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Financial Instruments and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2022
Fair Value Disclosures [Abstract] |
Financial Instruments and Fair Value Measurements | 16. Financial Instruments and Fair Value Measurements U.S. GAAP defines fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. These estimates are subjective in nature and involve uncertainties and matters of judgment, and therefore cannot be determined with precision. U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and establishes the following three levels of inputs that may be used to measure fair value: Level 1—Quoted prices in active markets for identical assets or liabilities Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Items Measured at Fair Value on a Recurring Basis The Company holds certain financial assets that are required to be measured at fair value on a recurring basis. Additionally, the Company elected the fair value option for the financial assets and liabilities of UACC’s consolidated CFEs, beneficial interests in the 2022-1 securitization completed in February and certain of UACC’s finance receivables that are ineligible to be sold as of the acquisition date. Under the fair value option allowable under ASC 825, “Financial Instruments” (“ASC 825”), the Company may elect to measure at fair value financial assets and liabilities that are not otherwise required to be carried at fair value. Subsequent changes in fair value for designated items are reported in earnings. The following tables presents the Company’s financial assets and liabilities measured at fair value on a recurring basis (in thousands):
|  | As of March 31, 2022 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 189,504 |  |  | $ | — |  |  | $ | — |  |  | $ | 189,504 |
Commercial paper |  |  | — |  |  |  | 22,999 |  |  |  | — |  |  |  | 22,999 |
CFE assets: |  |  |  |  |  |  |  |  |  |  |  |
Finance receivables |  |  | — |  |  |  | — |  |  |  | 189,469 |  |  |  | 189,469 |
Finance receivables at fair value |  |  | — |  |  |  | — |  |  |  | 35,954 |  |  |  | 35,954 |
Beneficial interests in securitizations |  |  | — |  |  |  | 15,603 |  |  |  | — |  |  |  | 15,603 |
Total financial assets |  | $ | 189,504 |  |  | $ | 38,602 |  |  | $ | 225,423 |  |  | $ | 453,529 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
CFE liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Securitization debt of consolidated VIEs |  |  | — |  |  |  | 204,627 |  |  |  | — |  |  |  | 204,627 |
Total financial liabilities |  | $ | — |  |  | $ | 204,627 |  |  | $ | — |  |  | $ | 204,627 |
|  | As of December 31, 2021 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 601,807 |  |  | $ | — |  |  | $ | — |  |  | $ | 601,807 |
Commercial paper |  |  | — |  |  |  | 149,974 |  |  |  | — |  |  |  | 149,974 |
Total financial assets |  | $ | 601,807 |  |  | $ | 149,974 |  |  | $ | — |  |  | $ | 751,781 |
Valuation Methodologies of Financial Instruments Measured at Fair Value on a Recurring Basis The following is a description of the valuation methodologies used for financial instruments carried at fair value. These methodologies are applied to financial assets and liabilities across the fair value levels discussed above, and it is the observability of the inputs used that determines the appropriate level in the fair value hierarchy for the respective asset or liability. Money Market Funds: Money market funds primarily consist of investments in highly liquid U.S. treasury securities, with original maturities of three months or less and are classified as Level 1. The Company determines the fair value of cash equivalents based on quoted prices in active markets. Commercial Paper: Commercial paper consists of unsecured promissory notes issued by companies, with original maturities of three months or less and is classified as Level 2. Commercial paper is issued at a discount to face value and is priced to reflect prevailing market interest rates. Financial assets and liabilities of CFEs: In connection with the UACC Acquisition, as described in Note 5– Acquisitions, the Company acquired certain financial assets and liabilities of consolidated VIE subsidiaries related to securitization transactions that were deemed to be CFEs. The Company elected the fair value option for the assets and liabilities of its consolidated VIEs related to the 2020 and 2021 historical securitizations acquired from UACC. As of the Acquisition Date, in accordance with ASC 825, the Company has elected the fair value option, for the eligible financial assets and liabilities of these consolidated CFEs in order to mitigate potential accounting mismatches between the carrying value of the financial assets and liabilities. To eliminate potential measurement differences, the Company elected the measurement alternative included in ASU 2014-13, allowing the Company to measure both the financial assets and liabilities of a qualifying CFE using the fair value of either the CFE’s