(6) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.
Liberty’s assets and liabilities measured at fair value are as follows:
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December 31, 2020 |
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December 31, 2019 |
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Quoted prices |
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Significant other |
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Quoted prices |
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Significant other |
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in active markets |
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observable |
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in active markets |
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observable |
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for identical assets |
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inputs |
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for identical assets |
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inputs |
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Description |
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Total |
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(Level 1) |
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(Level 2) |
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Total |
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(Level 1) |
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(Level 2) |
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amounts in millions |
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Cash equivalents |
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$ |
2,586 |
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2,586 |
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— |
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992 |
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992 |
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— |
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Debt and equity securities |
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$ |
266 |
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181 |
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85 |
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353 |
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242 |
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111 |
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Financial instrument assets |
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$ |
424 |
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84 |
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340 |
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532 |
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63 |
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469 |
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Debt |
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$ |
4,545 |
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— |
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4,545 |
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3,678 |
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— |
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3,678 |
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Financial instrument liabilities |
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$ |
106 |
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— |
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106 |
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53 |
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— |
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53 |
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The majority of Liberty’s Level 2 financial instruments are debt related instruments and derivative instruments. These assets and liabilities are not always traded publicly or not considered to be traded on “active markets,” as defined in GAAP. The fair values for such instruments are derived from a typical model using observable market data as the significant inputs or a trading price of a similar asset or liability is utilized. The fair value of debt related instruments are based on quoted market prices but not considered to be traded on “active markets,” as defined by GAAP. Accordingly, those debt and equity securities, financial instruments and debt or debt related instruments are reported in the foregoing
table as Level 2 fair value. Debt and equity securities and financial instrument assets included in the table above are included in the Other assets line item in the consolidated balance sheets.
Realized and Unrealized Gains (Losses) on Financial Instruments
Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following (amounts in millions):
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Years ended December 31, |
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2020 |
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2019 |
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2018 |
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Debt and equity securities |
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$ |
(74) |
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110 |
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2 |
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Debt measured at fair value (a) |
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(114) |
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(584) |
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130 |
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Change in fair value of bond hedges (b) |
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(127) |
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215 |
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(94) |
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Other derivatives |
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(87) |
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(56) |
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2 |
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$ |
(402) |
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(315) |
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40 |
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(a) |
The Company elected to account for its exchangeable senior debentures and cash convertible notes using the fair value option. Changes in the fair value of the exchangeable senior debentures and cash convertible notes recognized in the consolidated statements of operations are primarily due to market factors primarily driven by changes in the fair value of the underlying shares into which the debt is exchangeable. The Company isolates the portion of the unrealized gain (loss) attributable to changes in the instrument specific credit risk and recognizes such amount in other comprehensive earnings (loss). The change in the fair value of the exchangeable senior debentures and cash convertible notes attributable to changes in the instrument specific credit risk was a gain of $148 million, loss of $16 million and gain of $41 million for the years ended December 31, 2020, 2019 and 2018, respectively, and the cumulative change was a gain of $175 million as of December 31, 2020.
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(b) |
Contemporaneously with the issuance of the Convertible Notes, Liberty entered into privately negotiated cash convertible note hedges, which are expected to offset potential cash payments Liberty would be required to make in excess of the principal amount of the convertible notes, upon conversion of the notes. The bond hedges are marked to market based on the trading price of underlying Series A Liberty SiriusXM, Liberty Braves and Liberty Formula One securities and other observable market data as the significant inputs (Level 2). See note 9 for additional discussion of the convertible notes and the bond hedges.
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