FAIR VALUE MEASUREMENTS

3 Months Ended

Jun. 30, 2014

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs. The following tables present the Company’s financial assets and liabilities measured on a recurring basis using the fair value hierarchy as of June 30, 2014 and March 31, 2014 (in thousands).



	Fair Value Measurements at
	June 30, 2014
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	88,974	$	—		$	—		$	88,974
U.S. government and municipal obligations	40,929		74,565			—			115,494
Commercial paper	—		23,882			—			23,882
Corporate bonds	6,094		—			—			6,094
Derivative financial instruments	—		358			—			358
	$	135,997	$	98,805		$	—		$	234,802
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(4,369	)	$	(4,369	)
Derivative financial instruments	—		(102		)	—			(102		)
	$	—	$	(102	)	$	(4,369	)	$	(4,471	)



	Fair Value Measurements at
	March 31, 2014
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	82,079	$	19,997		$	—		$	102,076
U.S. government and municipal obligations	21,992		69,765			—			91,757
Commercial paper	—		14,581			—			14,581
Corporate bonds	10,380		—			—			10,380
Derivative financial instruments	—		368			—			368
	$	114,451	$	104,711		$	—		$	219,162
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(4,291	)	$	(4,291	)
Contingent contractual non-compliance liability	—		—			(49		)	(49		)
Derivative financial instruments	—		(139		)	—			(139		)
	$	—	$	(139	)	$	(4,340	)	$	(4,479	)

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including marketable securities and derivative financial instruments.

The Company’s Level 1 investments are classified as such because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency.

The Company’s Level 2 investments are classified as such because fair value is being calculated using data from similar but not identical sources, or a discounted cash flow model using the contractual interest rate as compared to the underlying interest yield curve. The Company's derivative financial instruments consist of forward foreign exchange contracts and are classified as Level 2 because the fair values of these derivatives are determined using models based on market observable inputs, including spot prices for foreign currencies and credit derivatives, as well as an interest rate factor. The Company classifies municipal obligations as level 2 because the fair values are determined using quoted prices from markets the Company considers to be inactive. Commercial paper is classified as Level 2 because the Company uses market information from similar but not identical instruments and discounted cash flow models based on interest rate yield curves to determine fair value. For further information on the Company's derivative instruments refer to Note 8.

The Company’s contingent purchase consideration at June 30, 2014 and March 31, 2014 was classified as Level 3 in the fair value hierarchy. The contingent contractual non-compliance liability was also classified as Level 3 at March 31, 2014. As of June 30, 2014, the balance is $0. The contingent contractual obligation has been reduced to zero as NetScout has either settled those liabilities or believes that because of the passage of time that the probability of a future negative settlement is essentially zero. These liabilities are valued by probability weighting expected payment scenarios and then applying a discount based on the present value of the future cash flow streams. They are classified as Level 3 because the probability weighting of future payment scenarios is based on assumptions developed by management.

The following table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended June 30, 2014 (in thousands):



	Contingent Purchase Consideration			Contingent Contractual Non-compliance Liability
Balance at beginning of period	$	(4,291	)	$	(49	)
(Increase) / decrease in fair value and accretion expense (included within research and development expense)	(78		)	49
Balance at end of period	$	(4,369	)	$	—

The Company has updated the probabilities used in the fair value calculation of the contingent liabilities at June 30, 2014 which reduced the liability by $9 thousand and is included as part of earnings for the three months ended June 30, 2014. The fair value of the contingent purchase consideration was estimated by applying a probability based model, which utilizes significant inputs that are unobservable in the market. Key assumptions include a 3.3% discount rate, and a percent weighted-probability of the settlement of the contingent contractual non-compliance liability. Deal related compensation expense, accretion charges and changes related to settlements of contractual non-compliance liabilities for the three months ended June 30, 2014 was $38 thousand and was included as part of earnings.

- 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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