Cars.com Inc. Fair Value Disclosure
Note 7. Fair Value Measurement
The Company measures and records certain assets at fair value in the accompanying consolidated and combined financial statements. U.S. GAAP establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and its own assumptions (unobservable inputs). The hierarchy consists of three levels:
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Level 1— |
Quoted market prices in active markets for identical assets or liabilities; |
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Level 2— |
Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
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Level 3— |
Unobservable inputs developed using its own estimates and assumptions, which reflect those that a market participant would use. |
Financial assets that are carried at fair value on a recurring basis in other current assets and investments and other assets on the Consolidated and Combined Balance Sheets consist of marketable securities held as LTIP investments.
The Company maintains an LTIP. Management has not made any new contributions to the LTIP subsequent to the Separation. The following table presents the LTIP investments carried at fair value as of December 31, 2017 and 2016, by category on the Consolidated and Combined Balance Sheets in accordance with the valuation hierarchy defined above (in thousands):
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Fair value measurement as of December 31, 2017 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Assets: |
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Mutual funds |
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$ |
1,765 |
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$ |
— |
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$ |
— |
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$ |
1,765 |
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Fixed income fund |
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581 |
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Total investments at fair value |
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$ |
2,346 |
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Fair value measurement as of December 31, 2016 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Assets: |
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Mutual funds |
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$ |
2,228 |
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$ |
— |
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$ |
— |
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$ |
2,228 |
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Fixed income fund |
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1,031 |
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Total investments at fair value |
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$ |
3,259 |
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Fair value for mutual funds is measured using Level 1 inputs and quoted market prices at the reporting date multiplied by the quantity held. The fixed income fund investment consists of a commingled fund for which quoted market prices are not available. The fair value of the investment represents the net asset value as provided by the trustee.
Certain assets and liabilities are measured at fair value on a nonrecurring basis, and therefore, not included in the tables above. These assets include goodwill and intangible assets and result as acquisitions occur. The amounts assigned to intangible assets and goodwill as they relate to acquisitions are based on best estimate of the fair value. The Company uses an independent valuation specialist to assist in determining the fair value of the identified intangible assets at acquisition. The fair value of the significant identified intangible assets is generally estimated using a combination of an income approach using the discounted cash flow analysis and market approach using the guideline public company analysis, which represents a Level 3 fair value measurement. The income approach includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. The market approach also uses forecasted revenue and earnings, as well as comparable public company trading values. Net cash flows attributable to the identified intangible assets are discounted to their present value at a rate commensurate with the perceived risk.
As the debt was recently issued in May 2017, the Company’s carrying amount for debt approximated fair value as of December 31, 2017. The fair value of the debt is measured using Level 2 inputs and are based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments.
Fair value of the Company’s financial instruments is determined as follows:
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Description |
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Fair Value Methodology |
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Cash and cash equivalents and |
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The carrying amounts approximate fair value because of the short-term maturity of these assets. |
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Short-term investments |
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Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available. |
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Debt |
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Fair values were based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments. |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.