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Fair Value Measurements
6 Months Ended
Jun. 30, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are:

Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities that are traded in an active exchange market, including shares of mutual funds.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active markets.

(a) Fair Value Measurements on a Recurring Basis

The following table presents fair value measurements for classes of Federated’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
June 30, 2015
 
December 31, 2014
 
 
Fair Value Measurements Using
 
Fair Value Measurements Using
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
109,087

 
$
0

 
$
0

 
$
109,087

 
$
115,267

 
$
0

 
$
0

 
$
115,267

Available-for-sale equity securities
 
120,716

 
24,789

 
0

 
145,505

 
119,435

 
23,755

 
0

 
143,190

Trading securities—equity
 
21,341

 
16,438

 
115

 
37,894

 
17,553

 
13,840

 
0

 
31,393

Trading securities—debt
 
0

 
7,391

 
0

 
7,391

 
0

 
7,488

 
0

 
7,488

Other1
 
1

 
2

 
0

 
3

 
31

 
14

 
0

 
45

Total financial assets
 
$
251,145

 
$
48,620

 
$
115

 
$
299,880

 
$
252,286

 
$
45,097

 
$
0

 
$
297,383

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
425

 
$
0

 
$
425

Acquisition-related future consideration liabilities
 
0

 
0

 
3,986

 
3,986

 
0

 
0

 
1,909

 
1,909

Other2
 
2,708

 
36

 
0

 
2,744

 
1,979

 
0

 
0

 
1,979

Total financial liabilities
 
$
2,708

 
$
36

 
$
3,986

 
$
6,730

 
$
1,979

 
$
425

 
$
1,909

 
$
4,313

1
Amounts include futures contracts and/or foreign currency forward contracts held within certain consolidated sponsored investment companies.
2
Amounts include investments sold short, futures contracts and/or foreign currency forward contracts held within certain consolidated sponsored investment companies.

The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis. Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at June 30, 2015 or December 31, 2014.

Cash and cash equivalents
Cash and cash equivalents include investments in money market funds and deposits with banks. Investments in Federated money market funds totaled $98.7 million and $107.6 million at June 30, 2015 and December 31, 2014, respectively. Cash investments in money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.

Available-for-sale equity securities
Available-for-sale equity securities include investments in sponsored fluctuating-value mutual funds and are included in Investments—affiliates on the Consolidated Balance Sheets. For investments in mutual funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For certain investments in mutual funds that are not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the securities are valued using NAV as a practical expedient and are classified as Level 2. There is no modeling or additional information needed to arrive at the fair values of any of these investments.
Trading securities—equity
Trading securities - equity primarily represent the equity securities held by consolidated sponsored investment companies (included in Investments—consolidated investment companies on the Consolidated Balance Sheets) as well as certain equity investments held in separate accounts for which Federated is the beneficiary (included in Investments—other on the Consolidated Balance Sheets). For the publicly traded equity securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on unadjusted quoted market prices. The fair value of certain equity securities traded principally in foreign markets and held by consolidated investment companies is determined by a third-party pricing service to account for changes to the fair value between the time the foreign market closes and the pricing time of the consolidated investment company (Level 2). At June 30, 2015, for one security held by a consolidated sponsored investment company, fair value was determined using a pricing methodology that included significant unobservable market inputs (Level 3). For the period between December 31, 2014 and June 30, 2015, there were no investments transferred between Level 2 and Level 1 and $0.1 million transferred from Level 2 to Level 3. For the period between December 31, 2013 and June 30, 2014, there were $2.5 million of investments transferred from Level 2 to Level 1. Transfers among levels of the fair value hierarchy are reported at fair value as of the beginning of the period in which the transfers occur.

Trading securities—debt
Trading securities - debt primarily represent U.S. bonds held by consolidated sponsored investment companies. The fair value of these securities may include observable market data such as valuations provided by independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions (Level 2).
Foreign currency forward contracts
The fair value of foreign currency forward contracts is primarily included in Receivables, net or Other current liabilities on the Consolidated Balance Sheets, representing contracts held by certain consolidated sponsored investment companies as part of their investment strategy. Pricing is determined by interpolating a value by utilizing the spot foreign exchange rate and forward points (based on the spot rate and currency interest rate differentials), which are all inputs that are observable in active markets (Level 2).

Futures contracts
The fair value of futures contracts is primarily included in Receivables, net or Other current liabilities on the Consolidated Balance Sheets, representing contracts held by certain consolidated sponsored investment companies as part of their investment strategy. Pricing is determined by using the value reported at settlement or closing price (Level 1).
Interest rate swap
The fair value of Federated's interest rate swap (the Swap), which expired on April 1, 2015, was included in Other current liabilities on the Consolidated Balance Sheets as of December 31, 2014. Pricing was determined based on a third-party, model-derived valuation in which all significant inputs are observable in active markets (Level 2), including the Eurodollar future rate and yields for three- and thirty-year Treasury securities. See Note (8) for additional information.

Acquisition-related future consideration liabilities
From time to time, pursuant to purchase and sale agreements entered into in connection with certain business combinations, Federated may be required to make future consideration payments if certain contingencies are met. See Note (12) for additional information regarding the nature and timing of these payments. In connection with these arrangements entered into after January 1, 2009, Federated records a liability as of the acquisition date representing the estimated fair value of future consideration payments. The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded in earnings. As of June 30, 2015, acquisition-related future consideration liabilities were recorded in Other current liabilities ($2.3 million) and Other long-term liabilities ($1.7 million) on the Consolidated Balance Sheets. Management estimated the fair value of future consideration payments based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3).

The following table presents a reconciliation of the beginning and ending balances for Federated's liability for future consideration payments related to these acquisitions for each period presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2015

 
2014

 
2015

 
2014

Beginning balance
$
1,909

 
$
6,489

 
$
1,909

 
$
6,489

New acquisition1
1,700

 
0

 
1,700

 
0

Changes in fair value2
377

 
(579
)
 
377

 
(579
)
Ending balance
$
3,986

 
$
5,910

 
$
3,986

 
$
5,910

1
Amounts include the preliminary fair value estimate of the contingent payment liability recorded in connection with a new acquisition.
2
For all periods presented, the amounts were included as Operating Expenses - Other on the Consolidated Statements of Income.

Investments sold short
The fair value of investments sold short within a consolidated sponsored investment company is included in Other current liabilities on the Consolidated Balance Sheets. The investments sold short primarily relate to domestic equity securities that are available in an active exchange market. The fair value of these investments sold short is based on unadjusted quoted market prices and is classified within Level 1 of the valuation hierarchy.

(b) Fair Value Measurements on a Nonrecurring Basis

Federated did not hold any assets or liabilities measured at fair value on a nonrecurring basis at June 30, 2015.

(c) Fair Value Measurements of Other Financial Instruments

The fair value of Federated’s debt is estimated by management based upon expected future cash flows utilizing a discounted cash flow methodology under the income approach. The fair value of the liability is estimated using observable market data (Level 2) in estimating inputs including the discount rate. Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.