Note 16. Fair value measurements

Our financial assets and liabilities are summarized below as of March 31, 2014 and December 31, 2013 with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, accounts receivable and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.


	Carrying Value			Fair Value			Quoted Prices (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
March 31, 2014
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		$	2,935		$	2,935		$	2,366		$	569		$	—
States, municipalities and political subdivisions			2,185			2,185			—			2,185			—
Foreign governments			12,337			12,337			7,344			4,993			—
Corporate bonds			10,114			10,128			—			9,139			989
Mortgage-backed securities			1,987			1,987			—			1,987			—
Investments in equity securities			118,486			118,486			118,418			61			7
Investment in Heinz Holding Preferred Stock			7,710			8,296			—			—			8,296
Other investments			19,143			19,143			—			—			19,143
Loans and finance receivables			12,464			11,561			—			62			11,499
Derivative contract assets ⁽¹⁾			93			93			4			33			56
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾			160			160			—			117			43
Finance and financial products:
Equity index put options			4,800			4,800			—			—			4,800
Credit default			275			275			—			—			275
Notes payable and other borrowings:
Insurance and other			12,448			12,842			—			12,842			—
Railroad, utilities and energy			47,751			52,281			—			52,281			—
Finance and financial products			13,024			13,554			—			12,920			634

December 31, 2013
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		$	2,658		$	2,658		$	2,184		$	473		$	1
States, municipalities and political subdivisions			2,345			2,345			—			2,345			—
Foreign governments			11,073			11,073			7,467			3,606			—
Corporate bonds			11,237			11,254			—			10,187			1,067
Mortgage-backed securities			2,040			2,040			—			2,040			—
Investments in equity securities			117,505			117,505			117,438			60			7
Investment in Heinz Holding Preferred Stock			7,710			7,971			—			—			7,971
Other investments			17,951			17,951			—			—			17,951
Loans and finance receivables			12,826			12,002			—			454			11,548
Derivative contract assets ⁽¹⁾			87			87			3			15			69
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾			208			208			1			198			9
Finance and financial products:
Equity index put options			4,667			4,667			—			—			4,667
Credit default			648			648			—			—			648
Notes payable and other borrowings:
Insurance and other			12,440			12,655			—			12,655			—
Railroad, utilities and energy			46,655			49,879			—			49,879			—
Finance and financial products			13,129			13,505			—			12,846			659

⁽¹⁾

Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities.

The fair values of substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the fair values presented are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative market assumptions and/or estimation methodologies may have a material effect on the estimated fair value. The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.

Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.

Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and we may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.

Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the three months ending March 31, 2014 and 2013 follow (in millions).


	Investments in fixed maturity securities			Investments in equity securities and other investments		Net derivative contract liabilities
Three months ending March 31, 2014
Balance at December 31, 2013	$	372		$	17,958	$	(5,255	)
Gains (losses) included in:
Earnings		—			—		222
Other comprehensive income		—			1,192		3
Regulatory assets and liabilities		—			—		2
Dispositions and settlements		(1	)		—		—
Transfers into (out of) Level 3		(56	)		—		(35	)

Balance at March 31, 2014	$	315		$	19,150	$	(5,063	)


Three months ending March 31, 2013
Balance at December 31, 2012	$	652		$	15,785	$	(7,847	)
Gains (losses) included in:
Earnings		—			520		1,235
Other comprehensive income		(2	)		399		(3	)
Regulatory assets and liabilities		—			—		1
Dispositions and settlements		(1	)		—		(27	)
Transfers into (out of) Level 3		—			—		—

Balance at March 31, 2013	$	649		$	16,704	$	(6,641	)

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are primarily related to changes in the values of derivative contracts and settlement transactions. Gains and losses included in other comprehensive income are included as components of the net change in unrealized appreciation of investments and the reclassification of investment appreciation in earnings, as appropriate in the Consolidated Statements of Comprehensive Income.

Quantitative information as of March 31, 2014, with respect to assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).


	Fair value		Principal valuation techniques	Unobservable Inputs	Weighted Average
Other investments:
Preferred stocks	$	12,297	Discounted cash flow	Expected duration	6 years

				Discount for transferability restrictions and subordination	97 basis points

Common stock warrants		6,846	Warrant pricing model	Discount for transferability and hedging restrictions	8%
Net derivative liabilities:
Equity index put options		4,800	Option pricing model	Volatility	20%

Credit default-states/municipalities		275	Discounted cash flow	Credit spreads	48 basis points

Other investments currently consist of investments that were acquired in a few relatively large private placement transactions and include preferred stocks and common stock warrants. These investments are subject to contractual restrictions on transferability and/or provisions that prevent us from economically hedging our investments. In applying discounted estimated cash flow techniques in valuing the perpetual preferred stocks, we made assumptions regarding the expected durations of the investments, as the issuers may have the right to redeem or convert these investments. We also made estimates regarding the impact of subordination, as the preferred stocks have a lower priority in liquidation than debt instruments of the issuers, which affected the discount rates used. In valuing the common stock warrants, we used a warrant valuation model. While most of the inputs to the model are observable, we are subject to the aforementioned contractual restrictions. We have applied discounts with respect to the contractual restrictions. Increases or decreases to these inputs would result in decreases or increases to the fair values of the investments.

Our equity index put option and credit default contracts are not exchange traded and certain contract terms are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and many contracts have long durations, and therefore are illiquid. For these and other reasons, we classified these contracts as Level 3. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.

We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include current index price, contract duration, dividend and interest rate inputs (including a Berkshire non-performance input) which are observable. However, we believe that the valuation of long-duration options using any model is inherently subjective, given the lack of observable transactions and prices, and acceptable values may be subject to wide ranges. Expected volatility inputs represent our expectations after considering the remaining duration of each contract and that the contracts will remain outstanding until the expiration dates without offsetting transactions occurring in the interim. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.