3.  Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

·                  Level 1—Quoted prices in active markets for identical assets or liabilities.

·                  Level 2—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—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We have classified our assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

The tables below set forth by level, assets and liabilities that were accounted for at fair value (carrying value equals fair value) as of June 30, 2012 and December 31, 2011.  The carrying value of our accounts receivable and accounts payable approximates the respective fair values due to the short-term nature of these financial instruments. The tables do not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):

(a) Included in cash and cash equivalents.

(b) Included in other non-current assets.

(c) Included in accrued liabilities.

(d) Included in other non-current liabilities.

The fair value of our money market funds and marketable equity securities were determined based upon market prices. The cost basis of our available for sale marketable equity securities is $1.2 million and the unrealized gains of $0.3 million are included in accumulated other comprehensive loss. The currency forwards are derivative instruments whose value is based upon quoted market prices from various market participants.

As permitted in the EyeWonder purchase agreement, we held back $5 million of the purchase price to fund certain transaction costs for a one-year period. To the extent we do not spend all of the $5 million fund on allowable transaction costs within one year of the purchase date (September 1, 2011), we are required to remit the balance to the EyeWonder seller. As of June 30, 2012, we spent the entire fund on transaction costs we believe are allowable and therefore have not recognized any amount as a payable to the EyeWonder seller.

In connection with the sale of Springbox (see Note 10), we are entitled to receive a percentage of the revenues collected by the business for three years after the closing date (June 1, 2012).  We have estimated the future revenues of Springbox based on the historical revenues and certain other factors, discounted to their present value.  The following table provides a reconciliation of changes in the fair values of our Level 3 assets (in thousands):

In connection with an acquisition of a business, we sometimes include a contingent consideration component of the purchase price based on future revenues. Each reporting period, we update our estimate of the future revenues of each earnout party and the corresponding earnout levels acheived, discounted to their present values. The change in fair value is recorded in cost of revenues in the accompanying consolidated statements of operations. The following table provides a reconciliation of changes in the fair values of our Level 3 liabilities (in thousands):

The fair value of our debt (see Note 6) at June 30, 2012 was approximately $453.2 million based on the average trading price (a Level 1 fair value measurement).

As discussed in Note 1, in March 2012 we made a $1.0 million investment for a 17% interest in Adagoo, a private company that is developing a web-based audience and measurement platform for publishers. Considering Adagoo’s early stage of development and the uncertainty of its future cash flows, we do not believe it is practicable to estimate its fair value on a periodic basis.