Note 11 – Fair Value Measurements
Pursuant to the accounting guidance for fair value instruments, fair value is defined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. When determining the fair value measurements for assets and liabilities, we consider the principal or most advantageous market in which the asset or liability would transact in and we consider assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
Under fair value accounting guidance, there is a three-tier fair value hierarchy to prioritize the inputs used in measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:
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Level 1: |
Observable inputs, such as unadjusted quoted market prices in active markets for the identical asset or liability. | |
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Level 2: |
Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. | |
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Level 3: |
Unobservable inputs that reflect the entity’s own assumptions in measuring the asset or liability at fair value. | |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
For assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets and liabilities, such measurements involve developing assumptions based on market observable data, and in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
The following table provides the fair value hierarchy for assets and liabilities measured on a recurring basis and the gains and (losses) recorded during the periods presented:
| Fair Value at June 30, 2013 | Fair Value at June 30, 2012 | |||||||||||||||||||||||
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Description |
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
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Assets/(Liabilities) |
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Short-term investments |
$ | 10,008 | $ | 0 | $ | 0 | $ | 203,014 | $ | 0 | $ | 0 | ||||||||||||
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Available-for-sale securities |
2,149 | 0 | 0 | 1,805 | 0 | 0 | ||||||||||||||||||
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Foreign exchange contracts |
0 | 12,872 | 0 | 0 | 38,589 | 0 | ||||||||||||||||||
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Interest rate swap |
0 | (320 | ) | 0 | 0 | (997 | ) | 0 | ||||||||||||||||
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Pension assets |
6,801 | 0 | 0 | 7,011 | 0 | 0 | ||||||||||||||||||
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Contingent consideration |
0 | 0 | (288 | ) | 0 | 0 | (22,100 | ) | ||||||||||||||||
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Net asset/(liability) |
$ | 18,958 | $ | 12,552 | $ | (288 | ) | $ | 211,830 | $ | 37,592 | $ | (22,100 | ) | ||||||||||
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| Total Gains (Losses) for the Year Ended June 30, |
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Description |
2013 | 2012 | 2011 | |||||||||
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Gain on contingent consideration |
$ | 22,100 | $ | 0 | $ | 0 | ||||||
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Loss on available-for-sale securities |
(5,933 | ) | 0 | 0 | ||||||||
The following describes the valuation methodologies we use to measure assets and liabilities accounted for at fair value on a recurring basis:
Short-Term Investments and Available-for-Sale Securities: Short-term investments and available-for-sale securities are classified as Level 1 as the fair value was determined from market quotes obtained from financial institutions in active markets.
Foreign Exchange Contracts: We use foreign exchange contracts to hedge market risks relating to possible adverse changes in foreign currency exchange rates. Our foreign exchange contracts were measured at fair value using Level 2 inputs. Such inputs include foreign currency exchange spot and forward rates for similar transactions in actively quoted markets.
Interest Rate Swap: We use an interest rate swap to hedge market risk relating to possible adverse changes in interest rates. We have elected to use the income approach to value our interest rate swap contract, which uses observable Level 2 inputs at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted). Level 2 inputs for the swap contract valuation are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR, for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates) at commonly quoted intervals, and credit risk. These key inputs, including the LIBOR cash rates for very short-term, futures rates for up to two years, and LIBOR swap rates beyond the derivative maturity are used to construct the swap yield curve and discount the future cash flows to present value at the measurement date. If the interest rate swap contract is a derivative asset, a credit default swap basis available at commonly quoted intervals can be collected from Bloomberg and applied to all cash flows. If the interest rate swap contract is a derivative liability, we are required to reflect potential credit risk to lenders using a borrowing rate specific to our Company. Refer to Note 10 – Derivatives, for more information regarding our derivative financial instruments.
Pension Assets: Our pension assets have been valued using Level 1 inputs as quoted prices in an active market exist for these assets. Refer to Note 16 – Retirement Benefits for more information.
Contingent Consideration: We use a probability-weighted discounted cash flow approach (a form of the income approach) in determining the fair value of the contingent consideration related to the MWM Acquisition. The principal inputs to the approach include our expectations of the specific business’ earnings before income taxes (“EBIT”) in fiscal year 2014 and a discount rate that begins with our weighted average cost of capital and adjusts for the risks associated with the underlying EBIT outcome, the functional form of the payout and our credit risk associated with making the payment. Given the use of significant inputs that are not observable in the market, the contingent liability is classified within Level 3 of the fair value hierarchy. During the fiscal year ended June 30, 2013 we reassessed our expectations of the EBIT in fiscal year 2014 and revised our estimate of the contingent consideration liability to reduce it by $22.1 million to a balance of zero. The gain was recognized within SG&A in our Consolidated Statements of Income. In addition, during the fiscal year ended June 30, 2013, we recorded a liability of $0.3 million of contingent consideration related to the earn-out in the Interchain Acquisition. Refer to Note 2 – Acquisitions for more information on the contingent liability.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
The following table provides the carrying value for assets and liabilities measured on a non-recurring basis, all of which are measured under Level 3 of the fair value hierarchy, and the losses recorded during the periods presented:
| Total Losses for
the Year Ended, June 30, |
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Description of Assets |
June 30, 2013 | June 30, 2012 | 2013 | 2012 | 2011 | |||||||||||||||
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Equity method investments |
$ | 1,660 | $ | 0 | $ | 0 | $ | 0 | $ | (2,108 | ) | |||||||||
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Goodwill |
234,342 | 180,811 | 0 | 0 | 0 | |||||||||||||||
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Long-lived assets |
485,296 | 459,112 | (658 | ) | (565 | ) | 0 | |||||||||||||
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Total |
$ | 721,298 | $ | 639,923 | $ | (658 | ) | $ | (565 | ) | $ | (2,108 | ) | |||||||
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The following describes the valuation methodologies we use to measure financial and non-financial instruments accounted for at fair value on a non-recurring basis.
Equity Method Investments: Equity method investments are generally valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate. These investments are generally included in Level 3.
Goodwill: Goodwill is reevaluated for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. This asset is included in Level 3. Refer to Note 8 – Goodwill for more information.
Long-lived Assets: Long-lived assets, including Property, plant and equipment, net and intangible assets are valued using the best information available, including quoted market prices or market prices for similar assets when available or internal cash flow estimates discounted at an appropriate interest rate or independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates. These assets are generally included in Level 3.