FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2019

Financial assets and liabilities carried at fair value at September 30, 2019 are classified in the categories described in the table below (in millions):



	Level 1		Level 2		Level 3		Total
ASSETS:
Cash and restricted cash equivalents:
Money market funds	$	5,885	$	—	$	—	$	5,885
Corporate debt securities	—		7		—		7
Time deposits and certificates of deposit	6		—		—		6
Short-term investments in marketable securities:
International government securities	—		108		—		108
U.S. government securities	—		153		—		153
Corporate debt securities	—		703		—		703
Time deposits and certificates of deposit	9		—		—		9
Long-term investments in marketable securities:
International government securities	—		28		—		28
U.S. government securities	—		178		—		178
Corporate debt securities	—		1,166		—		1,166
Trip.com Group convertible debt securities	—		741		—		741
Marketable equity securities	1,455		—		—		1,455
Other long-term investments	—		—		250		250
Total assets at fair value	$	7,355	$	3,084	$	250	$	10,689

LIABILITIES:
Foreign currency exchange derivatives	$	—	$	2	$	—	$	2

Financial assets carried at fair value at December 31, 2018 are classified in the categories described in the table below (in millions):



	Level 1		Level 2		Level 3		Total
Cash and restricted cash equivalents:
Money market funds	$	2,061	$	—	$	—	$	2,061
International government securities	—		21		—		21
U.S. government securities	—		1		—		1
Commercial paper	—		2		—		2
Time deposits and certificates of deposit	25		—		—		25
Short-term investments in marketable securities:
International government securities	—		314		—		314
U.S. government securities	—		656		—		656
Corporate debt securities	—		2,681		—		2,681
U.S. government agency securities	—		1		—		1
Commercial paper	—		7		—		7
Time deposits and certificates of deposit	1		—		—		1
Long-term investments in marketable securities:
International government securities	—		800		—		800
U.S. government securities	—		293		—		293
Corporate debt securities	—		4,401		—		4,401
Trip.com Group convertible debt securities	—		1,177		—		1,177
Marketable equity securities	1,036		—		—		1,036
Other long-term investment	—		—		200		200
Derivatives:
Foreign currency exchange derivatives	—		4		—		4
Total assets at fair value	$	3,123	$	10,358	$	200	$	13,681

The table above does not include contingent consideration related to a business acquisition (see Note 13).

There are three levels of inputs to measure fair value. The definition of each input is described below:


Level 1:	Quoted prices in active markets that are accessible by the Company at the measurement date for

identical assets and liabilities.


Level 2:	Inputs that are observable, either directly or indirectly. Such prices may be based upon quoted

prices for identical or comparable securities in active markets or inputs not quoted on active

markets, but corroborated by market data.


Level 3:	Unobservable inputs are used when little or no market data is available.

Investments in corporate debt securities, U.S. and international government securities, commercial paper, government agency securities and certain convertible debt securities are considered "Level 2" valuations because the Company has access to quoted prices, but does not have visibility into the volume and frequency of trading for all of these investments. For the Company's investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace. See Note 5 for information related to the carrying value of the Company's investments in marketable securities.

Other long-term investments reported at an aggregate fair value of $250 million and $200 million at September 30, 2019 and December 31, 2018, respectively, were considered a "Level 3" valuation and measured using management's estimates that incorporate current market participant expectations of future cash flows considered alongside recent financing transactions of the investee and other relevant information. See Note 5 for further information related to these investments.

The Company's derivative instruments are valued using pricing models. Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and foreign currency exchange rates. Derivatives are considered "Level 2" fair value measurements. The Company's derivative instruments are typically short-term in nature.

At September 30, 2019 and December 31, 2018, the Company's cash consisted of bank deposits. Other financial assets and liabilities, including restricted cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred merchant bookings, are carried at cost which approximates their fair value because of the short-term nature of these items. See Note 9 for the estimated fair value of the Company's outstanding Senior Notes and Note 5 for information related to an embedded derivative associated with the $25 million Trip.com Group convertible notes issued in 2016.

In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company mitigates these risks by following established risk management policies and procedures, including the use of derivatives. The Company does not use derivatives for trading or speculative purposes. All derivative instruments are recognized in the Consolidated Balance Sheets at fair value. Gains and losses resulting from changes in the fair value of derivative instruments that are not designated as hedging instruments for accounting purposes are recognized in the Unaudited Consolidated Statements of Operations in the period that the changes occur.

Derivatives Not Designated as Hedging Instruments — The Company is exposed to adverse movements in foreign currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation. The Company enters into average-rate derivative contracts to hedge translation risks from short-term foreign currency exchange rate fluctuations for the Euro, British Pound Sterling and certain other currencies versus the U.S. Dollar. At September 30, 2019 and December 31, 2018, there were no outstanding derivative contracts related to foreign currency translation risks.

The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in foreign currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Derivative assets are included in "Prepaid expenses and other current assets" and derivative liabilities are included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets. Derivatives associated with these transaction risks resulted in foreign currency losses of $29 million and $34 million for the three and nine months ended September 30, 2019, respectively, and foreign currency losses of $8 million and $38 million for the three and nine months ended September 30, 2018, respectively. These mark-to-market adjustments on the derivative contracts, offset by the effect of changes in foreign currency exchange rates on transactions denominated in currencies other than the functional currency, resulted in net losses of

$11 million and $32 million for the three and nine months ended September 30, 2019, respectively, and net losses of $15 million and $32 million for the three and nine months ended September 30, 2018, respectively. The net impacts related to these derivatives are reported in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.

The settlement of derivative contracts not designated as hedging instruments resulted in net cash outflows of $11 million and $36 million for the nine months ended September 30, 2019 and 2018, respectively, which are reported within "Net cash provided by operating activities" in the Unaudited Consolidated Statements of Cash Flows.

- 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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