Fair Value Measurements | 9 Months Ended |
Sep. 30, 2014 |
Fair Value Disclosures [Abstract] | ' |
Fair Value Measurements | ' |
8. Fair Value Measurements |
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would transact, and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. |
There are three levels of inputs that may be used to measure fair value: |
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Level 1: | | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. | | | | | | | | | | | | | | | | | | |
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Level 2: | | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. | | | | | | | | | | | | | | | | | | |
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Level 3: | | Pricing inputs that are generally unobservable and may not be corroborated by market data. | | | | | | | | | | | | | | | | | | |
Financial Assets and Liabilities Measured on a Recurring Basis |
The Company’s financial assets and liabilities are measured and recorded at fair value, except for equity method investments, cost method investments, and long-term debt. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. |
The following table summarizes the valuation of the Company’s material financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013: |
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| | September 30, | | | | | | | | | | | | | | | | | |
(IN MILLIONS) | | 2014 | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Investments in equity securities (1) | | $ | 35 | | | $ | 35 | | | — | | | — | | | | | | |
Plan assets for deferred compensation (2) | | | 27 | | | | 27 | | | — | | | — | | | | | | |
Investment in mutual funds (3) | | | 2 | | | | 2 | | | — | | | — | | | | | | |
Interest rate swap arrangements (4) | | | 2 | | | — | | | | 2 | | | — | | | | | | |
Total | | $ | 66 | | | $ | 64 | | | $ | 2 | | | — | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Interest rate swap arrangements (4) | | $ | 7 | | | — | | | $ | 7 | | | — | | | | | | |
Deferred compensation liabilities (5) | | | 27 | | | | 27 | | | — | | | — | | | | | | |
Total | | $ | 34 | | | $ | 27 | | | $ | 7 | | | — | | | | | | |
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| | December 31, | | | | | | | | | | | | | | | | | |
| | 2013 | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Investments in equity securities (1) | | $ | 28 | | | $ | 28 | | | — | | | — | | | | | | |
Plan assets for deferred compensation (2) | | | 25 | | | | 25 | | | — | | | — | | | | | | |
Investment in mutual funds (3) | | | 2 | | | | 2 | | | — | | | — | | | | | | |
Total | | $ | 55 | | | $ | 55 | | | — | | | — | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Interest rate swap arrangements (4) | | $ | 10 | | | — | | | $ | 10 | | | — | | | | | | |
Deferred compensation liabilities (5) | | | 25 | | | | 25 | | | — | | | — | | | | | | |
Total | | $ | 35 | | | $ | 25 | | | $ | 10 | | | — | | | | | | |
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-1 | Investments in equity securities are carried at fair value, which is based on the quoted market price at period end in an active market. These investments are classified as available-for-sale with any unrealized gains or losses resulting from changes in fair value recorded, net of tax, as a component of accumulated other comprehensive income/(loss) until realized. | | | | | | | | | | | | | | | | | | | |
-2 | Plan assets are comprised of investments in mutual funds, which are intended to fund liabilities arising from deferred compensation plans. These investments are carried at fair value, which is based on quoted market prices at period end in active markets. These investments are classified as trading securities with any gains or losses resulting from changes in fair value recorded in other expense, net. | | | | | | | | | | | | | | | | | | | |
-3 | Investments in mutual funds are money-market accounts held with the intention of funding certain specific retirement plans. | | | | | | | | | | | | | | | | | | | |
-4 | Derivative financial instruments include interest rate swap arrangements recorded at fair value based on externally-developed valuation models that use readily observable market parameters and the consideration of counterparty risk. | | | | | | | | | | | | | | | | | | | |
-5 | The Company offers certain employees the opportunity to participate in a deferred compensation plan. A participant’s deferrals are invested in a variety of participant directed stock and bond mutual funds and are classified as trading securities. Changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held exclusive of any transaction costs. A corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. | | | | | | | | | | | | | | | | | | | |
Derivative Financial Instruments |
Nielsen uses interest rate swap derivative instruments principally to manage the risk that changes in interest rates will affect the cash flows of its underlying debt obligations. |
To qualify for hedge accounting, the hedging relationship must meet several conditions with respect to documentation, probability of occurrence, hedge effectiveness and reliability of measurement. Nielsen documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions as well as the hedge effectiveness assessment, both at the hedge inception and on an ongoing basis. Nielsen recognizes all derivatives at fair value either as assets or liabilities in the consolidated balance sheets and changes in the fair values of such instruments are recognized currently in earnings unless specific hedge accounting criteria are met. If specific cash flow hedge accounting criteria are met, Nielsen recognizes the changes in fair value of these instruments in accumulated other comprehensive income/(loss). |
Nielsen manages exposure to possible defaults on derivative financial instruments by monitoring the concentration of risk that Nielsen has with any individual bank and through the use of minimum credit quality standards for all counterparties. Nielsen does not require collateral or other security in relation to derivative financial instruments. A derivative contract entered into between Nielsen or certain of its subsidiaries and a counterparty that was also a lender under Nielsen’s senior secured credit facilities at the time the derivative contract was entered into is guaranteed under the senior secured credit facilities by Nielsen and certain of its subsidiaries (see Note 9 - Long-term Debt and Other Financing Arrangements for more information). Since it is Nielsen’s policy to only enter into derivative contracts with banks of internationally acknowledged standing, Nielsen considers the counterparty risk to be remote. |
