FAIR VALUE MEASUREMENTS

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 at December 31, 2017 and March 31, 2017 (in thousands):



	Fair Value Measurements at
	December 31, 2017
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	331,912	$	—		$	—		$	331,912
U.S. government and municipal obligations	17,010		28,060			—			45,070
Commercial paper	—		5,007			—			5,007
Corporate bonds	1,005		—			—			1,005
Derivative financial instruments	—		153			—			153
	$	349,927	$	33,220		$	—		$	383,147
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(5,426	)	$	(5,426	)
Derivative financial instruments	—		(63		)	—			(63		)
	$	—	$	(63	)	$	(5,426	)	$	(5,489	)



	Fair Value Measurements at
	March 31, 2017
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	304,880	$	—		$	—		$	304,880
U.S. government and municipal obligations	40,628		80,273			—			120,901
Commercial paper	—		29,469			—			29,469
Corporate bonds	7,956		—			—			7,956
Certificate of deposits	—		1,499			—			1,499
Derivative financial instruments	—		110			—			110
	$	353,464	$	111,351		$	—		$	464,815
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(5,449	)	$	(5,449	)
Derivative financial instruments	—		(213		)	—			(213		)
	$	—	$	(213	)	$	(5,449	)	$	(5,662	)

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 calculated using market observable data for similar but not identical instruments, or a discounted cash flow model using the contractual interest rate as compared with the underlying interest yield curve. 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. 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's Level 3 liabilities consist of contingent purchase consideration. The Company's contingent purchase consideration at March 31, 2017 included $660 thousand related to the acquisition of certain assets and liabilities of Avvasi Inc. (Avvasi) in the second quarter of fiscal year 2017. The contingent purchase consideration represented amounts deposited into an escrow account, which was established to cover damages the Company suffers related to any liabilities that the Company did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the merger agreement. The contingent purchase consideration was paid to the seller in August 2017.

The fair value of contingent purchase consideration related to the acquisition of Simena LLC (Simena) in November 2011 for future consideration to be paid to the seller is $4.9 million at December 31, 2017. The contingent purchase consideration is included as a contingent liability within accrued other in the Company's consolidated balance sheet at December 31, 2017 and included as a long-term contingent liability at March 31, 2017.

The Company's contingent purchase consideration also includes $523 thousand related to the acquisition of certain assets and liabilities of Efflux Systems, Inc. (Efflux) in the second quarter of fiscal year 2018. The contingent purchase consideration represents amounts deposited into an escrow account, which was established to cover damages NetScout suffers related to any liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the merger agreement. The contingent purchase consideration is included as accrued other in the Company's consolidated balance sheet at December 31, 2017.

The following table sets forth a reconciliation of changes in the fair value of the Company's Level 3 financial assets and liabilities for the nine months ended December 31, 2017 (in thousands):



	Contingent Purchase Consideration
Balance at March 31, 2017	$	(5,449	)
Additions to Level 3	(523		)
Increase in fair value and accretion expense (included within research and development expense)	(114		)
Payments made	660
Balance at December 31, 2017	$	(5,426	)

Deal-related compensation expense and accretion charges related to the contingent consideration for the nine months ended December 31, 2017 was $114 thousand and was included as part of earnings.