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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2018
Fair Value Disclosures [Abstract] |
Fair Value Measurements |
9. | FAIR VALUE MEASUREMENTS
We measure certain assets and liabilities in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value 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. In addition, it establishes a framework for measuring fair value according to the following three-tier fair value hierarchy:
• | Level 1 - Quoted prices for identical assets or liabilities in active markets accessible as of the measurement date;
• | 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.
Financial Instruments Our financial instruments include Cash and cash equivalents, Trade receivables, Notes and other receivables, Reimbursable receivables, Warehouse receivables, restricted cash, contract assets, Accounts payable, Reimbursable payables, Short-term borrowings, contract liabilities, Warehouse facilities, Credit facility, Long-term debt and foreign currency forward contracts. The carrying amounts of Cash and cash equivalents, Trade receivables, Notes and other receivables, Reimbursable receivables, restricted cash, contract assets, Accounts payable, Reimbursable payables, contract liabilities and the Warehouse facilities approximate their estimated fair values due to the short-term nature of these instruments. The carrying values of our Credit facility and Short-term borrowings approximate their estimated fair values given the variable interest rate terms and market spreads. We estimated the fair value of our Long-term debt as $671.4 million and $712.6 million as of December 31, 2018 and 2017, respectively, using dealer quotes that are Level 2 inputs in the fair value hierarchy. The carrying value of our Long-term debt was $671.5 million and $690.6 million as of December 31, 2018 and 2017, respectively, which included debt issuance costs of $3.7 million and $4.3 million, respectively. Investments in Real Estate Ventures at Fair Value - Net Asset Value ("NAV") We report a majority of our investments in real estate ventures at fair value. For such investments, we increase or decrease our investment each reporting period by the change in the fair value and we report these fair value adjustments in the Consolidated Statements of Comprehensive Income within Equity earnings from real estate ventures. Of our investments reported at fair value, we generally estimate the fair value using the NAV per share (or its equivalent) our investees provide. Critical inputs to NAV estimates included valuations of the underlying real estate assets and borrowings, which incorporate investment-specific assumptions such as discount rates, capitalization rates, rental and expense growth rates, and asset-specific market borrowing rates. We did not consider adjustments to NAV estimates provided by investees, including adjustments for any restrictions to the transferability of ownership interests embedded within investment agreements to which we are a party, to be necessary based upon (i) our understanding of the methodology utilized and inputs incorporated to estimate NAV at the investee level, (ii) consideration of market demand for the specific types of real estate assets held by each venture and (iii) contemplation of real estate and capital markets conditions in the localities in which these ventures operate. As of December 31, 2018 and 2017, investments in real estate ventures at fair value using NAV were $191.2 million and $195.0 million, respectively. As these investments are not required to be classified in the fair value hierarchy, they have been excluded from the following table. Recurring Fair Value Measurements The following table categorizes by level in the fair value hierarchy the estimated fair value of our assets and liabilities measured at fair value on a recurring basis.
| December 31,
| 2018 |  | 2017
($ in millions) | Level 1 | Level 2 | Level 3 |  | Level 1 | Level 2 | Level 3
Assets |  |  |  |  |  |  |
Investments in real estate ventures - fair value | $ | 44.6 |  | — |  | 11.5 |  |  | 47.3 |  | — |  | — |
Foreign currency forward contracts receivable | — |  | 6.5 |  | — |  |  | — |  | 13.2 |  | — |
Warehouse receivables | — |  | 331.2 |  | — |  |  | — |  | 317.5 |  | — |
Deferred compensation plan assets | — |  | 258.2 |  | — |  |  | — |  | 229.7 |  | — |
Mortgage banking derivative assets | — |  | — |  | 32.4 |  |  | — |  | — |  | 19.0 |
Total assets at fair value | $ | 44.6 |  | 595.9 |  | 43.9 |  |  | 47.3 |  | 560.4 |  | 19.0 |
Liabilities |  |  |  |  |  |  |
Foreign currency forward contracts payable | $ | — |  | 8.6 |  | — |  |  | — |  | 1.9 |  | — |
Deferred compensation plan liabilities | — |  | 251.8 |  | — |  |  | — |  | 228.4 |  | — |
Earn-out liabilities | — |  | — |  | 192.0 |  |  | — |  | — |  | 227.1 |
Mortgage banking derivative liabilities | — |  | — |  | 26.1 |  |  | — |  | — |  | 10.3 |
Total liabilities at fair value | $ | — |  | 260.4 |  | 218.1 |  |  | — |  | 230.3 |  | 237.4 |
