FAIR VALUE MEASUREMENTS

Valvoline uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value, and related disclosures for instruments measured at fair value. Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. An instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. Valvoline measures assets and liabilities using inputs from the following three levels of fair value hierarchy:

Level 1 - Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 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 for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect Valvoline’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which may include Valvoline’s own financial data, such as internally developed pricing models, DCF methodologies, as well as instruments for which the fair value determination requires significant management judgment.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy as of September 30:



(In millions)	Fair Value Hierarchy	2018		2017
Cash and cash equivalents
Money market funds	Level 1	$	5	$	11
Time deposits	Level 2	22		35
Prepaid expenses and other current assets
Currency derivatives	Level 2	1		1
Other noncurrent assets
Non-qualified trust funds	Level 1	25		30
Total assets at fair value		$	53	$	77

Accrued expenses and other liabilities
Currency derivatives	Level 2	$	1	$	1
Total liabilities at fair value		$	1	$	1

Money market funds

Money market funds trade in an active market and are valued using quoted market prices, which are Level 1 inputs.

Time deposits

Time deposits are balances held with financial institutions that have maturities of three months or less. Time deposits are held at face value plus accrued interest, which approximates fair value, and are categorized as Level 2.

Currency derivatives

The Company uses derivatives not designated as hedging instruments consisting of forward contracts to hedge non-U.S. currency denominated balance sheet exposures and exchange one currency for another for a fixed rate on a future date of twelve months or less. The Company had outstanding contracts with notional values of $74 million and $47 million as of September 30, 2018 and 2017, respectively. The fair value of these outstanding contracts are recorded as assets and liabilities on a gross basis measured using readily observable market inputs to estimate the fair value for similar derivative instruments and are classified as Level 2. Valvoline has entered into master netting arrangements to mitigate losses in the event of nonperformance by counterparties that allow settlement on a net basis, the effect of which was not material to the recorded assets and liabilities as of September 30, 2018 or 2017.

Gains and losses on these instruments are recognized in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income as exchange rates change the fair value of these instruments and upon settlement to offset the remeasurement gain or loss on the related foreign currency-denominated exposures in the same period. Gains and losses recognized related to these instruments were not material in any period presented herein.

Non-qualified trust funds

The Company maintains a non-qualified trust to fund benefit payments for certain of its U.S. non-qualified pension plans. This fund is classified as Level 1 as it primarily consists of highly liquid fixed income U.S. government bonds that trade with sufficient frequency and volume to enable pricing information to be obtained on an ongoing basis. Gains and losses related to these investments are immediately recognized within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income and were not material in any period presented herein.

Long-term debt

The Company’s outstanding fixed rate senior notes consist of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the “2024 Notes”) and 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the “2025 Notes” and together with the 2024 Notes, the “Senior Notes”).

The fair values of the Senior Notes shown in the table below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy. Long-term debt is included in the Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs.



	September 30, 2018							September 30, 2017
(In millions)	Fair value		Carrying value		Unamortized discount and issuance costs			Fair value		Carrying value		Unamortized discount and issuance costs
2024 Notes	$	376	$	370	$	(5	)	$	401	$	370	$	(5	)
2025 Notes	376		395		(5		)	408		394		(6		)
Total	$	752	$	765	$	(10	)	$	809	$	764	$	(11	)

Refer to Note 10 for details of other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value.

Pension plan assets

Pension plan assets are measured at fair value at least annually on September 30. Refer to Note 13 for disclosures regarding the fair value of plan assets, including classification within the fair value hierarchy.