Fair Value Measurements

9 Months Ended

Sep. 30, 2014


9.	Fair Value Measurements

The following tables detail the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis, as well as non-recurring fair value measurements, at September 30, 2014 and December 31, 2013, respectively (in millions):


	Fair Value at Measurement Date Using
	Balance at September 30, 2014			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Assets
Foreign currency forward sale contracts⁽¹⁾	$	7		$	—	$	7		$	—
Liabilities
Interest rate swap derivatives⁽¹⁾		(2	)		—		(2	)		—

Fair Value Measurements on a Non-recurring Basis:
Impaired hotel properties held and used		18			—		—			18


	Fair Value at Measurement Date Using
	Balance at December 31, 2013			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Assets
Interest rate swap derivatives ⁽¹⁾	$	1		$	—	$	1		$	—
Foreign currency forward sale contracts⁽¹⁾		3			—		3			—
Liabilities
Interest rate swap derivatives ⁽¹⁾		(3	)		—		(3	)		—
Foreign currency forward sale contracts ⁽¹⁾		(6	)		—		(6	)		—

Fair Value Measurements on a Non-recurring Basis:
Impaired hotel properties held and used		9			—		—			9

(1)	These derivative contracts have been designated as hedging instruments.

Derivatives and Hedging

Interest rate swap derivatives designated as cash flow hedges. We have designated our floating-to-fixed interest rate swap derivatives as cash flow hedges. The purpose of the interest rate swaps is to hedge against changes in cash flows (interest payments) attributable to fluctuations in variable rate debt. The derivatives are valued based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the swaps. Changes in the fair value of the derivatives are recorded to other comprehensive income (loss). The hedges were fully effective as of September 30, 2014.

The following table summarizes our interest rate swap derivatives designated as cash flow hedges (in millions):


								Change in Fair Value
								Gain (Loss)				Gain (Loss)
	Total Notional		Maturity	Swapped	All-in-			Quarter ended September 30,				Year-to-date ended September 30,
Transaction Date	Amount		Date	Index	Rate			2014		2013		2014		2013
November 2011 ⁽¹⁾	A$	62	November 2016	Reuters BBSY		6.7	%	$	—	$	—	$	—	$	1
February 2011⁽²⁾	NZ$	79	February 2016	NZ$ Bank Bill		7.15	%	$	—	$	—	$	—	$	1

(1)	The swap was entered into in connection with the A$86 million ($75 million) mortgage loan on the Hilton Melbourne South Wharf.

(2)	The swap was entered into in connection with the NZ$105 million ($82 million) mortgage loan on seven properties in New Zealand.

Foreign Investment Hedging Instruments. We have four foreign currency forward sale contracts that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in foreign operations. These derivatives are considered hedges of the foreign currency exposure of a net investment in a foreign operation and are marked-to-market with changes in fair value recorded to other comprehensive income (loss). The forward sale contracts are valued based on the forward yield curve of the foreign currency to U.S. dollar forward exchange rate on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the derivatives.

The following table summarizes our foreign currency sale contracts (in millions):

Currently Outstanding						Change in Fair Value - All Contracts
	Total
	Transaction		Total			Gain (Loss)					Gain (Loss)
Transaction Date	Amount in Foreign		Transaction Amount		Forward Purchase	Quarter ended September 30,					Year-to-date ended September 30,
Range	Currency		in Dollars		Date Range	2014		2013			2014		2013
July 2011-May 2014	€	100	$	135	August 2015-May 2017	$	12	$	(6	)	$	13	$	(2	)

In addition to the forward sale contracts, we have designated a portion of the foreign currency draws on our credit facility as hedges of net investments in foreign operations. Changes in fair value of the designated credit facility draws are recorded to other comprehensive income (loss).

The following table summarizes the draws on our credit facility that are designated as hedges of net investments in foreign operations (in millions):


					Gain (Loss)					Gain (Loss)
	Balance Outstanding		Balance Outstanding in		Quarter ended September 30,					Year-to-date ended September 30,
Currency	US$		Foreign Currency		2014		2013			2014		2013
Canadian dollars ⁽¹⁾	$	28	C$	31	$	1	$	(1	)	$	1	$	1
Euros	$	97	€	77	$	8	$	(3	)	$	9	$	(3	)

(1)	We have an additional $67 million outstanding on the credit facility in Canadian dollars, which draw has not been designated as a hedging instrument.

Other Liabilities

Fair Value of Other Financial Liabilities. We did not elect the fair value measurement option for any of our other financial liabilities. Valuations for secured debt and our credit facility are determined based on the expected future payments discounted at risk-adjusted rates. Senior Notes and the Exchangeable Senior Debentures are valued based on quoted market prices. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts.

The fair value of certain financial liabilities is shown below (in millions):



	September 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial liabilities
Senior notes (Level 1)	$	2,498	$	2,662	$	2,647	$	2,766
Exchangeable Senior Debentures (Level 1)		382		662		371		603
Credit facility (Level 2)		712		712		946		946
Mortgage debt and other, excluding capital leases (Level 2)		419		426		793		802

Impairment

During the third quarter, an impairment loss of $6 million was triggered for one property due to a change in its expected hold period. The fair value of the property of $18 million is based on the expected cash flows over the remaining life of the property. The loss is included in depreciation expense.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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