Fair Value Measurements
|12 Months Ended|
Dec. 31, 2017
|Fair Value Measurements|
|Fair Value Measurements||
10. Fair Value Measurements
The Company follows ASC 825-10, Financial Instruments, which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.
Financial assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Fair Value on a Recurring Basis:
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value in the condensed consolidated balance sheets as of December 31, 2017 and 2016, based on the three-tier fair value hierarchy.
Level I assets and liabilities include money-market funds not insured by the FDIC, deferred compensation liability and the revolving credit facility. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level 1 and are included in cash and cash equivalents in the consolidated balance sheets. The fair value of the deferred compensation liability is based upon the daily quoted market prices for net asset value on the various funds selected by participants. The outstanding balance on the revolving credit facility approximated fair value as the revolving credit facility bore interest at variable rates and we believe our credit risk quality was consistent with when the debt originated.
Level II liabilities consist of Convertible Notes and Term Notes in which the Company uses observable market prices to determine the fair value. The outstanding value of our Term Notes approximated fair value as the Term Notes bore interest at variable rates and we believe our credit risk quality was consistent with when the debt originated through July 18, 2017, at which time the Second Amended and Restated Credit Facility replaced the Term Notes with the revolving credit facility.
Level III liabilities consist of the estimated fair value of contingent consideration as well as the deferred compensation asset. The fair market value of the deferred compensation asset is based upon the cash surrender value of the life insurance premiums.
The fair value of the contingent consideration liabilities related to the FinaConnect and Wheelhouse acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level III fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level III measurement not supported by market activity included our assessments of expected future cash flows related to our acquisitions of FinaConnect and Wheelhouse during the subsequent periods from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.
The Company utilized a discounted cash flow method with expected future performance of FinaConnect and Wheelhouse, and their ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair values of their respective contingent consideration. The Company will continue to reassess the fair value of the contingent consideration for each acquisition at each reporting date until settlement. Changes to the estimated fair values of the contingent consideration will be recognized in earnings of the Company and included in general and administration on the consolidated statements of operations.
The table below presents a reconciliation of contingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to December 31, 2017:
The table below presents a reconciliation of the assets to fund deferred compensation liability of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to December 31, 2017:
The asset value was increased due to funding of the plan as well as immaterial gains on the underlying investment vehicles, which resulted in an asset value of $5,185 as of December 31, 2017, which was included in other non-current assets on the condensed consolidated balance sheets.
The Company assesses categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the year.
On December 15, 2014, the Company issued $172,500 of Convertible Notes. As of December 31, 2017 and 2016, the carrying value of the 2019 Convertible Notes equaled $158,990 and $152,575, respectively, and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of December 31, 2017 and 2016, the fair value of the Convertible Notes was $180,180 and $164,824, respectively. The Company considers the Convertible Notes to be a Level II liability as of December 31, 2017 and 2016, and uses a market approach to calculate the fair value of the Convertible Notes. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on or near December 31, 2017 (see “Note 12 – Debt”).
As of December 31, 2017 and 2016, there was $0 and $142,000, respectively, of Term Notes outstanding. The July 18, 2017 amendment to the Prior Credit Facility replaced the Term Notes and related excess cash flow payment obligations with a revolving line of credit. As of December 31, 2016, the outstanding value of our Term Notes approximated fair value as the Term Notes bore interest at variable rates and we believed our credit risk quality was consistent with when the debt originated. As of December 31, 2016, the carrying value of the Term Notes equaled $138,335, and represents the aggregate principal amount outstanding less the unamortized debt issuance costs. The Company considered the Term Notes to be a Level II liability as of December 31, 2016 (see “Note 12 – Debt”).
As of December 31, 2017 and 2016, there was $81,168 and $0, respectively, outstanding on the revolving credit facility under the Second Amended and Restated Credit Agreement. As of December 31, 2017 and 2016, the outstanding balance on our revolving credit facility approximated fair value as the revolving credit facility bore interest at variable rates and we believed our credit risk quality was consistent with when the debt originated. The Company considered the revolving credit facility to be a Level I liability as of December 31, 2017 and 2016 (see “Note 12 – Debt”).
We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 2017 based upon the short-term nature of the assets and liabilities.
The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef