Fair Value of Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its assets and liabilities utilizing an established three-level hierarchy. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:

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

Level 2.    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(14) Fair Value Measurements (Continued)

Level 3.    Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, which are principally cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities, approximates their recorded values.

Interest rate swap

Effective October 17, 2008, SGI entered into a three-year interest rate swap agreement (the "2008 Hedge") with JPMorgan, which expired on October 17, 2011. Under the 2008 Hedge, which was designated as a cash flow hedge, SGI paid interest on a notional amount of debt at a fixed rate of and received interest on a notional amount of debt at the then prevailing three-month LIBOR rate. The objective of the 2008 Hedge was to eliminate the variability of cash flows attributable to the LIBOR component of interest expense paid on our variable-rate debt.

We believe we matched the critical terms of the hedged variable-rate debt with the 2008 Hedge and believe the 2008 Hedge was highly effective in offsetting changes in the expected cash flows due to fluctuation in the three-month LIBOR-based rate over the term of the forecasted interest payments related to the notional amount of variable-rate debt. The effectiveness of the 2008 Hedge was measured quarterly on a retrospective basis using the cumulative dollar-offset approach in which the cumulative changes in the cash flows of the actual swap were compared to the cumulative changes in the cash flows of the hypothetical swap. As the 2008 Hedge was determined to be effective, it was recorded in other comprehensive income (loss). There was no ineffective portion of the 2008 Hedge recorded in the Consolidated Statements of Operations and Comprehensive Income.

Foreign currency forward contracts

During the year ended December 31, 2012, we entered into foreign currency forward contracts for the sale of Euros for U.S. dollars to hedge a portion of the net investment in one of our subsidiaries that is denominated in Euros. Some of these foreign currency forward contracts settled in 2012. As of December 31, 2012, we had foreign currency forward contracts with an aggregate notional amount of €20,000 and a weighted-average exchange rate of approximately 1.2690 that are scheduled to settle in May 2013. We did not have any derivative instruments as of December 31, 2011.

We have designated the forward contracts as qualified hedges in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Gains and losses from the foreign currency forward contracts are recorded in accumulated other comprehensive (loss) income until the investment is liquidated. During the year ended December 31, 2012, we recorded a gain, net of tax, associated with the forward contracts of approximately $904 in other comprehensive (loss) income on our Consolidated Statements of Operations and Comprehensive Income. The following table provides further information relating to the Company's foreign currency forward contracts at December 31, 2012.

	Location on Balance Sheet	Notional Amount		Weighted average exchange rate	Fair Value Asset (Liability)		Valuation Technique
Foreign currency forward contracts	Accrued Liabilities	$	20,000	1.2690	(1,013	)	Quoted prices in active markets for identical assets or liabilities

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(14) Fair Value Measurements (Continued)

In accordance with ASC 323, Investments - Equity Method and Joint Ventures, we record our share of a derivative instrument held by LNS in which we have a 20% equity investment. Changes in the fair value of the derivative instrument are recorded by LNS within other comprehensive income on LNS' statement of comprehensive income. During the year ended December 31, 2012, we recorded a loss, net of tax, associated with our share of this derivative instrument of $518 in other comprehensive (loss) income on our Consolidated Statements of Operations and Comprehensive Income and in equity investments on our Consolidated Balance Sheet.

Debt

We believe that the fair value of our fixed interest rate debt approximated $986,763 and $855,178 as of December 31, 2012 and 2011, respectively, based on quoted market prices for our securities.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

In accordance with ASC 360, Property, Plant, and Equipment, machinery, equipment and deferred installation costs with a carrying amount of $25,900 were written down to a fair value of $20,100, resulting in an impairment charge of $5,800, which is included in depreciation and amortization expense in our Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2012.

The following are the classes of assets and liabilities measured at fair value on a non-recurring basis at December 31, 2012:

	Level 1	Level 2	Level 3	Total at December 31, 2012	Total Loss	Valuation Technique	Weighted-Average Discount Rate
Property and Equipment	$—	$—	$20,100	$20,100	$(5,800)	Discounted Cash Flow	9%

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the expected net future undiscounted cash flows to be generated by that asset. The amount of impairment of other long-lived assets is measured by the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is determined using a discounted cash flow valuation. Assumptions used in our discounted cash flow valuation include weighted-average cost of capital, long-term projected operating cash flows and long-term projected capital expenses.

There were no other assets or liabilities that were measured at fair value on a non-recurring basis as of December 31, 2012.