12.	Fair Value Measurements

Overview

Our recurring fair value measurements consist of the valuation of our derivative instruments, all of which are designated as accounting hedges. Non-recurring fair value measurements during 2013 and 2012 consisted of the impairment of two of our hotel properties.

The following table details 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 that we completed during 2013 and 2012 due to the impairment of non-financial assets (in millions):

	Fair Value at Measurement Date Using
				Quoted Prices		Significant
				in Active		Other			Significant
	Balance at			Markets for		Observable			Unobservable
	December 31,			Identical Assets		Inputs			Inputs
	2013			(Level 1)		(Level 2)			(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⁽²⁾		9			—		—			9

	Fair Value at Measurement Date Using
				Quoted Prices		Significant
				in Active		Other			Significant
	Balance at			Markets for		Observable			Unobservable
	December 31,			Identical Assets		Inputs			Inputs
	2012			(Level 1)		(Level 2)			(Level 3)
Fair Value Measurements on a Recurring Basis:
Assets
Interest rate swap derivatives ⁽¹⁾	$	7		$	—	$	7		$	—
Foreign currency forward sale contracts⁽¹⁾		5			—		5			—
Liabilities
Interest rate swap derivatives ⁽¹⁾		(6	)		—		(6	)		—

Fair Value Measurements on a Non-recurring Basis:
Impaired hotel properties held and used ⁽²⁾		34			—		—			34

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

(2)	The fair value measurements are as of the measurement date of the impairment and may not reflect the book value as of December 31, 2013 and December 31, 2012, respectively.

Impairment

During 2013, we recorded an impairment expense of approximately $1 million related to the Courtyard Nashua. The fair value was based on expected sale proceeds of the property, which property was sold on February 12, 2014. During 2012, we recorded an impairment loss of $60 million related to The Westin Mission Hills Resort & Spa. We evaluated the recoverability of the hotel’s carrying value assuming that it was more likely than not that the hotel will be sold before the end of its estimated useful life. Using an estimated undiscounted net cash flow, we concluded that the carrying value of the hotel was not fully recoverable. We estimated the fair value of the hotel using a discounted cash flow analysis, with an estimated stabilized growth rate of 3%, a discounted cash flow term of 10 years, a capitalization rate of 11%, and a discount rate of 12%. The discount and capitalization rates used for the fair value of the property reflect its heightened risk profile and are not indicative of our portfolio as a whole.

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) on the accompanying balance sheets. The hedges were fully effective as of December 31, 2013. The following table summarizes our interest rate swap derivatives designed as cash flow hedges (in millions):


							Change in Fair Value
	Total						Gain (Loss)
Transaction	Notional		Maturity	Swapped			Year ended December 31,
Date	Amount		Date	Index	All-in-Rate		2013		2012
November 2011 ⁽¹⁾	A$	62	November 2016	Reuters BBSY	6.7	%	$	1	$	(2)
February 2011⁽²⁾	NZ$	79	February 2016	NZ$ Bank Bill	7.15	%	$	2	$	—

(1)	The swap was entered into in connection with the A$82 million ($71 million) mortgage loan on the Hilton Melbourne South Wharf.

(2)	The swap was entered into in connection with the NZ$105 million ($87 million) mortgage loan on seven properties in New Zealand.

Interest rate swap derivatives designated as fair value hedges. We have designated our fixed-to-floating interest rate swap derivatives as fair value hedges. We enter into these derivative instruments to hedge changes in the fair value of fixed-rate debt that occur as a result of changes in market interest rates. The derivatives are valued based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk in the calculation of the fair value of the swaps. The changes in the fair value of the derivatives are largely offset by corresponding changes in the fair value of the underlying debt due to changes in the 3-month LIBOR rate, which change is recorded as an adjustment to the carrying amount of the debt. Any difference between the change in the fair value of the swap and the change in the fair value in the underlying debt, which was not significant for the periods presented, is considered the ineffective portion of the hedging relationship and is recognized in net income (loss).

We have three fixed-to-floating interest rate swap agreements for an aggregate notional amount totaling $300 million. We pay a floating interest rate equal to the 3-month LIBOR plus a spread which ranges from 2.7% to 3.2%, as opposed to the fixed rate of 5.531%, on the notional amount of $300 million through March 1, 2014. During 2013 and 2012, the fair value of the swaps decreased $6 million and $4 million, respectively.

Foreign Investment Hedging Instruments. We have five 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) within the equity portion of our balance sheet. The foreign currency 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 forward sale contracts (in millions):

Currently Outstanding

Change in Fair Value - All Contracts

Total

Transaction

Total

Amount in

Transaction

Forward

Gain (Loss)

Transaction

Foreign

Amount

Purchase

Year ended December 31,

Date Range

Currency

in Dollars

Date Range

2013

2012

May 2008-January 2013

€

120

163

May 2014-January 2016

)

In addition to the foreign currency 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. As a result, currency translation adjustments in the designated credit facility draws are recorded to other comprehensive income (loss) within the equity portion of our balance sheet, which adjustments offset a portion of the translation adjustment related to our foreign investments. The following table summarizes the draws on our credit facility that are designated as hedges of net investments in international operations (in millions):

	Balance		Balance		Gain (Loss)
	Outstanding		Outstanding in		Year ended December 31,
Currency	US$		Foreign Currency		2013		2012
Canadian dollars ⁽¹⁾	$	29	C$	31	$	2	$	—
Euros	$	102	€	74	$	(5)	$	(2)

(1)	We have drawn an additional $71 million on the credit facility in Canadian dollars that has not been designated as a hedging instrument.

Other Assets and Liabilities

Fair Value of Other Financial Assets and Liabilities. We did not elect the fair value measurement option for any of our other financial assets or liabilities. The fair values of 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 assets and liabilities and other financial instruments are shown below (in millions):

	As of December 31,
	2013				2012
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial liabilities
Senior notes (Level 1)	$	2,647	$	2,766	$	3,038	$	3,296
Exchangeable Senior Debentures (Level 1)		371		603		531		725
Credit facility (Level 2)		946		946		763		763
Mortgage debt and other, excluding capital leases (Level 2)		793		802		1,078		1,094