Fair Value Measurements

Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are:

Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities that are traded in an active exchange market, including shares of mutual funds.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active markets.

(a) Fair Value Measurements on a Recurring Basis

The following table presents fair value measurements for classes of Federated's financial assets and liabilities measured at fair value on a recurring basis at December 31:



	2015								2014
	Fair Value Measurements Using								Fair Value Measurements Using
in thousands	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	172,628	$	0	$	0	$	172,628	$	115,267	$	0	$	0	$	115,267
Available-for-sale equity securities	117,422		24,326		0		141,748		119,435		23,755		0		143,190
Trading securities – equity	15,900		7,498		0		23,398		17,553		13,840		0		31,393
Trading securities – debt	0		9,041		0		9,041		0		7,488		0		7,488
Other¹	4		17		910		931		31		14		0		45
Total financial assets	$	305,954	$	40,882	$	910	$	347,746	$	252,286	$	45,097	$	0	$	297,383
Financial Liabilities
Acquisition-related future consideration liabilities	0		0		2,161		2,161		0		0		1,909		1,909
Other²	2,681		59		469		3,209		1,979		425		0		2,404
Total financial liabilities	$	2,681	$	59	$	2,630	$	5,370	$	1,979	$	425	$	1,909	$	4,313


1	Amounts include structured trade finance loans held by Federated as well as futures contracts and/or foreign currency forward contracts held within certain consolidated sponsored investment companies.


2	Amounts include investments sold short, foreign currency forward contracts and/or futures contracts held within certain consolidated sponsored investment companies, as well as certain liabilities attributable to structured trade finance loans held by Federated and Federated's interest rate Swap that expired on April 1, 2015.

The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis. Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at December 31, 2015 or 2014.

Cash and cash equivalents

Cash and cash equivalents include investments in money market funds and deposits with banks. Investments in Federated money market funds totaled $162.2 million and $107.6 million at December 31, 2015 and 2014, respectively. Cash investments in money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.

Available-for-sale equity securities

Available-for-sale equity securities include investments in sponsored fluctuating-value mutual funds and are included in Investments—affiliates on the Consolidated Balance Sheets. For investments in mutual funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For certain investments in funds that are not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the securities are valued using NAV as a practical expedient and is classified as Level 2. There is no modeling or additional information needed to arrive at the fair values of any of these investments.

Trading securities—equity

Trading securities - equity primarily represent the equity securities held by consolidated sponsored investment companies (included in Investments—consolidated investment companies on the Consolidated Balance Sheets) as well as certain equity investments held in separate accounts for which Federated is the beneficiary (included in Investments—other on the Consolidated Balance Sheets). For publicly traded equity securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on unadjusted quoted market prices. In 2015, equity securities classified as Level 2 primarily relate to certain investments in funds that are not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions. These securities are valued using NAV as a practical expedient. There is no modeling or additional information needed to arrive at the fair values of any of these investments. In 2014, equity securities classified as Level 2 primarily related to the fair value of certain equity securities traded principally in foreign markets and held by consolidated investment companies. The fair value of these securities was determined by a third-party pricing service to account for changes to the fair value between the time the foreign market closes and the pricing time of the consolidated investment company. There were no material transfers between Level 1 and Level 2 during 2015 or 2014.

Trading securities—debt

Trading securities - debt primarily represent domestic bonds held by consolidated sponsored investment companies. The fair value of these securities may include observable market data such as valuations provided by independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions (Level 2).

Acquisition-related future consideration liabilities

From time to time, pursuant to purchase and sale agreements entered into in connection with certain business combinations, Federated may be required to make future consideration payments if certain contingencies are met. See Note (17) for additional information regarding the nature and timing of these payments. In connection with these arrangements entered into after January 1, 2009, Federated records a liability representing the estimated fair value of future consideration payments as of the acquisition date. The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded in earnings. As of December 31, 2015, acquisition-related future consideration liabilities were recorded in Other current liabilities ($0.7 million) and Other long-term liabilities ($1.5 million) on the Consolidated Balance Sheets. Management estimated the fair value of future consideration payments based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3).

The following table presents a reconciliation of the beginning and ending balances for Federated's liability for future consideration payments related to these acquisitions for each year presented:



in thousands	2015			2014			2013
Beginning balance	$	1,909		$	6,489		$	11,759
New acquisition adjustment¹	2,090			0			330
Changes in fair value²	415			(1,589		)	(941		)
Contingent consideration payments	(2,253		)	(2,991		)	(4,659		)
Ending balance	$	2,161		$	1,909		$	6,489


1	Amounts include the preliminary fair value estimate of the contingent payment liability recorded in connection with new acquisitions or the revision thereof upon finalization of the valuation process related to initial purchase accounting.


2	Amounts were included as Operating Expenses – Other on the Consolidated Statements of Income.

(b) Fair Value Measurements on a Nonrecurring Basis

Federated did not hold any assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2015.

The fair value of Federated's debt is estimated by management based upon expected future cash flows utilizing a discounted cash flow methodology under the income approach. The fair value of the liability is estimated using observable market data (Level 2) in estimating inputs including the discount rate. Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.