Fair value measurements

9 Months Ended

Sep. 30, 2012

Fair value measurements

Fair value measurements

6.       Fair value measurements

Financial Accounting Standards Board (“FASB”) literature regarding fair value measurements for financial and non-financial assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

For the nine-month period ended September 30, 2012, there were no impairment charges related to assets that are measured on a non-recurring basis.

The tables below segregate all financial assetsand liabilities that are measured at fair value on a recurring basis and non-financial assets and liabilities that are not subject to recurring fair value measurement into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value onSeptember 30, 2012 and December 31, 2011 (amounts in millions):

			Fair Value Measurements at
			September 30, 2012 Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs		Balance Sheet
	2012		(Level 1)		(Level 2)		(Level 3)		Classification
Recurring fair value measurements:
Money market funds	$	2,774	$	2,774	$	---	$	---	Cash and cash equivalents
U.S. treasuries and government agency securities		417		417		---		---	Short-term investments
Auction rate securities ("ARS")		19		---		---		19	Long-term investments
Foreign exchange contract derivatives		3		---		3		---	Other current assets
Total recurring fair value measurements	$	3,213	$	3,191	$	3	$	19

				Fair Value Measurements at
				December 31, 2011 Using
				Quoted
				Prices in
				Active		Significant
				Markets for		Other		Significant
				Identical		Observable		Unobservable
		December 31,		Assets		Inputs		Inputs		Total Gains		Balance Sheet
		2011		(Level 1)		(Level 2)		(Level 3)		(Losses)		Classification
Recurring fair value measurements:
Money market funds		$	2,869	$	2,869	$	---	$	---			Cash and cash equivalents
U.S. treasuries with original maturities
	of three months or less		2		2		---		---			Cash and cash equivalents
U.S. treasuries and government agency
	securities		344		344		---		---			Short-term investments
ARS			16		---		---		16			Long-term investments
Total recurring fair value measurements		$	3,231	$	3,215	$	---	$	16
Non-recurring fair value measurements:
Goodwill (a)		$	7,111	$	---	$	---	$	7,111	$	(12)
Total non-recurring fair value
	measurements	$	7,111	$	---	$	---	$	7,111	$	(12)

(a) During our annual impairment review of goodwill performed as of December 31, 2011, we identified and recorded an impairment of $12 million in our Distribution segment. The decrease in fair value of the reporting unit was primarily due to the decrease of forecasted revenue from our Distribution segment in view of the industry trend towards digital distribution.

The following tables provide a reconciliation of the beginning and ending balances of our financial assets classified as Level 3 by major categories (amounts in millions) at September 30, 2012 and 2011, respectively:

			Level 3
					Total
					financial
					assets at
					fair
			ARS (a)		value
Balance at January 1, 2012			$	16	$	16
	Total unrealized gains included in
		other comprehensive income		3		3
Balance at September 30, 2012			$	19	$	19

			Level 3
					Total
					financial
					assets at
					fair
			ARS (a)		value
Balance at January 1, 2011			$	23	$	23
	Total unrealized gains included
		in other comprehensive income		2		2
Balance at September 30, 2011			$	25	$	25

• Fair value measurements of the ARS have been estimated using an income-approach model (specifically, discounted cash-flow analysis). When estimating the fair value, we consider both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments and the likelihood of redemption. Significant assumptions used in the analysis include estimates for interest rates, spreads, cash flow timing and amounts, and holding periods of the securities.

Assets measured at fair value using significant unobservable inputs (Level 3) represent less than 1% of our financial assets measured at fair value on a recurring basis at September 30, 2012.

Foreign Currency Forward Contracts Not Designated as Hedges

We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. To mitigate our risk from foreign currency fluctuations we periodically enter into currency derivative contracts, primarily swaps and forward contracts with maturities of twelve months or less, with Vivendi as our principal counterparty. We do not hold or purchase any foreign currency contracts for trading or speculative purposes and we do not designate these forward contracts or swaps as hedging instruments.  Accordingly, we report the fair value of these contracts in our condensed consolidated balance sheet with changes in fair value recorded in our condensed consolidated statement of operations. The fair value of foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.