Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value

Note 19. Fair Value

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 (in millions):

	Level 1		Level 2		Level 3		Total
Assets:
Interest rate swaps	$	—	$	6	$	—	$	6
Liabilities:
Forward contracts	$	—	$	1	$	—	$	1

The forward contracts are over-the-counter contracts that do not trade on a public exchange. The fair values of the contracts are based on inputs such as foreign currency spot rates and forward points that are readily available on public markets, and as such, are classified as Level 2. The Company considered both its credit risk, as well as its counterparties’ credit risk, in determining fair value and no adjustment was made as the risk of default was deemed insignificant based on the short duration of the contracts and the Company’s rate of short-term debt.

The interest rate swaps are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets.

The Company believes the carrying values of its financial instruments related to current assets and current liabilities approximate fair value. The following table presents the carrying amounts and estimated fair values of the Company’s non-current financial instruments (in millions):

		September 30, 2012				December 31, 2011
	Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Restricted cash	1	$	3	$	3	$	2	$	2
VOI notes receivable	3		180		224		93		109
Securitized vacation ownership notes receivable	3		348		443		446		551
Other notes receivable	3		22		22		26		26
Total financial assets		$	553	$	692	$	567	$	688
Liabilities:
Long-term debt	1	$	1,653	$	1,929	$	2,194	$	2,442
Long-term securitized debt	3		299		319		402		412
Total financial liabilities		$	1,952	$	2,248	$	2,596	$	2,854
Off-Balance sheet:
Letters of credit	2	$	—	$	108	$	—	$	171
Surety bonds	2		—		80		—		21
Total off-balance sheet		$	—	$	188	$	—	$	192

As previously discussed, on January 1, 2012, the Company adopted ASU No. 2011-04. As a result, the Company has disclosed on a prospective basis the financial hierarchy that prioritizes inputs to valuation techniques as described in ASC No. 820, Fair Value Measurements and Disclosures.

The carrying value of the Company’s restricted cash approximates its fair value. The Company estimates the fair value of its VOI notes receivable and securitized VOI notes receivable using assumptions related to current securitization market transactions. To gain additional comfort on the value, the amount is then compared to a discounted expected future cash flow model using a discount rate commensurate with the risk of the underlying notes, primarily determined by the credit worthiness of the borrowers based on their FICO scores. The results of these two methods are then evaluated to conclude on the estimated fair value. The fair value of other notes receivable is estimated based on terms of the instrument and current market conditions. These financial instrument assets are recorded in the other assets line item in the Company’s consolidated balance sheet.

The Company estimates the fair value of its publicly traded debt based on the bid prices in the public debt markets. The carrying amount of its floating rate debt is a reasonable basis of fair value due to the variable nature of the interest rates. The Company’s non-public, securitized debt, and fixed rate debt fair value is determined based upon discounted cash flows for the debt rates deemed reasonable for the type of debt, prevailing market conditions and the length to maturity for the debt.

The fair values of the Company’s letters of credit and surety bonds are estimated to be the same as the contract values based on the nature of the fee arrangements with the issuing financial institutions.