FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

Our financial assets recorded at fair value on a recurring basis comprise of cash equivalents, available-for-sale marketable securities and certificates of deposits. We measure certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and our other current financial liabilities, including cash and cash equivalents, restricted cash and cash equivalents, WSE related assets and liabilities excluding insurance loss reserves, line of credit and accrued corporate wages, have fair values that approximate their carrying value due to their short-term nature.

Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market to measure fair value, summarized as follows:


•	Level 1—observable inputs for identical assets or liabilities, such as quoted prices in active markets,


•	Level 2—inputs other than the quoted prices in active markets that are observable either directly or indirectly,


•	Level 3—unobservable inputs in which there is little or no market data, which requires that we develop our own assumptions.

The fair value hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We classify our cash equivalents, debt securities and notes payable in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

We use an independent pricing source to determine the fair value of our available-for-sale securities included as Level 2. For purposes of valuing our securities, the independent pricing source utilizes the following market approach by investment class:


•	Money market funds are valued on a spread or discount rate basis,


•	Asset-backed securities are valued using historical and projected prepayments speed and loss scenarios and spreads obtained from the new issue market, dealer quotes and trade prices,


•	U.S. treasuries, corporate bonds, and other debt securities are priced based on dealer quotes from multiple sources, and


•	U.S. government agencies and government sponsored agencies are priced using LIBOR/swap curves, credit spreads and interest rate volatilities.

We have not adjusted the prices obtained from the independent pricing service and we believe the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price).

We did not have any Level 3 financial instruments as of September 30, 2018 and December 31, 2017. There were no transfers between levels as of September 30, 2018 and December 31, 2017.

Fair Value Measurements on a Recurring Basis

The following table summarizes our financial instruments by significant categories and fair value measurement on a recurring basis as of September 30, 2018 and December 31, 2017.



(in millions)	Level 1		Level 2		Total
September 30, 2018
Cash equivalents:
Money market funds	$	3	$	—	$	3
Total cash equivalents	3		—		3
Investments:
Asset-backed securities	—		35		35
Corporate bonds	—		86		86
U.S. government agencies and government-sponsored agencies	—		8		8
U.S. treasuries	—		29		29
Other debt securities	—		10		10
Total investments	—		168		168
Restricted cash equivalents:
Money market mutual funds	241		—		241
Commercial paper	20		—		20
Total restricted cash equivalents	261		—		261
Restricted investments:
U.S. treasuries	—		5		5
Exchange traded fund	1		—		1
Certificate of deposit	—		2		2
Total restricted investments	1		7		8
Total investments and restricted cash equivalents and investments	$	265	$	175	$	440

December 31, 2017
Restricted cash equivalents:
Money market mutual funds	$	199	$	—	$	199
Commercial paper	21		—		21
Total restricted cash equivalents	220		—		220
Restricted investments:
U.S. treasuries	37		—		37
Exchange traded fund	1		—		1
Certificate of deposit	—		2		2
Total restricted investments	38		2		40
Total restricted cash equivalents and investments	$	258	$	2	$	260

Fair Value of Financial Instruments Disclosure

Notes Payable

The carrying value of our notes payable at September 30, 2018 and December 31, 2017 was $420 million and $425 million, respectively. The estimated fair values of our notes payable at September 30, 2018 and December 31, 2017 were $419 million and $428 million, respectively. On September 30, 2018 we changed our methodology of estimating the fair values of our notes payable to a discounted cash flow, which incorporates credit spreads and market interest rates to estimate the fair value and is considered Level 3 in the hierarchy for fair value measurement. The valuation at December 31, 2017 is considered Level 2 in the hierarchy for fair value measurement and is based on quoted market prices.