9. FAIR VALUE
The fair values of financial instruments were as follows (dollars in millions):
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March 31, 2017
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December 31, 2016
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Carrying
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Estimated
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Carrying
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Estimated
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Value
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Fair Value
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Value
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Fair Value
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Non-qualified employee benefit plan investments
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$
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28
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$
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28
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$
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27
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$
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27
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Investments in equity securities
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18
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18
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18
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18
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Cross-currency interest rate contracts
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29
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29
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29
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29
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Interest rate contracts
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(1)
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(1)
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(2)
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(2)
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Long-term debt (including current portion)
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(4,222)
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(4,411)
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(4,195)
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(4,368)
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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 March 31, 2017 and December 31, 2016. The estimated fair value amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2017 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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Quoted prices
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Significant other
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Significant
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in active markets
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observable
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unobservable
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March 31,
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for identical
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inputs
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inputs
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Description
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2017
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assets (Level 1)(3)
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(Level 2)(3)
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(Level 3)
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Assets:
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Available-for sale equity securities:
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Non-qualified employee benefit plan investments
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$
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28
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$
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28
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$
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—
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$
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—
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Investments in equity securities
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18
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18
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—
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—
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Derivatives:
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Cross-currency interest rate contracts(1)
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29
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—
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—
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29
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Total assets
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$
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75
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$
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46
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$
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—
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$
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29
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Liabilities:
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Derivatives:
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Interest rate contracts(2)
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$
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(1)
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$
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—
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$
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(1)
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$
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—
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Fair Value Amounts Using
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Quoted prices
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Significant other
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Significant
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in active markets
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observable
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unobservable
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December 31,
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for identical
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inputs
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inputs
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Description
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2016
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assets (Level 1)(3)
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(Level 2)(3)
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(Level 3)
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Assets:
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Available-for sale equity securities:
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Non-qualified employee benefit plan investments
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$
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27
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$
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27
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$
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—
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$
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—
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Investments in equity securities
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18
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18
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—
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—
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Derivatives:
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Cross-currency interest rate contracts(1)
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29
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—
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—
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29
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Total assets
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$
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74
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$
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45
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$
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—
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$
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29
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Liabilities:
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Derivatives:
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Interest rate contracts(2)
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$
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(2)
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$
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—
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$
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(2)
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$
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—
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(1)
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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.
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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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(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 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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(3)
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There were no transfers between Levels 1 and 2 within the fair value hierarchy during the three months ended March 31, 2017 and the year ended December 31, 2016.
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The following table shows a reconciliation of beginning and ending balances for the three months ended March 31, 2017 and 2016 for instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (dollars in millions).
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Cross-Currency Interest
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Rate Contracts
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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
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Beginning balance, January 1, 2017
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$
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29
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Transfers into Level 3
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—
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Transfers out of Level 3
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—
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Total (losses) gains:
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Included in earnings
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—
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Included in other comprehensive income (loss)
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—
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Purchases, sales, issuances and settlements
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—
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Ending balance, March 31, 2017
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$
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29
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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 March 31, 2017
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$
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—
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Cross-Currency Interest
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Rate Contracts
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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
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Beginning balance, January 1, 2016
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$
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28
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Transfers into Level 3
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—
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Transfers out of Level 3
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—
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Total (losses) gains:
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Included in earnings
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—
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Included in other comprehensive income (loss)
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(8)
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Purchases, sales, issuances and settlements
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—
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Ending balance, March 31, 2016
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$
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20
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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 March 31, 2016
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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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Other
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Interest
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comprehensive
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2017
|
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expense
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income (loss)
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Total net gains included in earnings
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$
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—
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$
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—
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Changes in unrealized losses relating to assets still held at March 31, 2017
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—
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—
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Other
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Interest
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comprehensive
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2016
|
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expense
|
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income (loss)
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Total net gains included in earnings
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$
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—
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$
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—
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Changes in unrealized losses relating to assets still held at March 31, 2016
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—
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(8)
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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 each of the three months ended March 31, 2017 and 2016, we recorded charges of nil for the impairment of long‑lived assets.