FAIR VALUE MEASUREMENTS

9 Months Ended

Jun. 30, 2014

FAIR VALUE MEASUREMENTS

Fair Value Disclosures

8.  FAIR VALUE MEASUREMENTS

FINANCIAL ASSETS (LIABILITIES) CARRIED AT FAIR VALUE

	Fair Value			Level 1		Level 2			Level 3
June 30, 2014
Money market funds	$	69.1		$	69.1	$	-		$	-
Derivative assets		65.8			-		65.8			-
Derivative liabilities		(68.7	)		-		(68.7	)		-
Acquisition contingent earn-out payable		(55.8	)		-		-			(55.8	)
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 relates to the estimated FV of consideration due for the business acquisitions of DoubleDown and Strategy9 (see Note 18) dependent on whether the business reaches certain performance targets. A DCF model is used to determine the FV with the expected payments and probability-weighted performance projections. Changes in projections and/or probabilities are the most significant assumptions and result in directionally similar changes in FV. Changes in the risk-adjusted discount rate cause a directionally opposite change in FV. Changes in FV are recorded to earnings within contingent acquisition-related costs and the payable is presented as a component of other liabilities, current and noncurrent depending on the expected payment timing.

To derive the estimated FV at June 30, 2014 for DoubleDown earn-out, we applied probability rates of 9% - 64% to various scenarios along with a discount rate of 18%. The 2014 accretion was primarily related to the time-value of money. The payable balance totaled $55.2 million current at June 30, 2014 versus $57.6 million current and $48.8 million noncurrent at September 30, 2013. To derive the estimated FV of $0.6 million noncurrent at June 30, 2014 for Strategy9 earn-out, we applied probability rates of 10% - 50% to future scenarios along with a discount rate of 10%.

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

Acquisition Contingent Consideration Payable for the Nine Months Ended June 30,	2014			2013
Beginning balance	$	(106.4	)	$	(116.4	)
Issuances		(0.6	)		-
Accretion (fair value adjustment)		(8.8	)		(28.0	)
Payments		60.0			45.0
Ending balance	$	(55.8	)	$	(99.4	)

FINANCIAL ASSETS (LIABILITIES) NOT CARRIED AT FAIR VALUE

	Carrying Value			Fair Value			Level 1			Level 2			Level 3			Unrealized Gain (Loss)
June 30, 2014
Jackpot investments	$	302.4		$	338.3		$	338.3		$	-		$	-		$	35.9
Contracts & notes receivable		330.9			325.4			-			-			325.4			(5.5	)
Jackpot liabilities		(396.0	)		(385.8	)		-			-			(385.8	)		10.2
Debt		(1,920.6	)		(2,029.6	)		(1,409.3	)		(620.3	)		-			(109.0	)
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 % - 11.00 %). 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 (2.53%) for the estimated funding rate and the 10-year credit default swap rate (2.52%) for nonperformance risk. The present value (carrying value) of the expected lump sum payments were discounted using the 1-year treasury yield curve rate (.10%) with the 1-year credit default swap rate (.32%) for the current amounts and the 2-year treasury yield curve rate (.46%) with the 2-year credit default swap rate (.54%) for noncurrent amounts. Significant increases (decreases) in any of these inputs in isolation would result in a lower (higher) FV 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 FV 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.