets

Pension plan assets are reported at fair value on the consolidated balance sheet. The Investment Committee targets an allocation of pension assets to be generally 70% equity and 30% fixed income. There are several valuation methodologies used for those assets as described below.

Investments in the fair value hierarchy


•	Common stock (Level 1): Valued at the closing price reported on the active market on which the individual securities are traded on the last day of the year and classified in level 1 of the fair value hierarchy.


•	Mutual funds (Level 1): Valued at the net asset value of shares held at year end based on quoted market prices determined in an active market. These assets are classified in level 1 of the fair value hierarchy.


•	Corporate bonds, government securities, asset-backed securities and derivatives (Level 2): Valued using price evaluations reflecting the bid and/or ask sides of the market for a similar investment at year end. Asset-backed securities include commercial mortgage-backed securities and collateralized mortgage obligations. These assets are classified in level 2 of the fair value hierarchy.

Investments measured at net asset value


•	Partnerships: Net asset value of private equity is based on the fair market values associated with the underlying investments at year end. These funds have redemption restrictions that require advanced notice of 15 business days.

•

Common collective trust funds: This class consists of private funds that invest in government and corporate securities and various short-term debt instruments and are measured at net asset value to estimate the fair value of the investments. The net asset value of the investments is determined by reference to the fair value of the underlying securities, which are valued primarily through the use of directly or indirectly observable inputs. These funds have redemption restrictions that require advanced notice of up to 15 business days.

NOTE 13. Fair Value Measurements, continued

The pension plan assets at fair value by level, within the fair value hierarchy, as of calendar plan years 2016 and 2015 are shown in the table below. For additional information related to pension assets, see Note 8, Employee Benefit Plans.



	Fiscal Years
	2016								2015
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Common Stock	$	940	$	—	$	—	$	940	$	738	$	—	$	—	$	738
Mutual funds	12		—		—		12		15		—		—		15
Cash equivalents	1		—		—		1		8		—		—		8
Corporate bonds	—		497		—		497		—		480		—		480
Government securities	—		141		—		141		—		132		—		132
Asset-backed securities	—		14		—		14		—		14		—		14
Derivatives and other	—		11		—		11		—		6		—		6
Total investments in the fair value hierarchy	$	953	$	663	$	—	$	1,616	$	761	$	632	$	—	$	1,393
Investments measured at net asset value^(a)	n/a		n/a		n/a		$	923	n/a		n/a		n/a		$	916
Investments at fair value	$	953	$	663	$	—	$	2,539	$	761	$	632	$	—	$	2,309

(a) Investments measured at net asset value represent certain investments that have been measured at net asset value per share (or its equivalent) and are thus are not classified in the fair value hierarchy. In accordance with ASC 820, Fair Value Measurements, the fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the pension assets disclosed in Note 8, Employee Benefit Plans.