TripAdvisor 2013 Annual Report Download - page 87

Fair Value Measurements
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities
that are recognized or disclosed at fair value in the financial statements on a recurring basis. We measure assets
and liabilities at fair value based on the expected exit price, which is the amount that would be received on the
sale of an asset or amount paid to transfer a liability, as the case may be, in an orderly transaction between
market participants in the principal or most advantageous market in which we would transact. As such, fair value
may be based on assumptions that market participants would use in pricing an asset or liability at the
measurement date. The authoritative guidance on fair value measurements establishes a consistent framework for
measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are
assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1—Valuations are based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations are based on observable inputs other than quoted prices included in Level 1, such
as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated
by observable market data.
Level 3—Valuations are based on unobservable inputs reflecting our own assumptions, consistent with
reasonably available assumptions made by other market participants. These valuations require significant
judgment.
Derivative Financial Instruments
Our goal in managing our foreign exchange risk is to reduce, to the extent practicable, our potential
exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. We
account for our derivative instruments as either assets or liabilities and carry them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are
designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported
as a component of accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into
income in the same period or periods during which the hedged transaction affects earnings. The ineffective
portion of the gain or loss on the derivative instrument, if any, is recognized in current income. To receive hedge
accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash
flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded
from the assessment of hedge effectiveness and are recognized in income. For derivative instruments that hedge
the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges,
both the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item
attributable to the hedged risk are recognized in earnings in the current period. The net gain or loss on the
effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency
translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign
currency translation adjustment. For forward exchange contracts designated as net investment hedges, we
exclude changes in fair value relating to changes in the forward carrying component from its definition of
effectiveness. Accordingly, any gains or losses related to this component are recognized in current income. We
have not entered into any cash flow, fair value or net investment hedges to date as of December 31, 2013.
Derivatives that do not qualify for hedge accounting must be adjusted to fair value through current income.
In certain circumstances, we enter into foreign currency forward exchange contracts (“forward contracts”) to
reduce the effects of fluctuating foreign currency exchange rates on our cash flows denominated in foreign
currencies. Our derivative instruments or forward contracts that were entered into and are not designated as
hedges as of December 31, 2013 are disclosed below in “Note 5—Financial Instruments” in the notes to the
consolidated and combined financial statements. Monetary assets and liabilities denominated in a currency other
than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date
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