Fair Value Measurements

Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into the following three broad levels:



Level 1:		Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. (e.g. U.S. Treasuries and money market funds).
Level 2:		Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3:		Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. In addition, the Company considers counterparty credit risk in the assessment of fair value.

The Company’s financial assets and liabilities carried at fair value as of December 31, 2017, are classified below (in millions):



	Level 1		Level 2		Level 3		Total
Assets:
Money market investments related to the deferred compensation plan	$	15	$	—	$	—	$	15
Total Assets at fair value	$	15	$	—	$	—	$	15
Liabilities:
Forward interest rate swap contracts⁽²⁾	$	—	$	18	$	—	$	18
Foreign exchange contracts⁽¹⁾	2		9		—		11
Liabilities related to the deferred compensation plan	15		—		—		15
Total Liabilities at fair value	$	17	$	27	$	—	$	44

The Company’s financial assets and liabilities carried at fair value as of December 31, 2016, are classified below (in millions):



	Level 1		Level 2		Level 3		Total
Assets:
Foreign exchange contracts⁽¹⁾	$	11	$	12	$	—	$	23
Money market investments related to the deferred compensation plan	11		—		—		11
Total Assets at fair value	$	22	$	12	$	—	$	34
Liabilities:
Forward interest rate swap contracts⁽²⁾	$	—	$	27	$	—	$	27
Liabilities related to the deferred compensation plan	11		—		—		11
Total Liabilities at fair value	$	11	$	27	$	—	$	38


(1)	The fair value of foreign exchange contracts is calculated as follows:


a.	Fair value of a collar or put option contract associated with forecasted sales hedges is calculated using bid and ask rates for similar contracts.


b.	Fair value of regular forward contracts associated with forecasted sales hedges is calculated using the period-end exchange rate adjusted for current forward points.

Fair value of hedges against net assets is calculated at the period end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at period end (Level 2). If this is the case, the fair value is calculated at the rate at which the hedge is being settled (Level 1). As a result, transfers from Level 2 to Level 1 of the fair value hierarchy totaled $2 million and $11 million as of December 31, 2017 and 2016, respectively.


(2)	The fair value of forward interest rate swap contracts is based upon a valuation model that uses relevant observable market inputs at the quoted intervals, such as forward yield curves, and may be adjusted for the Company’s own credit risk and the interest rate swap terms. See gross balance reporting in Note 7, Derivative Instruments.