Investments in Real Estate Ventures We classify one investment as Level 1 in the fair value hierarchy as a quoted price is readily available. We increase or decrease our investment each reporting period by the change in the fair value of the investment. We report these fair value adjustments in the Consolidated Statements of Comprehensive Income within Equity earnings from real estate ventures. Investments classified as Level 3 in the fair value hierarchy represent investments in early-stage non-public entities where we elected the fair value option. The carrying value is deemed to approximate the fair value of these investments due to the proximity of the investment date to the balance sheet date as well as investee-level performance updates. Foreign Currency Forward Contracts We regularly use foreign currency forward contracts to manage our currency exchange rate risk related to intercompany lending and cash management practices. These contracts are on the Consolidated Balance Sheets as current assets and current liabilities. We determine the fair values of these contracts based on current market rates. The inputs for these valuations are Level 2 in the fair value hierarchy. As of December 31, 2018 and 2017, these contracts had a gross notional value of $1.99 billion ($0.84 billion on a net basis) and $2.43 billion ($1.82 billion on a net basis), respectively. We record the asset and liability positions for our foreign currency forward contracts based on the net payable or net receivable position with the financial institutions from which we purchase these contracts. The $6.5 million asset as of December 31, 2018 was composed of gross contracts with receivable positions of $6.7 million and payable positions of $0.2 million. The $8.6 million liability position as of December 31, 2018 was composed of gross contracts with receivable positions of $0.6 million and payable positions of $9.2 million. As of December 31, 2017, the $13.2 million asset was composed of gross contracts with receivable positions of $14.4 million and payable positions of $1.2 million. The $1.9 million liability position as of December 31, 2017, was composed of gross contracts with receivable positions of $2.3 million and payable positions of $4.2 million. Warehouse Receivables The fair value of the Warehouse receivables is based on already locked-in security-buy prices. As of December 31, 2018 and 2017, all of our Warehouse receivables included in the Consolidated Balance Sheets were under commitment to be purchased by government-sponsored enterprises ("GSEs") or by a qualifying investor as part of a U.S. government or GSE mortgage-backed security program. The Warehouse receivables are classified as Level 2 in the fair value hierarchy as all significant inputs are readily observable. Deferred Compensation Plan We maintain a deferred compensation plan for certain of our U.S. employees that allows them to defer portions of their compensation. We invest directly in insurance contracts which yield returns to fund these deferred compensation obligations. We recognize an asset for the amount that could be realized under these insurance contracts as of the balance sheet date, and we adjust the deferred compensation obligation to reflect the changes in the fair value of the amount owed to the employees. The inputs for this valuation are Level 2 in the fair value hierarchy. We recorded this plan on the Consolidated Balance Sheets as of December 31, 2018 as Deferred compensation plan assets of $258.2 million, long-term deferred compensation plan liabilities of $251.8 million, included in Deferred compensation, and as a reduction of equity, Shares held in trust, of $5.8 million. We recorded this plan on the Consolidated Balance Sheets as of December 31, 2017 as Deferred compensation plan assets of $229.7 million, long-term deferred compensation plan liabilities of $228.4 million, included in Deferred compensation, and as a reduction of equity, Shares held in trust, of $5.9 million. Earn-Out Liabilities We classify our Earn-out liabilities within Level 3 in the fair value hierarchy because the inputs we use to develop the estimated fair value include unobservable inputs. We base the fair value of our Earn-out liabilities on the present value of probability-weighted future cash flows related to the earn-out performance criteria on each reporting date. We determine the probabilities of achievement we assign to the performance criteria based on the due diligence we performed at the time of acquisition as well as actual performance achieved subsequent to acquisition. An increase to a probability of achievement would result in a higher fair value measurement. See Note 4, Business Combinations, Goodwill and Other Intangibles, for additional discussion of our Earn-out liabilities. Mortgage Banking Derivatives In the normal course of business, we enter into simultaneous contractual commitments to originate and sell multi-family mortgage loans at