VERISIGN INC/CAVRSN
VERISIGN INC/CA Fair Value Disclosure
Fair Value of Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and December 31, 2015:
Fair Value Measurement Using | |||||||||||||||
Total Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
(In thousands) | |||||||||||||||
As of December 31, 2016: | |||||||||||||||
Assets: | |||||||||||||||
Investments in money market funds | $ | 134,790 | $ | 134,790 | $ | — | $ | — | |||||||
Debt securities issued by the U.S. Treasury | 1,626,764 | 1,626,764 | — | — | |||||||||||
Equity securities of public companies | 2,174 | 2,174 | — | — | |||||||||||
Foreign currency forward contracts (1) | 242 | — | 242 | — | |||||||||||
Total | $ | 1,763,970 | $ | 1,763,728 | $ | 242 | $ | — | |||||||
Liabilities: | |||||||||||||||
Contingent interest derivative on Subordinated Convertible Debentures | $ | 14,339 | $ | — | $ | — | $ | 14,339 | |||||||
Foreign currency forward contracts (2) | 87 | — | 87 | — | |||||||||||
Total | $ | 14,426 | $ | — | $ | 87 | $ | 14,339 | |||||||
As of December 31, 2015: | |||||||||||||||
Assets: | |||||||||||||||
Investments in money market funds | $ | 137,593 | $ | 137,593 | $ | — | $ | — | |||||||
Debt securities issued by the U.S. Treasury | 1,685,882 | 1,685,882 | — | — | |||||||||||
Equity securities of public companies | 890 | 890 | — | — | |||||||||||
Foreign currency forward contracts (1) | 230 | — | 230 | — | |||||||||||
Total | $ | 1,824,595 | $ | 1,824,365 | $ | 230 | $ | — | |||||||
Liabilities: | |||||||||||||||
Contingent interest derivative on Subordinated Convertible Debentures | $ | 30,126 | $ | — | $ | — | $ | 30,126 | |||||||
Foreign currency forward contracts (2) | 164 | — | 164 | — | |||||||||||
Total | $ | 30,290 | $ | — | $ | 164 | $ | 30,126 | |||||||
(1) | Included in Other current assets |
(2) | Included in Accounts payable and accrued liabilities |
The fair value of the Company’s investments in money market funds approximates their face value. Such instruments are classified as Level 1 and are included in Cash and cash equivalents.
The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices and are classified as Level 1. Debt securities purchased with original maturities in excess of three months are included in Marketable securities. Debt securities purchased with original maturities less than three months are included in Cash and cash equivalents.
The fair value of the equity securities of public companies is based on quoted market prices and are classified as Level 1. Investments in equity securities of public companies are included in marketable securities.
The fair value of the Company’s foreign currency forward contracts is based on foreign currency rates quoted by banks or foreign currency dealers and other public data sources.
The Company utilizes a valuation model to estimate the fair value of the contingent interest derivative on the Subordinated Convertible Debentures. The inputs to the model include stock price, risk free interest rates, volatility, and credit spread observations. As several significant inputs are not observable, the overall fair value measurement of the derivative is classified as Level 3. The volatility and credit spread assumptions used in the calculation are the most significant unobservable inputs. As of December 31, 2016, the valuation of the contingent interest derivative assumed a volatility rate of approximately 26% and a credit spread of approximately 4%. The fair value of the contingent interest derivative would not have significantly changed using a volatility rate of either 21% or 31%, or a credit spread of either 3% or 5%.
The following table summarizes the change in the fair value of the Company’s contingent interest derivative on Subordinated Convertible Debentures during the year ended December 31, 2016 and 2015:
Year Ended December 31, | |||||||
2016 | 2015 | ||||||
(In thousands) | |||||||
Beginning balance | $ | 30,126 | $ | 26,755 | |||
Unrealized (gain) loss on contingent interest derivative on Convertible Debentures | (2,402 | ) | 14,130 | ||||
Payment of contingent interest | (13,385 | ) | (10,759 | ) | |||
Ending balance | $ | 14,339 | $ | 30,126 | |||
The contingent interest derivative balance as of December 31, 2016 includes $7.7 million which was paid on February 16, 2017.
As of December 31, 2016, the Company’s other financial instruments include cash, accounts receivable, restricted cash, and accounts payable whose carrying values approximated their fair values. The fair value of the Company’s Subordinated Convertible Debentures was $2.8 billion as of December 31, 2016. The fair values of the Company’s senior notes due 2023 (the “2023 Senior Notes”) and the senior notes due 2025 (the “2025 Senior Notes”) were $764.1 million and $514.1 million, respectively, as of December 31, 2016. The fair values of these debt instruments are based on available market information from public data sources and are classified as Level 2.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2016 | Feb 17, 2017 | Showing above |
| 2015 | Feb 19, 2016 | |
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.