FAIR VALUE

Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:


•	Level 1 – Quoted prices for identical instruments in active markets;


•	Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and


•	Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the nine months ended October 1, 2016.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of October 1, 2016 and January 2, 2016:



	Fair Value Measurements as of October 1, 2016
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	297,071	$	297,071	$	—	$	—
Short-term investments:
Corporate debt securities	400		—		400		—
Bank certificates of deposit	2,000		—		2,000		—
United States Treasury securities	2,000		2,000		—		—
Commercial paper	1,000		—		1,000		—
Marketable equity securities	3,103		3,103		—		—
Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust	25,657		25,657		—		—
Foreign currency exchange contracts	349		—		349		—
Total Assets	$	331,580	$	327,831	$	3,749	$	—

As of October 1, 2016, Cadence did not have any financial liabilities requiring a recurring fair value measurement.

	Fair Value Measurements as of January 2, 2016
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	360,691	$	360,691	$	—	$	—
Short-term investments:
Corporate debt securities	34,829		—		34,829		—
Bank certificates of deposit	15,046		—		15,046		—
United States Treasury securities	36,286		36,286		—		—
United States government agency securities	4,152		4,152		—		—
Commercial paper	1,993		—		1,993		—
Marketable equity securities	2,192		2,192		—		—
Trading securities held in NQDC trust	24,905		24,905		—		—
Total Assets	$	480,094	$	428,226	$	51,868	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Foreign currency exchange contracts	362		—		362		—
Total Liabilities	$	362	$	—	$	362	$	—

Level 3 Measurements

During the nine months ended October 1, 2016, Cadence acquired intangible assets of $23.2 million. The fair value of the intangible assets acquired was determined using the income and cost approaches and level 3 inputs. Key assumptions include the amount and timing of expected future cash flows, market conditions, projected costs, assumed profit margins, discount rates and the economy in general. The fair value of these intangible assets was affected most significantly by the projected income associated with the intangible assets and the anticipated timing of the projected income, but was also impacted by the discount rate used to adjust the outcomes to their present values. Cadence used discount rates ranging from 14.0% to 17.5% to value the intangible assets acquired.

As part of its acquisitions during the nine months ended October 1, 2016, Cadence also assumed obligations related to deferred revenue, which were estimated using the cost build-up approach. The cost build-up approach determines fair value using estimates of the costs required to fulfill the contracted obligations plus an assumed profit. Cadence assumed a profit margin of 14.5% when valuing these liabilities, which were then adjusted to present value using a discount rate of 3.5%. The resulting fair value using this approach approximates the amount that Cadence would be required to pay a third party to assume the obligation. The fair value of the deferred revenue obligations assumed was affected most significantly by the estimated costs required to fulfill the obligation, but was also affected by the assumed profit margin and the discount rate.

Cadence believes that its estimates and assumptions related to the fair value of its acquired intangible assets and deferred revenue obligations are reasonable, but significant judgment is involved.