DELPHI 2015 Annual Report Download - page 135

Table of Contents
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consolidated balance sheet, assets and liabilities are considered to be fair valued on a nonrecurring basis. This generally occurs
when accounting guidance requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for
impairment.
Fair Value Measurements
Fair Value Measurements on a Recurring Basis
Derivative instruments—All derivative instruments are required to be reported on the balance sheet at fair value unless
the transactions qualify and are designated as normal purchases or sales. Changes in fair value are reported currently through
earnings unless they meet hedge accounting criteria. Delphi’s derivative exposures are with counterparties with long-term
investment grade credit ratings. Delphi estimates the fair value of its derivative contracts using an income approach based on
valuation techniques to convert future amounts to a single, discounted amount. Estimates of the fair value of foreign currency
and commodity derivative instruments are determined using exchange traded prices and rates. Delphi also considers the risk of
non-performance in the estimation of fair value, and includes an adjustment for non-performance risk in the measure of fair
value of derivative instruments. The non-performance risk adjustment reflects the credit default spread (“CDS”) applied to the
net commodity by counterparty and foreign currency exposures by counterparty. When Delphi is in a net derivative asset
position, the counterparty CDS rates are applied to the net derivative asset position. When Delphi is in a net derivative liability
position, estimates of peer companies’ CDS rates are applied to the net derivative liability position.
In certain instances where market data is not available, Delphi uses management judgment to develop assumptions that
are used to determine fair value. This could include situations of market illiquidity for a particular currency or commodity or
where observable market data may be limited. In those situations, Delphi generally surveys investment banks and/or brokers
and utilizes the surveyed prices and rates in estimating fair value.
As of December 31, 2015 and December 31, 2014, Delphi was in a net derivative liability position of $129 million and
$104 million, respectively, and no significant adjustments were recorded for nonperformance risk based on the application of
peer companies’ CDS rates, evaluation of our own nonperformance risk and because Delphi’s exposures were to counterparties
with investment grade credit ratings.
Contingent consideration—As described in Note 20. Acquisitions and Divestitures, as of December 31, 2015, additional
contingent consideration may be earned as a result of Delphi's acquisition agreements for Control-Tec LLC ("Control-Tec"),
Ottomatika, Inc. ("Ottomatika") and Antaya Technologies Corporation ("Antaya"). The liability for contingent consideration is
re-measured to fair value at each reporting date based on a probability-weighted discounted cash flow analysis using a rate that
reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of
market participant assumptions. The measurement of the liability for contingent consideration is based on significant inputs that
are not observable in the market, and is therefore classified as a Level 3 measurement in accordance with ASU Topic
820-10-35. Examples of utilized unobservable inputs are estimated future earnings of the acquired businesses and applicable
discount rates. The estimate of the liability may fluctuate if there are changes in the forecast of the acquired businesses' future
earnings, as a result of actual earnings levels achieved or in the discount rates used to determine the present value of contingent
future cash flows. As of December 31, 2015, the range of periods in which the earn-out provisions may be achieved is from
2016 through 2018. The Company regularly reviews these assumptions, and makes adjustments to the fair value measurements
as required by facts and circumstances.
As of December 31, 2015 and December 31, 2014, the liability for contingent consideration was $32 million (of which $2
million was classified within other current liabilities and $30 million was classified within other long-term liabilities) and $11
million (which was classified within other long-term liabilities). Any changes in the fair value of this liability will be
recognized within other income (expense), net in the consolidated statement of operations.