NOTE E – FAIR VALUE MEASUREMENTS

As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value. Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows.

Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include Ashland’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived using fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.

The following table summarizes financial instruments subject to recurring fair value measurements as of June 30, 2018.

	Carrying		Total fair		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(In millions)	value		value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	182	$	182	$	182	$	—	$	—
Restricted investments (a)		334		334		334		—		—
Deferred compensation investments (b)		162		162		—		162		—
Investment of captive insurance company		2		2		2		—		—
Foreign currency derivatives		2		2		—		2		—
Total assets at fair value	$	682	$	682	$	518	$	164	$	—
Liabilities
Foreign currency derivatives	$	3	$	3	$	—	$	3	$	—

(a)

Included in restricted investments is $30 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets.

(b)

Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.

The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2017.

	Carrying		Total fair		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(In millions)	value		value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	566	$	566	$	566	$	—	$	—
Restricted investments (a)		332		332		332		—		—
Deferred compensation investments (b)		158		158		—		158		—
Investment of captive insurance company		3		3		3		—		—
Foreign currency derivatives		2		2		—		2		—
Total assets at fair value	$	1,061	$	1,061	$	901	$	160	$	—
Liabilities
Foreign currency derivatives	$	36	$	36	$	—	$	36	$	—

(a)

Included in restricted investments is $30 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets.

(b)

Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.

Restricted investments

During 2015, Ashland and Hercules entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity Company and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million (the January 2015 asbestos insurance settlement). Ashland placed $335 million of the settlement funds from the January 2015 asbestos insurance settlement into a renewable annual trust restricted for the purpose of paying ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims. These funds were classified primarily as noncurrent restricted investment assets, with $30 million classified within other current assets, in the Condensed Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017, respectively.

During 2015, Ashland diversified the restricted investments received from the January 2015 asbestos insurance settlement into primarily equity and corporate bond mutual funds that are designated as available-for-sale securities, classified as Level 1 measurements within the fair value hierarchy. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in the stockholders' equity section of the Condensed Consolidated Balance Sheets as a component of accumulated other comprehensive income (AOCI). Investment income and realized gains and losses on the available-for-sale securities are reported in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income (Loss). The following table provides a summary of the available-for-sale securities portfolio as of June 30, 2018 and September 30, 2017:

(In millions)	June 30 2018			September 30 2017
Original cost	$	335		$	335
Accumulated adjustments, net		(38	)		(24	)
Adjusted cost, beginning of year (a)		297			311
Investment income (b)		6			9
Net unrealized gain		42			35
Realized gains		4			2
Settlement funds		10			2
Disbursements		(25	)		(27	)
Fair value	$	334		$	332

(a)

The accumulated adjustments include investment income, realized gains, disbursements and settlements recorded in previous periods.

(b)

Investment income for the demand deposit includes interest income as well as dividend income transferred from the equity and corporate bond mutual funds.

The following table presents gross unrealized gains and losses for the restricted investment available-for-sale securities as of June 30, 2018 and September 30, 2017:

			Gross		Gross
(In millions)	Adjusted Cost		Unrealized Gain		Unrealized Loss			Fair Value
As of June 30, 2018
Demand deposit	$	18	$	—	$	—		$	18
Equity mutual fund		154		47		—			201
Corporate bond mutual fund		120		—		(5	)		115
Fair value	$	292	$	47	$	(5	)	$	334

As of September 30, 2017
Demand deposit	$	9	$	—	$	—		$	9
Equity mutual fund		168		34		—			202
Corporate bond mutual fund		120		1		—			121
Fair value	$	297	$	35	$	—		$	332

The unrealized gains and losses as of June 30, 2018 and September 30, 2017 were recognized within AOCI. Ashland invests in highly-rated investment grade mutual funds. No other-than-temporary impairment was recognized in AOCI during the three and nine months ended June 30, 2018 and 2017.

The following table presents the investment income, realized gains and disbursements related to the investments within the portfolio for the three and nine months ended June 30, 2018 and 2017.

	Three months ended						Nine months ended
	June 30						June 30
(In millions)	2018			2017			2018			2017
Investment income	$	2		$	2		$	6		$	7
Realized gains		—			—			4			2
Disbursements		(7	)		(7	)		(25	)		(19	)

Deferred compensation investments

Deferred compensation investments consist of Level 2 measurements within the fair value hierarchy which are comprised primarily of a guaranteed interest fund, a common stock index fund and an intermediate government bond fund. Gains and losses related to deferred compensation investments are immediately recognized within the Statements of Consolidated Comprehensive Income (Loss).

Foreign currency derivatives

Ashland conducts business in a variety of foreign currencies. Accordingly, Ashland regularly uses foreign currency derivative instruments to manage exposure on certain transactions denominated in foreign currencies to curtail potential earnings volatility effects on certain assets and liabilities, including short-term inter-company loans, denominated in currencies other than Ashland’s functional currency of an entity. These derivative contracts generally require exchange of one foreign currency for another at a fixed rate at a future date and generally have maturities of less than twelve months. All contracts are valued at fair value with net changes in fair value recorded within the selling, general and administrative expense caption. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in non-functional currencies. The following table summarizes the net gains and losses recognized during the three and nine months ended June 30, 2018 and 2017 within the Statements of Consolidated Comprehensive Income (Loss).

	Three months ended						Nine months ended
	June 30						June 30
(In millions)	2018			2017			2018			2017
Foreign currency derivative losses	$	(9	)	$	(1	)	$	(36	)	$	(1	)

The following table summarizes the fair values of the outstanding foreign currency derivatives as of June 30, 2018 and September 30, 2017 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.

	June 30		September 30
(In millions)	2018		2017
Foreign currency derivative assets	$	2	$	2
Notional contract values		309		79

Foreign currency derivative liabilities	$	3	$	36
Notional contract values		460		1,601

Other financial instruments

At June 30, 2018 and September 30, 2017, Ashland's long-term debt (including the current portion and excluding debt issuance cost discounts) had a carrying value of $2,483 million and $2,615 million, respectively, compared to a fair value of $2,541 million and $2,768 million, respectively. The fair values of long-term debt are based on quoted market prices or, if market prices are not available, the present values of the underlying cash flows discounted at Ashland’s incremental borrowing rates, which are deemed to be Level 2 measurements within the fair value hierarchy.