NOTE 8. FAIR VALUE
In accordance with ASC 820, fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”); (ii) inputs other than quoted prices included within Level 1 that are observable, including quoted prices for similar assets or liabilities (“Level 2”); and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (“Level 3”). Additionally, in accordance with ASC 815, the Company has included additional disclosures about the Company's derivatives and hedging activities (Level 2).
The tables below present information about financial assets and liabilities carried at fair value on a recurring basis:
| Fair Value Measurements | ||||||||||||
| As of June 30, 2013 | ||||||||||||
| Description | Total | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
| (in millions) | ||||||||||||
| Assets | ||||||||||||
| Available-for-sale securities(a) | $ | 268 | $ | 268 | $ | - | $ | - | ||||
| Derivatives(b) | 3 | - | 3 | - | ||||||||
| Redeemable noncontrolling interests(c) | (519) | - | - | (519) | ||||||||
| Total | $ | (248) | $ | 268 | $ | 3 | $ | (519) | ||||
| As of June 30, 2012 | ||||||||||||
| Description | Total | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
| (in millions) | ||||||||||||
| Assets | ||||||||||||
| Available-for-sale securities(a) | $ | 561 | $ | 351 | $ | 210 | $ | - | ||||
| Derivatives(b) | 17 | - | 17 | - | ||||||||
| Redeemable noncontrolling interests(c) | (641) | - | - | (641) | ||||||||
| Total | $ | (63) | $ | 351 | $ | 227 | $ | (641) | ||||
The Company utilizes the market, income or cost approaches or a combination of these valuation techniques for its Level 3 fair value measures. Inputs to such measures could include observable market data obtained from independent sources such as broker quotes and recent market transactions for similar assets. It is the Company's policy to maximize the use of observable inputs in the measurement of its Level 3 fair value measurements. To the extent observable inputs are not available, the Company utilizes unobservable inputs based upon the assumptions market participants would use in valuing the asset. Examples of utilized unobservable inputs are future cash flows, long term growth rates and applicable discount rates.
Significant unobservable inputs used in the fair value measurement of the Company's redeemable noncontrolling interests are OIBDA growth rates (3%-7% range) and discount rates (8%). Significant increases (decreases) in growth rates and multiples, assuming no change in discount rates, would result in a significantly higher (lower) fair value measurement. Significant decreases (increases) in discount rates, assuming no changes in growth rates and multiples, would result in a significantly higher (lower) fair value measurement.
The fair value of the redeemable noncontrolling interests in the RSNs were primarily determined by (i) applying a multiples-based formula that is intended to approximate fair value for one of the RSNs and (ii) using a discounted OIBDA valuation model, assuming an 8% discount rate for the other RSN. At June 30, 2013, the minority shareholder's put right in one of the RSNs is currently exercisable.
The remaining redeemable noncontrolling interest is currently not exercisable and is not material.
The changes in redeemable noncontrolling interests classified as Level 3 measurements were as follows:
| For the years ended June 30, | ||||||
| 2013 | 2012 | |||||
| (in millions) | ||||||
| Beginning of period | $ | (641) | $ | (242) | ||
| Total gains (losses) included in net income | (93) | (75) | ||||
| Issuance of redeemable noncontrolling interest | - | (273) | ||||
| Other(a) | 215 | (51) | ||||
| End of period | $ | (519) | $ | (641) | ||
Financial Instruments
The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables, payables and cost investments, approximates fair value.
The aggregate fair value of the Company's borrowings at June 30, 2013 was approximately $18,756 million compared with a carrying value of $16,458 million and, at June 30, 2012, was approximately $18,300 million compared with a carrying value of $15,455 million. Fair value is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market (a Level 1 measurement).
Foreign Currency Forward Contracts
The Company uses financial instruments designated as cash flow hedges primarily to hedge certain exposures to foreign currency exchange risks associated with the cost for producing or acquiring films and television programming abroad. The notional amount of foreign exchange forward contracts with foreign currency risk outstanding at June 30, 2013 and 2012 was $578 million and $294 million, respectively. As of June 30, 2013 and 2012, the fair values of the foreign exchange forward contracts were not material and $17 million, respectively, were recorded in the underlying hedged balances. The Company's foreign currency forward contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
The effective changes in fair value of derivatives designated as cash flow hedges for the fiscal year ended June 30, 2013 of $(2) million were recorded in accumulated other comprehensive income with foreign currency translation adjustments. The ineffective changes in fair value of derivatives designated as cash flow hedges were immaterial. Amounts are reclassified from accumulated other comprehensive income when the underlying hedged item is recognized in earnings. During the fiscal year ended June 30, 2013, 2012 and 2011, the Company reclassified gains (losses) of approximately $13 million, $19 million and $(3) million, respectively, from other comprehensive income to net income. The Company expects to reclassify the cumulative change in fair value included in other comprehensive income within the next 24 months. Cash flows from the settlement of foreign exchange forward contracts offset cash flows from the underlying hedged item and are included in operating activities in the consolidated statements of cash flows.
Changes in the fair value of derivatives that are not designated as hedges are recorded in earnings each period. The Company uses these financial instruments as economic hedges for certain exposures to foreign currency exchange risks. The notional amount of foreign exchange forward contracts used as economic hedges with foreign currency risk outstanding at June 30, 2013 was $128 million. As of June 30, 2013, the fair values and the effective changes in fair value of the foreign exchange forward contracts were not material. The realized gains of derivatives designated as economic hedges for the year ended June 30, 2013 of $28 million, was recorded in net income. Derivatives designated as economic hedges in the corresponding prior year periods were immaterial.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company's assets measured at fair value on a nonrecurring basis include investments, long-lived assets, indefinite-lived intangible assets and goodwill. The Company reviews the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually as of June 30 for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to be Level 3 measurements.
During fiscal 2013, the Company recorded a non-cash goodwill impairment charge of $35 million reflecting the pending sale of a business in its Digital Media Group below its carrying value. The business was subsequently sold in fiscal 2013. During the fourth quarter of fiscal 2013, the Company completed its annual impairment review of goodwill and indefinite-lived intangible assets. As a result of the impairment review performed, the Company did not record an impairment charge during the fiscal year ended June 30, 2013.
Concentrations of Credit Risk
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
The Company's receivables did not represent significant concentrations of credit risk at June 30, 2013 or June 30, 2012 due to the wide variety of customers, markets and geographic areas to which the Company's products and services are sold.
The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At June 30, 2013, the Company did not anticipate nonperformance by any of the counterparties.