Restaurant Brands International Inc. Fair Value Disclosure
| Note 16. | Fair Value Measurements |
Fair Value Measurements
The following table presents our assets and liabilities measured at fair value on a recurring basis and the levels of inputs used to measure fair value, which include derivatives designated as cash flow hedging instruments, derivatives designated as net investment hedges, derivatives not designated as hedging instruments, investments held in a rabbi trust which consist of money market accounts and mutual funds established to fund a portion of our current and future obligations under the Burger King Executive Retirement Plan (“ERP”), and ERP liabilities as well as their location on our condensed consolidated balance sheets as of December 31, 2015 and December 31, 2014:
| Balance Sheet Location | Fair Value Measurements | Fair Value Measurements | ||||||||||||||||||||||||
| at December 31, 2015 | at December 31, 2014 | |||||||||||||||||||||||||
| (Level 1) | (Level 2) | Total | (Level 1) | (Level 2) | Total | |||||||||||||||||||||
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Derivatives designated as cash flow hedges |
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Foreign currency |
Trade and notes receivable, net | $ | — | $ | 6.6 | $ | 6.6 | $ | — | $ | 6.0 | $ | 6.0 | |||||||||||||
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Derivatives designated as net investment hedges |
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Foreign currency |
Inventories and other current assets, net | — | — | — | — | 2.1 | 2.1 | |||||||||||||||||||
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Foreign currency |
Other assets, net | — | 830.9 | 830.9 | — | 75.9 | 75.9 | |||||||||||||||||||
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Derivatives not designated as hedging instruments |
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Interest rate |
Other assets, net | — | — | — | — | 88.9 | 88.9 | |||||||||||||||||||
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Other |
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Investments held in a rabbi trust |
Inventories and other current assets, net | 0.9 | — | 0.9 | 1.1 | — | 1.1 | |||||||||||||||||||
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Investments held in a rabbi trust |
Other assets, net | 4.3 | — | 4.3 | 5.2 | — | 5.2 | |||||||||||||||||||
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Total assets at fair value |
$ | 5.2 | $ | 837.5 | $ | 842.7 | $ | 6.3 | $ | 172.9 | $ | 179.2 | ||||||||||||||
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Derivatives designated as cash flow hedges |
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Interest rate |
Other liabilities, net | $ | — | $ | 40.9 | $ | 40.9 | $ | — | $ | 25.6 | $ | 25.6 | |||||||||||||
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Derivatives designated as net investment hedges |
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Foreign currency |
Other liabilities, net | — | 6.3 | 6.3 | — | — | — | |||||||||||||||||||
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Other |
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ERP liabilities |
Other accrued liabilities | — | 0.9 | 0.9 | — | 1.1 | 1.1 | |||||||||||||||||||
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ERP liabilities |
Other liabilities, net | — | 4.3 | 4.3 | — | 5.2 | 5.2 | |||||||||||||||||||
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Total liabilities at fair value |
$ | — | $ | 52.4 | $ | 52.4 | $ | — | $ | 31.9 | $ | 31.9 | ||||||||||||||
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Our derivatives are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty.
Investments held in a Rabbi trust consist of money market funds and mutual funds and the fair value measurements are derived using quoted prices in active markets for the specific funds which are based on Level 1 inputs of the fair value hierarchy. The fair value measurements of the ERP liabilities are derived principally from observable market data which are based on Level 2 inputs of the fair value hierarchy.
At December 31, 2015, the fair value of our variable rate term debt and bonds was estimated at $8.7 billion, compared to a principal carrying amount of $8.6 billion. At December 31, 2014, the fair value of our variable rate term debt and bonds was estimated at $10.1 billion, compared to a principal carrying amount of $10.0 billion. Fair value of variable rate term debt and fixed rate debt was estimated using inputs based on bid and offer prices and are Level 2 inputs within the fair value hierarchy.
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived assets, goodwill, the Brand and other intangible assets. Refer to Note 3 for inputs and valuation techniques used to measure fair value of these nonfinancial assets.
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.