Note 11: Fair Value Measurements

The accounting guidance related to financial assets and financial liabilities (“financial instruments”) establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below.

• Level 1: Consists of financial instruments whose values are based on quoted market prices for identical financial instruments in an active market.
• Level 2: Consists of financial instruments that are valued using models or other valuation methodologies. These models use inputs that are observable either directly or indirectly. Level 2 inputs include (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active, (3) pricing models whose inputs are observable for substantially the full term of the financial instrument and (4) pricing models whose inputs are derived primarily from or corroborated by observable market data through correlation or other means for substantially the full term of the financial instrument.
• Level 3: Consists of financial instruments whose values are determined using pricing models that use significant inputs that are primarily unobservable, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and their classification within the fair value hierarchy. Financial instruments are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. There have been no changes in the classification of any financial instruments within the fair value hierarchy in the periods presented. Our financial instruments that are accounted for at fair value on a recurring basis are presented in the table below.

Contractual Obligation

As a result of the acquisition of the Universal Orlando theme park in 2011, we assumed a contractual obligation that involves an interest held by a third party in the revenue of certain theme parks. The arrangement provides the counterparty with the right to periodic payments associated with current period revenue and, beginning in 2017, the option to require NBCUniversal to purchase the interest for cash in an amount based on a contractually specified formula. The arrangement was recognized at fair value at the time of the acquisition and the fair value has been adjusted periodically since the acquisition with the expectation that the arrangement would be settled in 2017, or shortly thereafter. It has a current carrying value of $1.1 billion and adjustments to fair value, as well as the periodic payments, have been presented in other income (expense), net in our consolidated statement of income.

As a result of the continuing process of obtaining additional information and revising estimates, including in 2015 the estimated impact on the arrangement of the Universal Studios Japan transaction and the planned development of a theme park in China, we no longer expect the settlement of the arrangement in 2017, or shortly thereafter. Accordingly, in the fourth quarter of 2015, we concluded that we should no longer adjust the arrangement to fair value and it is no longer presented in the recurring fair value measurements table. We also concluded that the amounts that are payable based on current period revenue should be presented in other operating and administrative expenses. We believe these changes are preferable because they better reflect the economic substance of the arrangement as a revenue participation similar to those that exist in our film and television agreements. The change in our method of accounting coupled with the change in likelihood of the settlement result in the method being applied prospectively, similar to a change in estimate. See Note 18 for the treatment of this change in method in our segment reporting presentation.

Contingent Consideration

In June 2015, we settled a contingent consideration liability related to the acquisition of NBCUniversal, which was based upon future net tax benefits realized by us that would affect future payments to GE, for a payment of $450 million, which is included as a financing activity in our consolidated statement of cash flows. The settlement resulted in a gain of $240 million, which was recorded to other income (expense), net in our consolidated statement of income.

Nonrecurring Fair Value Measurements

We have assets and liabilities that are required to be recorded at fair value on a nonrecurring basis when certain circumstances occur. In the case of film, television or stage play production costs, when an event or change in circumstance occurs that may indicate that the fair value of a production is less than its unamortized costs, we determine the fair value of the production and record an adjustment for the amount by which the unamortized capitalized costs exceed the production’s fair value. The estimated fair value of a production is based on Level 3 inputs that primarily use an analysis of future expected cash flows. Adjustments to capitalized film and stage play production costs of $42 million, $26 million and $167 million were recorded in 2015, 2014 and 2013, respectively.

Note 11: Fair Value Measurements

The accounting guidance related to financial assets and financial liabilities (“financial instruments”) establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and their classification within the fair value hierarchy.

Our financial instruments that are accounted for at fair value on a recurring basis were not material for all periods presented.

As a result of the acquisition of the Universal Orlando theme park in 2011, we assumed a contractual obligation that involves an interest held by a third party in the revenue of certain theme parks. The arrangement provides the counterparty with the right to periodic payments associated with current period revenue and, beginning in 2017, the option to require us to purchase the interest for cash in an amount based on a contractually specified formula. The arrangement was recognized at fair value at the time of the acquisition and the fair value has been adjusted periodically since the acquisition with the expectation that the arrangement would be settled in 2017, or shortly thereafter. It has a current carrying value of $1.1 billion and adjustments to fair value, as well as the periodic payments, have been presented in other income (expense), net in our consolidated statement of income.

As a result of the continuing process of obtaining additional information and revising estimates, including in 2015 the estimated impact on the arrangement of the Universal Studios Japan transaction and the planned development of a theme park in China, we no longer expect the settlement of the arrangement in 2017, or shortly thereafter. Accordingly, in the fourth quarter of 2015, we concluded that we should no longer adjust the arrangement to fair value and it is no longer presented in the recurring fair value measurements table. We also concluded that the amounts that are payable based on current period revenue should be presented in other operating and administrative expenses. We believe these changes are preferable because they better reflect the economic substance of the arrangement as a revenue participation similar to those that exist in our film and television agreements. The change in our method of accounting coupled with the change in likelihood of the settlement result in the method being applied prospectively, similar to a change in estimate. See Note 17 for the treatment of this change in method in our segment reporting presentation.

Nonrecurring Fair Value Measurements

We have assets that are required to be recorded at fair value on a nonrecurring basis when certain circumstances occur. In the case of film, television or stage play production costs, when an event or change in circumstance occurs that may indicate that the fair value of a production is less than its unamortized costs, we determine the fair value of the production and record an adjustment for the amount by which the unamortized capitalized costs exceed the production’s fair value. The estimated fair value of a production is based on Level 3 inputs that primarily use an analysis of future expected cash flows. Adjustments to capitalized film and stage play production costs of $42 million, $26 million and $167 million were recorded in 2015, 2014 and 2013, respectively.