Note 14 – Fair Value Measurements

Pursuant to the accounting guidance for fair value measurements, fair value is defined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. When determining the fair value measurements for assets and liabilities, we consider the principal or most advantageous market in which the asset or liability would transact in and we consider assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

Under fair value accounting guidance, there is a three-tier fair value hierarchy to prioritize the inputs used in measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.

The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

 

Level 1:		Observable inputs, such as unadjusted quoted market prices in active markets for the identical asset or liability.
Level 2:		Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3:		Unobservable inputs that reflect the entity’s own assumptions in measuring the asset or liability at fair value.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets and liabilities, such measurements involve developing assumptions based on market observable data, and in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

 

The following table provides the fair value hierarchy for assets and liabilities measured on a recurring basis.

 

		Fair Value at March 31, 2015												Fair Value at June 30, 2014
Description		Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
Assets/(Liabilities)
Available-for-sale securities		$	54,649			$	0			$	0			$	2,472			$	0			$	0
Foreign exchange contracts			0				263,274				0				0				(21,283	)			0
Pension assets			3,407				0				0				6,641				0				0
Contingent consideration			0				0				(38,002	)			0				0				(7,328	)
Net asset/(liability)		$	58,056			$	263,274			$	(38,002	)		$	9,113			$	(21,283	)		$	(7,328	)

 

		Total (Gains) Losses for the Three Months Ended March 31,								Total (Gains) Losses for the Nine Months Ended March 31,
Description of Liability		2015				2014				2015				2014
Contingent Consideration		$	0			$	(13	)		$	866			$	(29	)

The following describes the valuation methodologies we use to measure assets and liabilities accounted for at fair value on a recurring basis:

Available-for-Sale Securities: Available-for-sale securities are classified as Level 1 as the fair value was determined from market quotes obtained from financial institutions in active markets.

Foreign Exchange Contracts: We use foreign exchange contracts to hedge market risks relating to possible adverse changes in foreign currency exchange rates. Our foreign exchange contracts were measured at fair value using Level 2 inputs. Such inputs include foreign currency exchange spot and forward rates for similar transactions in actively quoted markets.

Pension Assets: Our pension assets have been valued using Level 1 inputs as quoted prices in an active market exist for these assets. Refer to Note 17 – Retirement Benefits for more information.

Contingent Consideration: A portion of our contingent consideration is associated with a $30.0 million earn-out related to the acquisition of Redbend. We determined the fair value of the contingent consideration based on our expectations of the achievement of Redbend’s cumulative bookings target for awarded business from January 1, 2015 through December 31, 2016. At March 31, 2015, our preliminary value of the contingent consideration liability related to Redbend is $22.4 million.

A portion of our contingent consideration is associated with an earn-out related to our acquisition of substantially all of the assets of yurbuds. We use a discounted cash flow approach (a form of the income approach) in determining the fair value of the contingent consideration. The principal inputs to the approach include our expectations of yurbuds’ gross profit, through June 30, 2017 and a discount rate that begins with our weighted average cost of capital and adjusts for the risks associated with the underlying yurbuds gross profit outcome, the functional form of the payout and our credit risk associated with making the payment. During the three and nine months ended March 31, 2015, we reassessed our expectations of yurbuds’ gross profit outcome and confirmed our estimate of the $6.2 million contingent consideration liability.

A portion of our contingent consideration is associated with an earn-out related to the IPSG/VFX Acquisition. We determined the fair value of the contingent consideration based on our expectations of IPSG/VFX gross profit related to the sale of certain specified products through June 30, 2017. During the three and nine months ended March 31, 2015, we reassessed our expectations of IPSG/VFS’s gross profit outcome and confirmed our estimate of the $7.7 million contingent consideration liability.

A portion of our contingent consideration is associated with an earn-out related to our acquisition of Duran Audio B/V (“Duran”). We use a probability-weighted discounted cash flow approach (a form of the income approach) in determining the fair value of the contingent consideration. The principal inputs to the approach include our expectations of Duran’s gross profit related to the sale of certain specified products through June 30, 2020 and a discount rate that begins with our weighted average cost of capital and adjusts for the risks associated with the underlying Duran gross profit outcome, the functional form of the payout and our credit risk associated with making the payment. We did not make any revisions to our estimate of the contingent consideration liability during the three months ended March 31, 2015. During the nine months ended March 31, 2015, we reassessed our expectations of Duran’s gross profit outcome and revised our estimate of the contingent consideration liability to increase it to $1.9 million from the previously recorded balance of $0.9 million. This increase of $1.0 million was recorded within SG&A in our Condensed Consolidated Statement of Income for the nine months ended March 31, 2015.

Given the use of significant inputs that are not observable in the market, our contingent consideration is classified within Level 3 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.

The following table provides the carrying value for assets and liabilities measured on a non-recurring basis, all of which are measured under Level 3 of the fair value hierarchy, and the losses recorded during the periods presented.

 

Description of Assets		March 31, 2015				June 30, 2014
Equity method investments		$	2,805			$	3,578
Goodwill			710,599				540,952
Long-lived assets			722,856				691,887
Total		$	1,436,260			$	1,236,417

The following describes the valuation methodologies we use to measure financial and non-financial instruments accounted for at fair value on a non-recurring basis.

Equity Method Investments: Equity method investments are generally valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate. These investments are generally included in Level 3.

Goodwill: Goodwill is evaluated for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. This asset is included in Level 3. Refer to Note 8 – Goodwill and Intangible Assets, Net for more information.

Long-lived Assets: Long-lived assets include Property, plant and equipment, net and intangible assets, and are valued using the best information available, including quoted market prices or market prices for similar assets when available or internal cash flow estimates discounted at an appropriate interest rate or independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates. These assets are generally included in Level 3.