Fair Value Of Assets And Liabilities

12 Months Ended

Dec. 31, 2016

FAIR VALUE OF ASSETS AND LIABILITIES

We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following tables present our assets and liabilities measured at fair value on a recurring basis:



	December 31, 2016
(in millions)	Level 1		Level 3
Cash equivalents and restricted cash	$	34.1	$	—
Big Fish Games deferred payments	—		27.8
Big Fish Games earnout liability	—		67.9
Total	$	34.1	$	95.7



	December 31, 2015
(in millions)	Level 1		Level 3
Cash equivalents and restricted cash	$	30.1	$	—
Big Fish Games deferred payments	—		54.8
Big Fish Games earnout liability	—		345.2
Bluff contingent consideration liability	—		2.3
Total	$	30.1	402.3

The following table presents the change in fair value of our instruments classified within Level 3:



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in millions)	Big Fish Games Deferred Payments			Big Fish Games Earnout Liability			Bluff Contingent Consideration			Total
Balance as of December 31, 2015	$	54.8		$	345.2		$	2.3		$	402.3
Payments	(28.4		)	(281.6		)	—			(310.0		)
Change in fair value	1.4			4.3			(2.3		)	3.4
Balance as of December 31, 2016	$	27.8		$	67.9		$	—		$	95.7

Our cash equivalents and restricted cash, which are held in interest-bearing accounts, qualify for Level 1 in the fair value hierarchy which includes unadjusted quoted market prices in active markets for identical assets.

We estimated the fair values of the Big Fish Games deferred payment and earnout liability as of December 31, 2016 using a discounted cash flows analysis over the period in which the obligations are expected to be settled, and applied a discount rate of 2.3% based on our cost of debt. The cost of debt was based on the observed market yields of our Senior Unsecured Notes, a Level 3 fair value measurement, and was adjusted for the difference in seniority and term of the deferred payments and earnout liability. The increase in fair values of the Big Fish Games deferred payment and earnout liability of $5.7 million in 2016 and $21.7 million in 2015 was recorded as acquisition expense in the accompanying Consolidated Statements of Comprehensive Income. In December 2016 and 2015, we paid our deferred founder’s payment totaling $28.4 million each year. Changes to our cost of debt could lead to different fair value estimates for the deferred payments and earnout liability. A one-percentage point change in the discount rate would increase or decrease the fair values of the Big Fish Games deferred payment and earnout liability by $1.0 million.

Our accrued liability for a contingent consideration recorded in conjunction with the Bluff acquisition was based on significant inputs not observed in the market and represent a Level 3 fair value measurement. The estimate of the contingent consideration liability used an income approach and was based on the probability of achieving enabling legislation which permits Internet poker gaming and the probability-weighted discounted cash flows. During the fourth quarter of 2016, the Company eliminated the contingent liability as the legislation did not pass and thus the contingency period expired in February 2017. Therefore, the Company recorded a $2.3 million reduction of acquisition expenses, net, in the accompanying Consolidated Statements of Comprehensive Income in 2016.

We currently have no other assets or liabilities subject to fair value measurement on a recurring basis. Our $600.0 million par value Senior Unsecured Notes are disclosed at fair value which is based on unadjusted quoted prices for similar liabilities in markets that are not active. The fair value of the Senior Unsecured Notes was $622.5 million at December 31, 2016 and $604.1 million at December 31, 2015.

The following methods and assumptions were used in estimating our fair value disclosures for financial instruments:

Cash equivalents—The carrying amount reported in the balance sheet for cash equivalents approximates our fair value due to the short-term maturity of these instruments.

Long-term debt: Senior Secured Credit Facility—The carrying amounts of the borrowings under the Senior Secured Credit Facility approximate fair value, based upon current interest rates, representing a Level 2 fair value measurement.

We did not measure any assets at fair value on a non-recurring basis for 2015 and 2016.

- 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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