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 as of September 30, 2013 and December 31, 2012.  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):

 

				Fair Value Measurements at September 30, 2013
		Balance Sheet Location		Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value Measurements
Assets:
Currency forward derivatives/options			(b)	$	—		$	267		$	—		$	267
Springbox revenue sharing			(b)(c)	—			—			512			512
Marketable equity securities			(c)	1,060			—			—			1,060
Total				$	1,060		$	267		$	512		$	1,839
Liabilities:
Revenue earnout			(d)(e)	$	—		$	—		$	855		$	855

 

				Fair Value Measurements at December 31, 2012
		Balance Sheet Location		Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value Measurements
Assets:
Money market funds			(a)	$	4,004		$	—		$	—		$	4,004
Currency forward derivatives/options			(b)	—			445			—			445
Springbox revenue sharing			(b)(c)	—			—			768			768
Marketable equity securities			(c)	337			—			—			337
Total				$	4,341		$	445		$	768		$	5,554
Liabilities:
Revenue earnouts			(d)(e)	$	—		$	—		$	2,857		$	2,857

 

(a) Included in cash and cash equivalents.

(b) Included in other current assets.

(c) Included in other non-current assets.

(d) Included in accrued liabilities.

(e) Included in other non-current liabilities.

 

The fair value of our money market funds and marketable equity securities were determined based upon quoted market prices. Our marketable equity securities relate to a single issuer with an adjusted cost basis of $0.3 million.  The currency forwards/options are derivative instruments whose value is based upon quoted market prices from various market participants.

 

In connection with the sale of Springbox 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):

 

		Revenue Sharing Arrangement
		Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period		$	768		$	—
Additions		—			768
Collections		(200		)	—
Change in fair value recognized in earnings		(56		)	—
Balance at end of period		$	512		$	768

 

In connection with an acquisition of a business, we sometimes include a contingent consideration component of the purchase price based on future revenues. We estimate future revenues based on historical revenues and certain other factors. Each reporting period, we update our estimate of the future revenues of each earnout party and the corresponding earnout levels achieved, 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 value of our Level 3 liabilities (in thousands):

 

		Revenue Earnouts
		Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period		$	2,857		$	1,673
Additions		—			1,855
Payments		(1,201		)	—
Change in fair value recognized in earnings		(801		)	(439		)
Balance at end of period		$	855		$	3,089

 

The fair value of our debt (see Note 6) at September 30, 2013 was approximately $387.3 million based on the average trading price (a Level 1 fair value measurement).