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 September 30, 2017 and December 31, 2016, only our residual assets, financing receivables held-for-sale, interest rate swaps and investments, 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.

The tables below illustrate the estimated fair value of our financial instruments on our balance sheet. Unless otherwise discussed below, fair value for our Level 2 and Level 3 measurements is measured using a discounted cash flow model, contractual terms and 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 inputs would result in a lower fair value and a decline would result in a higher fair value. Our convertible notes are valued using a market based approach and observable prices. The financing receivables held for sale, if any, are carried at the lower of cost or fair value.

 

		As of September 30, 2017
		Fair Value				Carrying Value				Level
		(dollars in millions)
Assets
Financing receivables (1)		$	1,044			$	1,062				Level 3
Investments (2)			131				131				Level 3
Securitization residual assets			35				35				Level 3
Liabilities
Credit facilities		$	175			$	175				Level 3
Non-recourse debt (3)			1,103				1,097				Level 3
Convertible notes (3)			156				151				Level 2
Derivative liabilities			1				1				Level 2

 

(1)	There were no financing receivables held-for-sale as of September 30, 2017.

(2)	The amortized cost of our investments as of September 30, 2017 was $131 million.

(3)	Fair value and carrying value excludes unamortized debt issuance costs.

 

		As of December 31, 2016
		Fair Value				Carrying Value				Level
		(dollars in millions)
Assets
Financing receivables (1)		$	1,017			$	1,042				Level 3
Investments (2)			58				58				Level 3
Securitization residual assets			19				19				Level 3
Derivative assets			1				1				Level 2
Liabilities
Credit facilities		$	283			$	283				Level 3
Non-recourse debt (3)			718				709				Level 3

 

(1)	There were no financing receivables held-for-sale as of December 31, 2016.

(2)	The amortized cost of our investments as of December 31, 2016 was $61 million.

(3)	Fair value and carrying value excludes unamortized debt issuance costs.

Investments

We carry our investments in debt securities at fair value on our balance sheet as investments. The following table reconciles the beginning and ending balances for our Level 3 investments that are carried at fair value on a recurring basis:

 

		For the three months ended September 30,								For the nine months ended September 30,
		2017				2016				2017				2016
		(dollars in millions)
Balance, beginning of period		$	126			$	48			$	58			$	29
Purchases of investments			5				2				71				34
Payments on investments			—				—				(1	)			(1	)
Sale of investments			—				—				—				(14	)
Realized gains on investments recorded in earnings			—				—				—				1
Unrealized gains (losses) on investments recorded in OCI (1)			—				—				3				1
Balance, end of period		$	131			$	50			$	131			$	50

 

(1)

As of September 30, 2017 and December 31, 2016, approximately $10 million of investment grade rated debt was held for more than 12 months in an unrealized loss position of approximately $1 million due to interest rate movements. We have the intent and the ability to hold this investment until a recovery of amortized cost. As of September 30, 2017 and December 31, 2016, we held no other securities in an unrealized loss position for over 12 months.

In determining the fair value of our investments, we used a range of interest rate spreads of approximately 1% to 4% based upon comparable transactions as of September 30, 2017 and December 31, 2016.

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 September 30, 2017 and December 31, 2016, 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 other assets or accounts payable, accrued expenses and other line items in the consolidated balance sheets.

Non-recurring Fair Value Measurements

Our financial statements may include non-recurring fair value measurements related to acquisitions and non-monetary transactions, if any. Assets acquired in a business combination are recorded at their fair value. We may 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 primarily of 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:

 

		September 30,  2017				December 31, 2016
		(dollars in millions)
Cash deposits		$	91			$	29
Restricted cash deposits (included in other assets)			68				30
Total cash deposits		$	159			$	59
Amount of cash deposits in excess of amounts federally insured		$	157			$	57