fixed prices with fixed expiration dates. Commitments to borrowers become effective when the borrowers "lock-in" a specified interest rate and maximum principal balance for an established time frame (hereinafter referred to as an interest rate lock commitment or "IRLC"). All mortgagors are evaluated for creditworthiness prior to execution of an IRLC. We are exposed to market interest risk (the risk of movement in market interest rates following the execution of an IRLC) until a loan is funded and onwards through delivery. To mitigate the effect of the interest rate risk inherent in providing IRLCs to borrowers, we simultaneously enter into a forward commitment to sell the eventual loan associated with the IRLC to a GSE or other investor. Similar to the IRLC, the forward sale commitment locks in an interest rate, maximum principal balance, and price for the sale of the loan. Ultimately, the terms of the forward sale commitment and the IRLC are matched in substantially all respects, with the objective of eliminating market interest rate and other balance sheet risk to the extent practical. As an additional element of protection, forward sale commitments extend for a longer period of time as compared to IRLCs to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan in accordance with the terms of the sale commitment. The fair value of our IRLCs to prospective borrowers and the related inputs primarily include, as applicable, the expected net cash flows associated with servicing the loan and the effects of interest rate movements between the date of the IRLC and the balance sheet date based on applicable published U.S. Treasury rates. The fair value of our forward sales contracts to prospective investors considers the market price movement of a similar security between the trade date and the balance sheet date. The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value. Both the rate lock commitments to prospective borrowers and the forward sale contracts to prospective investors are undesignated derivatives and considered Level 3 valuations due to significant unobservable inputs related to counterparty credit risk. An increase in counterparty credit risk assumptions would result in a lower fair value measurement. The fair valuation is determined using discounted cash flow techniques, and the derivatives are marked to fair value through Revenue in the Consolidated Statements on Comprehensive Income. The tables below present a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
($ in millions) | Balance as of December 31, 2017 | Net change in fair value | Foreign CTA 1 | Purchases / Additions | Settlements 2 | Balance as of December 31, 2018
Mortgage banking derivative assets and liabilities, net | $ | 8.7 |  | 1.1 |  | — |  | 70.4 |  | (73.9 | ) | 6.3 |
Earn-out liabilities | 227.1 |  | 7.4 |  | (4.0 | ) | 11.6 |  | (50.1 | ) | 192.0 |
Investments in real estate ventures | — |  | — |  | — |  | 11.5 |  | — |  | 11.5 |
($ in millions) | Balance as of December 31, 2016 | Net change in fair value | Foreign CTA 1 | Purchases / Additions | Settlements | Balance as of December 31, 2017
Mortgage banking derivative assets and liabilities, net | $ | 15.5 |  | 13.7 |  | — |  | 75.7 |  | (96.2 | ) | 8.7 |
Earn-out liabilities | 229.6 |  | 1.9 |  | 8.4 |  | 11.4 |  | (24.2 | ) | 227.1 |
1 CTA: Currency translation adjustments 2 In 2018, earn-out liabilities of $9.1 million were reclassified to guaranteed deferred acquisition obligations. Net change in fair value, included in the tables above, is reported in Net income as follows.
Category of Assets/Liabilities using Unobservable Inputs | Consolidated Statements of Comprehensive Income Account Caption
Earn-out liabilities (Short-term and Long-term) | Restructuring and acquisition charges
Other current assets - Mortgage banking derivative assets | Revenue
Other current liabilities - Mortgage banking derivative liabilities | Revenue
Non-Recurring Fair Value Measurements We review our investments in real estate ventures, except those investments otherwise reported at fair value, on a quarterly basis, or as otherwise deemed necessary, for indications of whether we may be unable to recover the carrying value of our investments and whether such investments are other than temporarily impaired. When the carrying amount of the investment is in excess of the estimated future undiscounted cash flows, we use a discounted cash flow approach or other acceptable method to determine the fair value of the investment in computing the amount of the impairment. Our determination of fair value primarily relies on Level 3 inputs. We did not recognize any significant investment-level impairment losses during the three-year period ended December 31, 2018. See Note 5, Investments in Real Estate Ventures, for additional information, including information related to impairment charges recorded at the investee level.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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