Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements

Fair Value Measurements

16.       Fair Value Measurements

Fair Value Measurements on a Recurring Basis

FASBliterature regarding fair value measurements for financial and non-financial assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The table below segregates all assets and liabilities that are measured at fair value on a recurring basis (which means they are so measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):

				Fair Value Measurements at
				December 31, 2012 Using
				Quoted
				Prices in
				Active
				Markets for		Significant
				Identical		Other		Significant
		As of		Financial		Observable		Unobservable
		December 31,		Instruments		Inputs		Inputs		Balance Sheet
		2012		(Level 1)		(Level 2)		(Level 3)		Classification
Financial assets:
Money market funds		$	3,511	$	3,511	$	---	$	---	Cash and cash equivalents
U.S. treasuries and government agency
	securities		387		387		---		---	Short-term investments
Corporate bonds			11		11		---		---	Short-term investments
ARS held through Morgan Stanley
	Smith Barney LLC		8		---		---		8	Long-term investments
Total financial assets at fair value		$	3,917	$	3,909	$	---	$	8

				Fair Value Measurements at
				December 31, 2011 Using
				Quoted
				Prices in
				Active
				Markets for		Significant
				Identical		Other		Significant
		As of		Financial		Observable		Unobservable
		December 31,		Instruments		Inputs		Inputs		Balance Sheet
		2011		(Level 1)		(Level 2)		(Level 3)		Classification
Financial assets:
Money market funds		$	2,869	$	2,869	$	---	$	---	Cash and cash equivalents
U.S. treasuries with original maturities
	of three months or less		2		2		---		---	Cash and cash equivalents
U.S. treasuries and government agency
	securities		344		344		---		---	Short-term investments
ARS held through Morgan Stanley
	Smith Barney LLC		16		---		---		16	Long-term investments
Total financial assets at fair value		$	3,231	$	3,215	$	---	$	16

The following table provides a reconciliation of the beginning and ending balances of our financial assets and financial liabilities classified as Level 3 by major categories (amounts in millions) at December 31, 2012 and2011:

			Level 3
					Total
					financial
					assets at
			ARS		fair
			(a)		value
Balance at January 1, 2011			$	23	$	23
	Total unrealized gains included in other
		comprehensive income		3		3
	Settlements			(10)		(10)
Balance at December 31, 2011			$	16	$	16
	Total unrealized gains included in other
		comprehensive income		2		2
	Settlements			(10)		(10)
Balance at December 31, 2012			$	8	$	8

(a)       Fair value measurements have been estimated using an income-approach model (specifically, discounted cash-flow analysis). When estimating the fair value, we consider both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments, and the likelihood of redemption. Significant assumptions used in the analysis include estimates for interest rates, spreads, cash flow timing and amounts, and holding periods of the securities. Assets measured at fair value using significant unobservable inputs (Level 3) represent less than1% of our financial assets measured at fair value on a recurring basis at December 31, 2012.

Foreign Currency Forward Contracts Not Designated as Hedges

We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. To mitigate our risk from foreign currency fluctuations we periodically enter into currency derivative contracts, principally swaps and forward contracts with maturities of twelve months or less, with Vivendi as our principal counterparty. We do not hold or purchase any foreign currency contracts for trading or speculative purposes and we do not designate these forward contracts or swaps as hedging instruments.  Accordingly, we report the fair value of these contracts in the consolidated balance sheet within “Other current assets” or “Other current liabilities” and with changes in fair value recorded in the consolidated statement of operations within “Investment and other income (expense), net” and “General and administrative expense.” The fair value of foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period and was not material as of December 31, 2012 and 2011.

Fair Value Measurements on a Non-Recurring Basis

       We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

       During our annual impairment review of goodwill performed as of December 31, 2011, we identified and recorded an impairment of $12 million in our Distribution segment. The decrease in fair value of the reporting unit was primarily due to the decrease of forecasted revenue from our Distribution segment in view of the industry trend towards digital distribution. No impairments of goodwill were recorded for the years ended December 31, 2012 and 2010.

In accordance with the provisions of the impairment of long-lived assets subsections of ASC Subtopic 360-10, intangible assets were written down to their fair value during in the quarter ended December 31, 2010 within our Activision operating segment. The write down resulted in impairment charges of $67million, $9 million and $250 million to license agreements, game engines and internally developed franchises intangible assets, respectively (see Note 11 of the notes to the Consolidated Financial Statements for details).

The tables below present intangible assets that were measured at fair value on a non-recurring basis at December 31, 2011 (amounts in millions):

				Fair Value Measurements at
				December 31, 2011 Using
				Quoted
				Prices in
				Active
				Markets for		Significant
				Identical		Other		Significant
		As of		Financial		Observable		Unobservable
		December 31,		Instruments		Inputs		Inputs
		2011		(Level 1)		(Level 2)		(Level 3)		Total Losses
Non-financial assets:
Goodwill		$	7,111	$	---	$	---	$	7,111	$	12
Total non-financial assets at fair
	value	$	7,111	$	---	$	---	$	7,111	$	12