It is Nielsen’s policy to have an International Swaps and Derivatives Association (“ISDA”) Master Agreement established with every bank with which it has entered into any derivative contract. Under each of these ISDA Master Agreements, Nielsen agrees to settle only the net amount of the combined market values of all derivative contracts outstanding with any one counterparty should that counterparty default. Certain of the ISDA Master Agreements contain cross-default provisions where if the Company either defaults in payment obligations under its credit facility or if such obligations are accelerated by the lenders, then the Company could also be declared in default on its derivative obligations. At September 30, 2014, Nielsen had no material exposure to potential economic losses due to counterparty credit default risk or cross-default risk on its derivative financial instruments. |
Interest Rate Risk |
Nielsen is exposed to cash flow interest rate risk on the floating-rate U.S. Dollar and Euro Term Loans, and uses floating-to-fixed interest rate swaps to hedge this exposure. For these derivatives, Nielsen reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income/(loss) and reclassifies it into earnings in the same period or periods in which the hedged transaction affects earnings, and within the same income statement line item as the impact of the hedged transaction. |
As of September 30, 2014 the Company had the following outstanding interest rate swaps utilized in the management of its interest rate risk: |
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| Notional Amount | | | Maturity Date | | Currency | | | | | | | | | | | | | |
Interest rate swaps designated as hedging instruments | | | | | | | | | | | | | | | | | | | | |
US Dollar term loan floating-to-fixed rate swaps | $ | 250,000,000 | | | November 2014 | | US Dollar | | | | | | | | | | | | | |
US Dollar term loan floating-to-fixed rate swaps | $ | 250,000,000 | | | September 2015 | | US Dollar | | | | | | | | | | | | | |
US Dollar term loan floating-to-fixed rate swaps | $ | 125,000,000 | | | November 2015 | | US Dollar | | | | | | | | | | | | | |
Euro term loan floating-to-fixed rate swaps | € | 125,000,000 | | | November 2015 | | Euro | | | | | | | | | | | | | |
US Dollar term loan floating-to-fixed rate swaps | $ | 1,575,000,000 | | | May 2016 | | US Dollar | | | | | | | | | | | | | |
US Dollar term loan floating-to-fixed rate swaps | $ | 500,000,000 | | | November 2016 | | US Dollar | | | | | | | | | | | | | |
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Nielsen expects to recognize approximately $11 million of net pre-tax losses from accumulated other comprehensive loss to interest expense in the next 12 months associated with its interest-related derivative financial instruments. |
Fair Values of Derivative Instruments in the Consolidated Balance Sheets |
The fair values of the Company’s derivative instruments as of September 30, 2014 and December 31, 2013 were as follows: |
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| | September 30, 2014 | | | December 31, 2013 | |
| | | | | | Accounts Payable | | | | | | | Accounts Payable | | | | | |
Derivatives Designated as Hedging Instruments | | Other Non- | | | and Other Current | | | Other Non-Current | | | and Other Current | | | Other Non-Current | |
(IN MILLIONS) | | Current Assets | | | Liabilities | | | Liabilities | | | Liabilities | | | Liabilities | |
Interest rate swaps | | $ | 2 | | | $ | 2 | | | $ | 5 | | | $ | 2 | | | $ | 8 | |
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Derivatives in Cash Flow Hedging Relationships |
The pre-tax effect of derivative instruments in cash flow hedging relationships for the three months ended September 30, 2014 and 2013 was as follows: |
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| | | | | | | Amount of Loss | | | |
| | Amount of (Gain)/Loss | | | | | Reclassified from AOCI | | | |
| | Recognized in OCI | | | Location of Loss | | into Income | | | |
| | (Effective Portion) | | | Reclassified from AOCI | | (Effective Portion) | | | |
Derivatives in Cash Flow | | Three Months Ended | | | into Income (Effective | | Three Months Ended | | | |
Hedging Relationships | | September 30, | | | Portion) | | September 30, | | | |
(IN MILLIONS) | | 2014 | | | 2013 | | | | | 2014 | | | 2013 | | | |
Interest rate swaps | | $ | (3 | ) | | $ | 7 | | | Interest expense | | $ | 4 | | | $ | 4 | | | |
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The pre-tax effect of derivative instruments in cash flow hedging relationships for the nine months ended September 30, 2014 and 2013 was as follows: |
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| | | | | | | Amount of Loss | | | |
| | Amount of Loss | | | | | Reclassified from AOCI | | | |
| | Recognized in OCI | | | Location of Loss | | into Income | | | |
| | (Effective Portion) | | | Reclassified from AOCI | | (Effective Portion) | | | |
Derivatives in Cash Flow | | Nine Months Ended | | | into Income (Effective | | Nine Months Ended | | | |
Hedging Relationships | | September 30, | | | Portion) | | September 30, | | | |
(IN MILLIONS) | | 2014 | | | 2013 | | | | | 2014 | | | 2013 | | | |
Interest rate swaps | | $ | 6 | | | $ | 2 | | | Interest expense | | $ | 12 | | | $ | 12 | | | |
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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis |
The Company is required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements. The Company’s equity method investments, cost method investments, and non-financial assets, such as goodwill, intangible assets, and property, plant and equipment, are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized. |
The Company did not measure any material non-financial assets or liabilities at fair value during the nine months ended September 30, 2014. |