Fair Value Measurements

12 Months Ended

Dec. 31, 2014

Fair Value Measurements

j2 Global complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:



	§	Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

	§	Level 2 – Include other inputs that are directly or indirectly observable in the marketplace.

	§	Level 3 – Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company's money market funds and its marketable equity securities are classified within Level 1. The Company values these Level 1 investments using quoted market prices. The Company's debt investments, time deposits and commercial paper, all of which have counterparties with high credit ratings, are classified within Level 2. The Company values these Level 2 investments based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of the Senior Notes and Convertible Notes (see Note 8 - Long-Term Debt) are determined using recent quoted market prices or dealer quotes for such securities, if available, which are Level 1 inputs. If such information is unavailable, the fair value of these securities are determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 2 inputs. If none of the aforementioned information is available, the fair value of these securities are determined using cash-flow models of the scheduled payments and, for the Convertible Notes, discounted at market interest rates for comparable debt without the conversion feature, which are Level 2 inputs. In addition, the Company may pay contingent interest on the Convertible Notes which is accounted for as a derivative with fair value adjustments being recorded to interest expense. This derivative is fair valued using a binomial lattice convertible bond pricing model using historical and implied market information, which are Level 2 inputs. The total carrying value of long-term debt was $593.4 million and $245.7 million, and the corresponding fair value was approximately $711.1 million and $283.3 million, at December 31, 2014 and December 31, 2013, respectively.

The Company classifies its contingent consideration liability in connection with the acquisition of Ookla (see Note 3 - Business Acquisitions) within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. The fair value of the contingent consideration liability was determined using option based approaches. This methodology was utilized because the distribution of payments is not symmetric and amounts are only payable upon certain EBITDA thresholds being reached. Such valuation approach included a Monte-Carlo simulation for the contingency since the financial metric driving the payments is path dependent. Significant increases or decreases in either of the inputs noted above in isolation would result in a significantly lower or higher fair value measurement.

The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):



December 31, 2014	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	212,645	$	—	$	—	$	212,645
Time deposits	—		51,807		—		51,807
Certificates of Deposit	—		65		—		65
Equity securities	36,245		—		—		36,245
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	—		26,844		—		26,844
Debt securities issued by states of the United States and political subdivisions of the states	—		2,093		—		2,093
Corporate debt securities	—		91,467		—		91,467
Total assets measured at fair value	$	248,890	$	172,276	$	—	$	421,166

Liabilities:
Contingent consideration	$	—	$	—	$	15,000	$	15,000
Contingent interest derivative	—		742		—		742
Total liabilities measured at fair value	$	—	$	742	$	15,000	$	15,742

December 31, 2013	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	101,231	$	—	$	—	$	101,231
Time deposits	22,773		—		—		22,773
Certificates of Deposit	14,403		—		—		14,403
Equity securities	30,047		—		—		30,047
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	23,702		—		—		23,702
Debt securities issued by states of the United States and political subdivisions of the states	3,296		—		—		3,296
Corporate debt securities	66,692		—		—		66,692
Total assets measured at fair value	$	262,144	$	—	$	—	$	262,144

At the end of each reporting period, management reviews the inputs to measure the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. On September 30, 2014, management reevaluated the inputs of its Level 1 assets used in determining fair value and transferred $206.9 million of financial instruments from Level 1 to Level 2. The Company determined the fair value of such transfer as of the end of the reporting period.

The following tables presents a reconciliation of the Company’s Level 3 financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):



	Level 3		Affected line item in the Statement of Income
Balance as of December 31, 2013	$	—
Contingent consideration	15,000		Not Applicable
Total (gains) losses reported in earnings	—
Transfers into or out of Level 3	—
Balance as of December 31, 2014	$	15,000

The following tables presents a reconciliation of the Company’s derivative instruments (in thousands):



	Amount		Affected line item in the Statement of Income
Derivative Liabilities:
Level 2:
Balance as of December 31, 2013	$	—
Contingent interest	372
Total (gains) losses reported in earnings	370		Interest expense (income), net
Balance as of December 31, 2014	$	742

Losses associated with other-than-temporary impairments are recorded as a component of other income (expenses). Gains and losses not associated with other-than-temporary impairments are recorded as a component of other comprehensive income.

- 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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