PHINIA INC.PHIN
PHINIA INC. Fair Value Disclosure
FAIR VALUE MEASUREMENTS
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:
Level 1:Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2:Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC Topic 820:
A.Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
B.Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
C.Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
There were no assets and liabilities measured at fair value on a recurring basis as of December 31, 2023. The following table classifies assets and liabilities measured at fair value on a recurring basis as of December 31, 2022:
| Basis of fair value measurements | |||||||||||||||||||||||||||||
| (in millions) | Balance at December 31, 2022 | Quoted prices in active markets for identical items (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Valuation technique | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 7 | $ | — | $ | 7 | $ | — | A | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Foreign currency contracts | $ | (1) | $ | — | $ | (1) | $ | — | A | ||||||||||||||||||||
The following tables classify the Company’s defined benefit plan assets measured at fair value on a recurring basis:
| Basis of fair value measurements | |||||||||||||||||||||||||||||||||||
| (in millions) | Balance at December 31, 2023 | Quoted prices in active markets for identical items (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Valuation technique | Assets measured at NAV1 | |||||||||||||||||||||||||||||
| Fixed income securities | $ | 414 | $ | 103 | $ | — | $ | — | A | $ | 311 | ||||||||||||||||||||||||
| Equity securities | 147 | 128 | — | 11 | A, C | 8 | |||||||||||||||||||||||||||||
| Cash | 54 | 54 | — | — | A | — | |||||||||||||||||||||||||||||
| Real estate and other | 202 | 5 | — | 64 | A, C | 133 | |||||||||||||||||||||||||||||
| $ | 817 | $ | 290 | $ | — | $ | 75 | $ | 452 | ||||||||||||||||||||||||||
| Basis of fair value measurements | |||||||||||||||||||||||||||||||||||
| (in millions) | Balance at December 31, 2022 | Quoted prices in active markets for identical items (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Valuation technique | Assets measured at NAV1 | |||||||||||||||||||||||||||||
| Fixed income securities | $ | 365 | $ | 30 | $ | — | $ | — | A | $ | 335 | ||||||||||||||||||||||||
| Equity securities | 68 | 55 | — | — | A | 13 | |||||||||||||||||||||||||||||
| Cash | 137 | 137 | — | — | A | — | |||||||||||||||||||||||||||||
| Real estate and other | 218 | — | — | 46 | C | 172 | |||||||||||||||||||||||||||||
| $ | 788 | $ | 222 | $ | — | $ | 46 | $ | 520 | ||||||||||||||||||||||||||
_____________________________
1 Certain assets that are measured at fair value using the Net Asset Value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. These amounts represent investments in commingled and managed funds that have underlying assets in fixed income securities, equity securities, and other assets.
The reconciliation of Level 3 defined benefit plans assets was as follows:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||||||||
| (in millions) | Real estate and other | Equity | |||||||||
| Balance, January 1, 2022 | $ | 127 | $ | — | |||||||
| Purchases, sales and settlements | (93) | — | |||||||||
| Realized gains | 3 | — | |||||||||
| Unrealized gains on assets still held at the reporting date | 25 | — | |||||||||
| Translation adjustment | (16) | — | |||||||||
| Balance, December 31, 2022 | $ | 46 | $ | — | |||||||
| Purchases, sales and settlements | 19 | 10 | |||||||||
| Unrealized losses on assets still held at the reporting date | (4) | — | |||||||||
| Translation adjustment | 3 | 1 | |||||||||
| Balance, December 31, 2023 | $ | 64 | $ | 11 | |||||||
The fair value of real estate properties is estimated using an appraisal provided by the administrator of the property or infrastructure investment. The fair value of equity securities is estimated using the mark-to-model method. Management believes these are appropriate methodologies to obtain the fair value of these assets.
Refer to Note 17, “Retirement Benefit Plans,” to the Consolidated Financial Statements for more detail surrounding the defined benefit plan’s asset investment policies and strategies, target allocation percentages and expected return on plan asset assumptions.
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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.