8. FAIR VALUE MEASUREMENTS

Financial Assets (Liabilities) Carried at Fair Value

	Fair Value			Level 1		Level 2			Level 3
December 31, 2013
Money market funds	$	144.8		$	144.8	$	-		$	-
Investment securities		99.5			-		99.5			-
Derivative assets		57.0			-		57.0			-
Derivative liabilities		(61.4	)		-		(61.4	)		-
Acquisition contingent earn-out payable		(110.9	)		-		-			(110.9	)

September 30, 2013
Money market funds	$	168.0		$	168.0	$	-		$	-
Investment securities		28.8			-		28.8			-
Derivative assets		67.0			-		67.0			-
Derivative liabilities		(72.2	)		-		(72.2	)		-
Acquisition contingent earn-out payable		(106.4	)		-		-			(106.4	)

Valuation Techniques and Balance Sheet Presentation

Money market funds were primarily money market securities valued based on quoted market prices in active markets.

Investment securities were commercial paper debt securities valued based on quoted market prices for similar instruments, using observable market based inputs.

Derivative assets and liabilities were valued using quoted forward pricing from bank counterparties, LIBOR credit default swap rates for non-performance risk, forward yields for the 10-year treasury sourced from Bloomberg, and net settlement amounts where appropriate. These are presented primarily as components of other assets, other liabilities, notes payable, and AOCI. See Note 9.

Acquisition contingent earn-out payable related to DoubleDown reaching certain earnings targets was valued with a DCF model applied to the expected payments determined based on probability-weighted internal earnings projections. We applied a rate of probability (10% - 90%) to each outstanding scenario, as well as a risk-adjusted discount rate of 18%, to derive the estimated fair value at December 31, 2013. Changes in the projections and/or the probabilities are the most significant assumptions and result in directionally similar changes in the fair value. Discount rate changes cause a directionally opposite change in the fair value. Acquisition contingent earn-out payable was presented as a component of other liabilities, $60.0 million current and $50.9 million noncurrent at December 31, 2013 versus $57.6 million current and $48.8 million noncurrent at September 30, 2013. The payable fair value increased $4.5 million during the first quarter ended December 31, 2013 primarily due to the time-value of money.

Reconciliation of Items Carried at Fair Value Using Significant Unobservable Inputs (Level 3)

Acquisition Contingent Consideration Payable
Three Months Ended December 31,	2013			2012
Beginning balance	$	(106.4	)	$	(116.4	)
Accretion (interest and fair value adjustment)		(4.5	)		(2.1	)
Ending balance	$	(110.9	)	$	(118.5	)

Net change in unrealized gain (loss) included in earnings related to instruments still held	$	-		$	-

Financial Assets (Liabilities) Not Carried at Fair Value

	Carrying			Fair											Unrealized
	Value			Value			Level 1			Level 2		Level 3			Gain (Loss)
December 31, 2013
Jackpot investments	$	320.3		$	354.1		$	354.1		$	-	$	-		$	33.8
Contracts & notes receivable		403.2			397.6			-			-		397.6			(5.6	)
Jackpot liabilities		(412.7	)		(409.5	)		-			-		(409.5	)		3.2
Debt		(2,131.8	)		(2,305.9	)		(2,305.9	)		-		-			(174.1	)

September 30, 2013
Jackpot investments	$	325.1		$	366.3		$	366.3		$	-	$	-		$	41.2
Contracts & notes receivable		394.9			388.3			-			-		388.3			(6.6	)
Jackpot liabilities		(425.0	)		(425.2	)		-			-		(425.2	)		(0.2	)
Debt		(2,121.9	)		(2,346.6	)		(2,346.6	)		-		-			(224.7	)

Valuation Techniques and Balance Sheet Presentation

Jackpot investments were valued based on quoted market prices.

Contracts and notes receivable were valued using DCF, incorporating expected payments and market interest rates relative to the credit risk of each customer (low 7.5 %, medium 8.0 %, high 9.5 % - 11.25 %). Credit risk is determined on a number of factors, including customer size, type, financial condition, historical collection experience, account aging, and credit ratings derived from credit reporting agencies and other industry trade reports. Contracts are secured by the underlying assets sold and notes are secured by the developed property and/or other assets. The high risk category includes most of our development financing loans in new markets and customers in regions with a history of currency or economic instability, such as Latin America. See Notes 3 and 4.

Jackpot liabilities were valued using DCF, incorporating expected future payment timing, estimated funding rates based on the treasury yield curve, and IGT's nonperformance credit risk. Expected annuity payments over 1-25 years (average 10 years) were discounted using the 10-year treasury yield curve rate (3.00%) for the estimated funding rate and the 10-year credit default swap rate (1.65%) for nonperformance risk. The present value (carrying value) of the expected lump sum payments were discounted using the 1-year treasury yield curve rate (.11%) with the 1-year credit default swap rate (.22%) for the current amounts and the 2-year treasury yield curve rate (.39%) with the 2-year credit default swap rate (.34%) for noncurrent amounts. Significant increases (decreases) in any of these inputs in isolation would result in a lower (higher) fair value measurement. Generally, changes in the estimated funding rates do not correlate with changes in nonperformance credit risk.

The majority of our debt was level 1 and valued using quoted market prices or dealer quotes for the identical financial instrument when traded as an asset in an active market. Outstanding borrowings, if any, under our revolving credit facility are level 2 and fair value is determined using DCF of expected payments at current borrowing rates. Carrying values in the table excluded swap adjustments and equity components of convertible debt.

Level 3 Valuation Process

Our valuation policies and procedures are determined by the Accounting Department, which ultimately reports to the Chief Financial Officer, in coordination with appropriate business asset owners and third-party valuation services when needed. Changes in fair value and methods for calibration, back testing, and other testing procedures of pricing models are evaluated through analytical review by managers of the responsible Accounting Department quarterly, by the Global Controller at inception and periodically with significant changes. Material valuations are discussed with the Audit Committee at inception and periodically if changes are significant or if impairment charges are recorded. Third-party information is evaluated for consistency with the FASB ASC for fair value measurement through analytical review and in-depth discussions with a variety of valuation experts.

Unobservable inputs are used only to the extent that observable inputs are not available and reflect management assumptions that cannot be corroborated with observable market data about what market participants would use in pricing the asset or liability, including assumptions about risk. Our unobservable inputs consist primarily of expected cash flows, stock price volatility, and other rates derived through extrapolation or interpolation. These inputs are developed based on the best information available, including trends deduced from available historical information and future expectations, using company specific data and market or industry published data. These inputs are validated for reasonableness by analytic comparison to other relevant valuation statistics whenever possible. Unobservable inputs depend on the facts and circumstances specific to a given asset or liability and require significant professional judgment.