| FAIR VALUE |
8. FAIR VALUE
The fair values of financial instruments were as follows (dollars in millions):
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June 30, 2016
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|
December 31, 2015
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Carrying
Value
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Estimated
Fair Value
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Carrying
Value
|
|
Estimated
Fair Value
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|
|
Non-qualified employee benefit plan investments
|
|
$
|
27
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|
$
|
27
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|
$
|
26
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|
$
|
26
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|
|
Investments in equity securities
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|
|
18
|
|
|
18
|
|
|
18
|
|
|
18
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|
|
Cross-currency interest rate contracts
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|
|
26
|
|
|
26
|
|
|
28
|
|
|
28
|
|
|
Interest rate contracts
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|
|
(4
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)
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|
(4
|
)
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|
(4
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)
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|
(4
|
)
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|
Long-term debt (including current portion)
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|
(4,749
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)
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(4,789
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)
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(4,795
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)
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|
(4,647
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)
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The carrying amounts reported in our condensed consolidated balance sheets of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair values of non-qualified employee benefit plan investments and investments in equity securities are obtained through market observable pricing using prevailing market prices. The estimated fair values of our long-term debt are based on quoted market prices for the identical liability when traded as an asset in an active market (Level 1).
The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2016 and December 31, 2015. The estimated fair value amounts have not been comprehensively revalued for purposes of these financial statements since June 30, 2016 and current estimates of fair value may differ significantly from the amounts presented herein.
The following assets and liabilities are measured at fair value on a recurring basis (dollars in millions):
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Fair Value Amounts Using
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Description
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June 30,
2016
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|
Quoted prices
in active
markets for
identical
assets
(Level 1)(4)
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|
Significant
other
observable
inputs
(Level 2)(4)
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|
Significant
unobservable
inputs
(Level 3)
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|
Assets:
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|
|
|
|
|
|
|
|
|
|
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Available-for sale equity securities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Equity mutual funds
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$
|
27
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|
$
|
27
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|
$
|
—
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|
$
|
—
|
|
|
Investments in equity securities(1)
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|
|
18
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|
|
18
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|
|
—
|
|
|
—
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|
|
Derivatives:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency interest rate contracts(2)
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|
|
26
|
|
|
—
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|
|
—
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|
|
26
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|
|
|
|
|
|
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|
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|
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|
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Total assets
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|
$
|
71
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|
$
|
45
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|
$
|
—
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$
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26
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Liabilities:
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|
|
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|
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Derivatives:
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|
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|
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|
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|
|
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Interest rate contracts(3)
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|
$
|
(4
|
)
|
$
|
—
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|
$
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(4
|
)
|
$
|
—
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|
|
|
|
|
|
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Fair Value Amounts Using
|
|
|
Description
|
|
December 31,
2015
|
|
Quoted prices
in active
markets for
identical
assets
(Level 1)(4)
|
|
Significant
other
observable
inputs
(Level 2)(4)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity mutual funds
|
|
$
|
26
|
|
$
|
26
|
|
$
|
—
|
|
$
|
—
|
|
|
Investments in equity securities(1)
|
|
|
18
|
|
|
18
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|
|
—
|
|
|
—
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|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency interest rate contracts(2)
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total assets
|
|
$
|
72
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|
$
|
44
|
|
$
|
—
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|
$
|
28
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Liabilities:
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Derivatives:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts(3)
|
|
$
|
(4
|
)
|
$
|
—
|
|
$
|
(4
|
)
|
$
|
—
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|
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(1)
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As of April 1, 2015, we no longer exercise significant influence in our investment in Nippon Aqua Co., Ltd., for which we previously accounted using the equity method. Consequently, we now account for this investment at fair value as an available-for-sale equity security.
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(2)
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The income approach is used to calculate the fair value of these instruments. Fair value represents the present value of estimated future cash flows, calculated using relevant interest rates, exchange rates, and yield curves at stated intervals. There were no material changes to the valuation methods or assumptions used to determine the fair value during the current period.
In November 2014, we entered into two five year cross-currency interest rate contracts and one eight year cross-currency interest rate contract. These instruments have been categorized by us as Level 3 within the fair value hierarchy due to unobservable inputs associated with the credit valuation adjustment, which we deemed to be significant inputs to the overall measurement of fair value at inception.
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(3)
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The income approach is used to calculate the fair value of these instruments. Fair value represents the present value of estimated future cash flows, calculated using relevant interest rates and yield curves at stated intervals. There were no material changes to the valuation methods or assumptions used to determine the fair value during the current period.
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(4)
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There were no transfers between Levels 1 and 2 within the fair value hierarchy for the six months ended June 30, 2016 and the year ended December 31, 2015.
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The following table shows a reconciliation of beginning and ending balances for the three and six months ended June 30, 2016 and 2015 for instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (dollars in millions).
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Three months
ended
June 30, 2016
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Six months
ended
June 30, 2016
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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
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Cross-Currency
Interest
Rate Contracts
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Cross-Currency
Interest
Rate Contracts
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Beginning balance
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$
|
20
|
|
$
|
28
|
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|
Transfers into Level 3
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|
—
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—
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Transfers out of Level 3
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—
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—
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Total gains (losses):
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Included in earnings
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—
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—
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Included in other comprehensive income (loss)
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|
6
|
|
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(2
|
)
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Purchases, sales, issuances and settlements
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|
—
|
|
|
—
|
|
|
|
|
|
|
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|
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Ending balance, June 30, 2016
|
|
$
|
26
|
|
$
|
26
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The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at June 30, 2016
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$
|
—
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$
|
—
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Three months
ended
June 30, 2015
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Six months
ended
June 30, 2015
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|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
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Cross-Currency
Interest
Rate Contracts
|
|
Cross-Currency
Interest
Rate Contracts
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|
Beginning balance
|
|
$
|
33
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|
$
|
5
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Transfers into Level 3
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—
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|
—
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Transfers out of Level 3
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|
—
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|
|
—
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Total gains (losses):
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|
|
|
|
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Included in earnings
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—
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—
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Included in other comprehensive income (loss)
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|
(8
|
)
|
|
20
|
|
|
Purchases, sales, issuances and settlements
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|
—
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|
|
—
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|
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Ending balance, June 30, 2015
|
|
$
|
25
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|
$
|
25
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|
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The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at June 30, 2015
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|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
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|
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Gains and losses (realized and unrealized) included in earnings for instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are reported in interest expense and other comprehensive income (loss) as follows (dollars in millions):
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Three months
ended
June 30, 2016
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Six months
ended
June 30, 2016
|
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Interest
expense
|
|
Other
comprehensive
income (loss)
|
|
Interest
expense
|
|
Other
comprehensive
income (loss)
|
|
|
Total net gains included in earnings
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
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|
|
Changes in unrealized gains (losses) relating to assets still held at June 30, 2016
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|
—
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|
6
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|
—
|
|
|
(2
|
)
|
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|
Three months
ended
June 30, 2015
|
|
Six months
ended
June 30, 2015
|
|
|
|
|
Interest
expense
|
|
Other
comprehensive
income (loss)
|
|
Interest
expense
|
|
Other
comprehensive
income (loss)
|
|
|
Total net gains included in earnings
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Changes in unrealized (losses) gains relating to assets still held at June 30, 2015
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
20
|
|
We also have assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include property, plant and equipment and those associated with acquired businesses, including goodwill and intangible assets. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired. During the six months ended June 30, 2016 and 2015, we recorded charges of $1 million and nil, respectively, for the impairment of long-lived assets.
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