Time Magazine 2015 Annual Report Download - page 98

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company primarily applies the market approach for valuing recurring fair value measurements. As of
December 31, 2015 and 2014, assets and liabilities valued using significant unobservable inputs (Level 3) primarily related to
warrants to purchase shares of Class A common stock of CME valued at $179 million and $242 million, respectively. The
Company estimates the fair value of these warrants using a Monte Carlo Simulation model. Significant unobservable inputs
used in the fair value measurement at December 31, 2015 are an expected term of 1.44 years and an expected volatility of
approximately 59%. The other Level 3 assets and liabilities consisted of assets related to equity instruments held by
employees of a former subsidiary of the Company, liabilities for contingent consideration and options to redeem securities.
The following table reconciles the beginning and ending balances of net derivative assets and liabilities classified as
Level 3 and identifies the total gains (losses) the Company recognized during the year ended December 31, 2015 and 2014
on such assets and liabilities that were included in the Consolidated Balance Sheet as of December 31, 2015 and 2014
(millions):
December 31,
2015 2014
Balance as of the beginning of the period ......................................... $ 241 $ 1
Total gains (losses), net:
Included in operating income ................................................ (1) —
Included in other loss, net ................................................... (65) 31
Included in other comprehensive income (loss) .................................. — —
Purchases ................................................................. — 213
Settlements ................................................................ (2) (20)
Issuances .................................................................. — 16
Transfers in and/or out of Level 3 .............................................. — —
Balance as of the end of the period .............................................. $ 173 $ 241
Net gain (loss) for the period included in net income related to assets and liabilities still
held as of the end of the period ............................................... $ (66) $ 32
Other Financial Instruments
The Company’s other financial instruments, including debt, are not required to be carried at fair value. Based on the
interest rates prevailing at December 31, 2015, the fair value of Time Warner’s debt exceeded its carrying value by
approximately $2.490 billion and, based on interest rates prevailing at December 31, 2014, the fair value of Time Warner’s
debt exceeded its carrying value by approximately $4.364 billion. The fair value of Time Warner’s debt was considered a
Level 2 measurement as it was based on observable market inputs such as current interest rates and, where available, actual
sales transactions. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are
not recognized in the consolidated financial statements unless the debt is retired prior to its maturity.
Information as of December 31, 2015 about the Company’s investments in CME that are not required to be carried at
fair value on a recurring basis is as follows (millions):
Carrying Value Fair Value Fair Value Hierarchy
Class A common stock (a) ........................ $ — $ 195 Level 1
Series B convertible redeemable preferred shares ...... — 268 Level 2
Senior secured notes ............................. 268 420 Level 2
(a) Includes 1 share of Series A convertible preferred stock.
84