3. Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level hierarchy for classifying financial instruments. The levels of inputs used to determine the fair value of our financial assets and liabilities carried on the balance sheet at fair value and for those which only disclosure of fair value is required are characterized in accordance with the fair value hierarchy established by ASC 820, Fair Value Measurements. Where inputs for a financial asset or liability fall in more than one level in the fair value hierarchy, the financial asset or liability is classified in its entirety based on the lowest level input that is significant to the fair value measurement of that financial asset or liability. We use our judgment and consider factors specific to the financial assets and liabilities in determining the significance of an input to the fair value measurements. As of December 31, 2015 and 2014, only our residual assets (described in Note 5), financing receivables held-for-sale, interest rate swaps and investments available-for-sale, if any, were carried at fair value on the consolidated balance sheets on a recurring basis. The three levels of the fair value hierarchy are described below:

 

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Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date.

 

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Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

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Level 3—Unobservable inputs are used when little or no market data is available.

 

Unless otherwise discussed below, fair value is measured using a discounted cash flow model, contractual terms and Level 3 unobservable inputs which consist of base interest rates and spreads over base rates which are based upon market observation and recent comparable transactions. An increase in these unobservable inputs would result in a lower fair value and a decline would result in a higher fair value. The financing receivables held for sale are carried at the lower of cost or market.

 

		As of December 31, 2015
		Fair Value				Carrying Value				Level
			(dollars in millions)
Assets
Financing receivables		$	806			$	784			Level 3
Financing receivables held-for-sale			61				60			Level 3
Investments available-for-sale (1)			29				29			Level 3
Liabilities
Credit facility		$	247			$	247			Level 3
Asset-backed nonrecourse notes (2)			579				579			Level 3
Other nonrecourse debt			111				101			Level 3
Derivative liabilities			1				1			Level 2

 

(1)	The amortized cost of our investments available-for-sale as of December 31, 2015, was $31 million.

(2)	Carrying value of asset-based nonrecourse notes excludes unamortized debt issuance costs.

 

		As of December 31, 2014
		Fair Value				Carrying Value				Level
			(dollars in millions)
Assets
Financing receivables (1)		$	598			$	553			Level 3
Financing receivables held-for-sale			62				62			Level 3
Investments available-for-sale (2)			27				27			Level 3
Liabilities
Credit facility		$	316			$	316			Level 3
Asset-backed nonrecourse notes (3)			208				208			Level 3
Other nonrecourse debt			127				113			Level 3

 

(1)	An allowance for loan losses of $1.2 million was included in the carrying value of the financing receivables as of December 31, 2014. There was no allowance for loan losses outstanding as of December 31, 2015.

(2)	The amortized cost of our investments available-for-sale as of December 31, 2014, was $27 million.

(3)	Carrying value of asset-backed nonrecourse notes excludes unamortized debt issuance costs.

 

Investments

During 2014 as part of our portfolio management process, we sold an investment designated as held-to-maturity. As a result, we have transferred all of our remaining investments in debt securities to investments available-for-sale at fair value. The following table reconciles the beginning and ending balances for our Level 3 investments that are carried at fair value on a recurring basis following the transfer of our investments to available-for-sale:

 

		For the year ended December 31,
		2015				2014
		(dollars in millions)
Balance, beginning of period		$	27			$	—
Transfers to / purchases of available-for-sale debt securities.			33				83
Payments on available-for-sale debt securities			(8	)			—
Sale of available-for-sale debt securities			(22	)			(60	)
Unrealized gains on debt securities transferred to available for sale			—				5
Gains on debt securities recorded in earnings			1				3
Losses on debt securities recorded in OCI			(2	)			(4	)
Balance, end of Period		$	29			$	27

For investments held at fair value, we used a range of interest rate spreads of 3% to 5% based upon comparable transactions.

Interest Rate Swap Agreements

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. We have determined that the significant inputs, such as interest yield curves and discount rates, used to value our derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of our or our counterparties default. As of December 31, 2015, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The fair values of the derivative financial instruments are included in the accounts payable, accrued expenses and other line item in the consolidated balance sheets.

Non-recurring Fair Value Measurements

Our financial statements may include non-recurring fair value measurements related to acquisitions, if any. Assets acquired in a business combination are recorded at their fair value. We use third party valuation firms to assist us with developing our estimates of fair value.

 

Concentration of Credit Risk

Financing receivables, investments and leases consist of primarily U.S. federal government-backed receivables, investment grade state and local government receivables and receivables from various sustainable infrastructure projects and do not, in our view, represent a significant concentration of credit risk. See Note 6 for an analysis by type of obligor. As described above, we do not believe we have a significant credit exposure to our interest rate swap providers. We had cash deposits that are subject to credit risk as shown below:

 

		December 31,
		2015				2014
		(dollars in millions)
Cash Deposits		$	43			$	58
Restricted Cash Deposits (included in Other assets)			36				12
Total Cash Deposits			79				70
Amount of Cash Deposits in excess of amounts federally insured		$	75			$	66