Fair Value Measurements

The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:


•	Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


•	Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.

Financial Instruments Required To Be Carried At Fair Value

Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):



	Fair Value Measurements as of December 31, 2016
	Level 1		Level 2			Level 3			Total
Assets
Foreign currency exchange contracts	$	—	$	1,122		$	—		$	1,122
Liabilities
Foreign currency exchange contracts	—		(1,360		)	—			(1,360		)
Interest rate swap agreements	—		(131		)	—			(131		)
Contingent consideration	—		—			(2,531		)	(2,531		)
Temporary Equity
Redeemable noncontrolling interest	—		—			(45,755		)	(45,755		)



	Fair Value Measurements as of December 31, 2015
	Level 1		Level 2			Level 3			Total
Assets
Foreign currency exchange contracts	$	—	$	718		$	—		$	718
Liabilities
Foreign currency exchange contracts	—		(601		)	—			(601		)
Interest rate swap agreements	—		(352		)	—			(352		)
Contingent consideration	—		—			(10,403		)	(10,403		)
Temporary Equity
Redeemable noncontrolling interest	—		—			(38,624		)	(38,624		)

Derivative Contracts:

The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.

Contingent consideration:

In October 2015, the Company, through its subsidiaries, acquired two debt solution service providers in Europe. According to the terms of the purchase agreements, the sellers could earn additional earn-out payments in cash based on each acquired entities’ respective subsequent operating performance. The Company recorded the acquisition-date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date. During the review of the earn-out analysis in the fourth quarter of 2016, the Company determined that, based on the actual and forecasted operating performance at one of the acquired entities, there would be no future earn-out payment to the sellers, as a result, the entire liability for the contingent consideration of $8.1 million relating to the acquisition of this entity was reversed during the year ended December 31, 2016. As of December 31, 2016, the fair value of the contingent consideration for the other acquired entity was approximately $2.5 million.

The following table provides a roll-forward of the fair value of contingent consideration for the years ended December 31, 2016 and 2015 (in thousands):



	Amount
Balance at December 31, 2014	$	—
Issuance of contingent consideration in connection with acquisition	10,587
Change in fair value of contingent consideration	132
Effect of foreign currency translation	(316		)
Balance at December 31, 2015	10,403
Change in fair value of contingent consideration	(7,602		)
Effect of foreign currency translation	(270		)
Balance at December 31, 2016	$	2,531

Redeemable Noncontrolling Interest:

Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interest subject to these arrangements is included in temporary equity as redeemable noncontrolling interest, and is adjusted to its estimated redemption amount each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amount are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interest at the time it was originally recorded. The recorded value of the redeemable noncontrolling interest cannot go below the floor level. Adjustments to the carrying amount of redeemable noncontrolling interest are charged to retained earnings (or to additional paid-in capital if there are no retained earnings) and do not affect net income or comprehensive income in the consolidated financial statements.

The components of the change in the redeemable noncontrolling interest for the years ended December 31, 2016, 2015 and 2014 are presented in the following table (in thousands):



	Amount
Balance at December 31, 2013	$	26,564
Addition to redeemable noncontrolling interest	4,997
Net loss attributable to redeemable noncontrolling interest	(4,513		)
Adjustment of the redeemable noncontrolling interest to fair value	5,730
Effect of foreign currency translation attributable to redeemable noncontrolling interest	(3,893		)
Balance at December 31, 2014	28,885
Addition to redeemable noncontrolling interest	9,409
Net income attributable to redeemable noncontrolling interest	1,371
Adjustment of the redeemable noncontrolling interest to fair value	2,349
Effect of foreign currency translation attributable to redeemable noncontrolling interest	(3,390		)
Balance at December 31, 2015	38,624
Addition to redeemable noncontrolling interest	826
Redemption of redeemable noncontrolling interest	(3,562		)
Net loss attributable to redeemable noncontrolling interest	(47,831		)
Adjustment of the redeemable noncontrolling interest to fair value	74,194
Effect of foreign currency translation attributable to redeemable noncontrolling interest	(16,496		)
Balance at December 31, 2016	$	45,755

Financial Instruments Not Required To Be Carried At Fair Value

Investment in Receivable Portfolios:

The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios using Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.

In the Company’s current analysis, the estimated blended market participant cost to collect and discount rate is approximately 50.3% and 10.5%, respectively, for U.S. portfolios, approximately 29.9% and 12.0%, respectively, for Europe portfolios and approximately 32.8% and 11.0%, respectively for other geographies. Using this method, the fair value of investment in receivable portfolios was approximately $2,446.6 million and $2,473.8 million as of December 31, 2016 and 2015, respectively, as compared to the carrying value of $2,382.8 million and $2,440.7 million as of December 31, 2016 and 2015, respectively. A 100 basis point fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of U.S., European and other geographies portfolios by approximately $43.8 million, $52.0 million and $6.4 million, respectively, as of December 31, 2016. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount which could be realized if its investment in receivable portfolios were sold.

Deferred Court Costs:

The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs approximates fair value.

Debt:

The majority of Encore and its subsidiaries’ borrowings are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities, Cabot’s senior secured notes and borrowings under its revolving credit facility, and other borrowing under revolving credit facilities at certain of the Company’s other subsidiaries.

Encore’s convertible senior notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible senior notes was $416.5 million and $406.6 million, as of December 31, 2016 and 2015, respectively. The fair value estimate for these convertible senior notes, which incorporates quoted market prices using Level 2 inputs, was approximately $431.7 million and $372.2 million as of December 31, 2016 and 2015, respectively.

Cabot’s senior secured notes are carried at historical cost, adjusted for debt discount and debt premium. The carrying value of Cabot’s senior secured notes was $1,295.7 million and $1,144.2 million, as of December 31, 2016 and 2015, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was $1,312.7 million and $1,403.5 million as of December 31, 2016 and 2015, respectively.

The Company’s preferred equity certificates are legal obligations to the noncontrolling shareholders of certain subsidiaries. They are carried at the face amount, plus any accrued interest. The Company determined that the carrying value of these preferred equity certificates approximated fair value as of December 31, 2016 and 2015.