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Fair Value Measurements
9 Months Ended
Jun. 30, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.
The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 may also include certain investment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that the determination of fair value requires significant judgment or estimation.
Fair value is applied to financial assets such as our marketable securities, which are classified and accounted for as available-for-sale and to financial liabilities for contingent consideration. These items are stated at fair value at each reporting period using the above guidance.
The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
Total carrying
 value at
 
Fair Value Measurements Using
 Inputs Considered as
 
June 30, 2016
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market
$
27,646

 
$
27,646

 
$

 
$

Corporate bonds
34,073

 

 
34,073

 

Commercial paper
23,954

 

 
23,954

 

Certificates of deposit
9,327

 

 
9,327

 

Government municipal bonds
3,104

 

 
3,104

 

Total assets measured at fair value
$
98,104

 
$
27,646

 
$
70,458

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration on acquired business
10,587

 
$

 
$

 
$
10,587

Total liabilities measured at fair value
$
10,587

 
$

 
$

 
$
10,587


 
Total carrying
 value at
 
Fair Value Measurements Using
 Inputs Considered as
 
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market
$
14,436

 
$
14,436

 
$

 
$

Corporate bonds
35,840

 

 
35,840

 

Commercial paper
7,985

 

 
7,985

 

Certificates of deposit
13,768

 

 
13,768

 

Government municipal bonds
3,224

 

 
3,224

 

Total assets measured at fair value
$
75,253

 
$
14,436

 
$
60,817

 
$


Our money market funds, which have been determined to be cash equivalents, are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets. We value our Level 2 assets using
7. FAIR VALUE MEASUREMENTS (CONTINUED)
inputs that are based on market indices of similar assets within an active market. There were no transfers into or out of our Level 2 financial assets during the nine months ended June 30, 2016.
The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities or contingent consideration, currently and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our investment portfolio. We may also incur changes to our contingent consideration liability as discussed below.
In connection with the Bluenica acquisition discussed in Note 2, we are required to make contingent payments over a period of up to four years, subject to Digi Cold Chain Solutions achieving specified revenue thresholds. The fair value of the liability for contingent payments recognized upon acquisition was $10.4 million, and was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in this calculation included the discount rate and various probability factors. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period.
The following table presents a reconciliation of the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended June 30, 2016 (in thousands):
 
Three months ended
June 30, 2016
 
Nine months ended
June 30, 2016
Fair value at beginning of period
$
10,522

 
$

Purchase price contingent consideration

 
10,400

Change in fair value of contingent consideration
65

 
187

Fair value at end of period
$
10,587

 
$
10,587


The change in fair value of contingent consideration for the acquisition of Bluenica is included in general and administrative and interest expense on our Condensed Consolidated Statements of Operations and reflects our estimate of the probability of achieving the relevant targets and is discounted based on our estimated discount rate. We have estimated the fair value of the contingent consideration based on the probability of achieving the specified revenue thresholds at 93.6% to 98.1%. A significant increase (decrease) in our estimates of achieving the relevant targets could materially increase (decrease) the fair value of the contingent consideration liability.