FAIR VALUE MEASUREMENTS

6 Months Ended

Mar. 31, 2014

8. FAIR VALUE MEASUREMENTS

FINANCIAL ASSETS (LIABILITIES) CARRIED AT FAIR VALUE

	Fair Value			Level 1		Level 2			Level 3
March 31, 2014
Money market funds	$	72.1		$	72.1	$	-		$	-
Investment securities		15.0			-		15.0			-
Derivative assets		65.3			-		65.3			-
Derivative liabilities		(62.6	)		-		(62.6	)		-
Acquisition contingent earn-out payable		(53.0	)		-		-			(53.0	)

September 30, 2013
Money market funds	$	168.0		$	168.0	$	-		$	-
Investment securities		28.8			-		28.8			-
Derivative assets		74.6			-		74.6			-
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% - 60%) to each outstanding scenario, as well as a risk-adjusted discount rate of 18%, to derive the estimated fair value at March 31, 2014. 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. The payable fair value increased $2.1 million during the 2014 second quarter and $6.6 million for the six months ended March 31, 2014 primarily due to the time-value of money. Changes in fair value are recorded to earnings as a component of contingent acquisition-related costs and the payable balance of $53.0 million is presented as a component of other current liabilities at March 31, 2014 versus $57.6 million current and $48.8 million noncurrent at September 30, 2013. Earn-out consideration of $60.0 million (excluding payroll taxes) was paid during the 2014 second quarter for earnings targets met by DoubleDown for calendar 2013, and $45.0 million (excluding payroll taxes) was paid during the 2013 second quarter for earnings targets met for calendar 2012.

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

Acquisition Contingent Consideration Payable for the Six Months Ended March 31,	2014			2013
Beginning balance	$	(106.4	)	$	(116.4	)
Accretion (interest and fair value adjustment)		(6.6	)		(16.2	)
Payments		60.0			45.0
Ending balance	$	(53.0	)	$	(87.6	)

FINANCIAL ASSETS (LIABILITIES) NOT CARRIED AT FAIR VALUE

															Unrealized
	Carrying Value			Fair Value			Level 1			Level 2		Level 3			Gain (Loss)
March 31, 2014
Jackpot investments	$	308.3		$	343.1		$	343.1		$	-	$	-		$	34.8
Contracts & notes receivable		376.0			369.5			-			-		369.5			(6.5	)
Jackpot liabilities		(400.4	)		(395.8	)		-			-		(395.8	)		4.6
Debt		(2,141.9	)		(2,293.7	)		(2,293.7	)		-		-			(151.8	)

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 (2.72%) for the estimated funding rate and the 10-year credit default swap rate (2.00%) 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 (.45%) with the 2-year credit default swap rate (.38%) 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.

Debt is predominantly 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.

- 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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