financial assets or liabilities, whichever is more observable. Under the measurement alternative prescribed by ASU 2014-13, the Company recognizes changes in the CFE’s net assets, including changes in fair value adjustments and net interest earned, in its condensed consolidated statements of operations. The Company is required to determine whether the fair value of the financial assets or the fair value of the financial liabilities of the eligible CFEs are more observable, but in either case, the methodology results in the fair value of the financial assets of the securitization trust being equal to the fair value of their liabilities The Company determined that the fair value of the liabilities of the securitization CFEs are more observable, since market prices of their liabilities are based on non-binding quoted prices provided by broker dealers who make markets in similar financial instruments. The assets of the securitization CFEs are not readily marketable, and their fair value measurement requires information that may be limited in availability. In determining the fair value of the securitization debt of consolidated CFEs, the broker dealers consider contractual cash payments and yields expected by market participants. Broker dealers also incorporate common market pricing methods, including a spread measurement to the treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including ratings, coupon, collateral type and seasoning or age of the security. When the Company obtains prices from multiple broker dealers for the same security and has a consensus among them, it deems these fair values to be based on observable valuation inputs and classified as Level 2 of the fair value hierarchy. Where a third-party broker dealer quote is not available, an internal model is utilized using unobservable inputs or if we have multiple quotes that are not within determined range, it classified the securitization debt as Level 3 of the fair value hierarchy. The financial assets of the consolidated CFEs are an aggregate value derived from the fair value of the CFEs liabilities. The Company determined that CFEs finance receivables in their entirety should be classified as Level 3 of the fair value hierarchy. Finance receivables at fair value: In connection with the UACC Acquisition as described in Note 5 – Acquisitions, the Company acquired certain finance receivables for which it elected the fair value option in accordance with ASC 825. These receivables primarily relate to finance receivables that are not eligible to be sold in the immediate future due to various factors such as: delinquencies, bankruptcy, etc. The Company estimates the fair value of these receivables using a discounted cash flow model and incorporates key inputs that include performance rate, default rate, recovery rate, and weighted average coupon rates, as well as certain macroeconomics events the Company believes market participants would consider relevant. Beneficial interests in securitization: Beneficial interests in securitization relate to the Company’s 2022-1 securitization completed in February 2022 and include rated notes as well as certificates. Refer to Note 4 – Variable Interest Entities and Securitizations. The Company elected the fair value option on its beneficial interests in securitization. Beneficial interests may initially be classified as Level 2 if the transactions occur within close proximity to the end of each respective reporting period. Subsequently, similar to the securitization debt described above, fair value is determined by requesting a non-binding quote from broker dealers, or by utilizing market acceptable valuation models, such as discounted cash flows. Broker dealer quotes may be based on an income approach, which converts expected future cash flows to a single present value amount, with specific consideration of inputs relevant to particular security types. Such inputs may include ratings, collateral types, geographic concentrations, underlying loan vintages, delinquencies and defaults, loss severity assumptions, prepayments, and weighted average coupons and maturities. When the volume or level of market activity for a security is limited, certain inputs used to determine fair value may not be observable in the market. Broker dealer quotes may also be based on a market approach that considers recent transactions involving identical or similar securities. When the Company obtains prices from multiple broker dealers for the same security and has a consensus among them, it deems these fair values to be based on observable valuation inputs and classified as Level 2 of the fair value hierarchy. Where a third-party broker dealer quote is not available, the Company utilizes an internally developed model using unobservable inputs. If internally developed models are utilized or if the Company has multiple quotes that are not within a consensus range of each other, the Company deems these securities to be classified as Level 3 of the fair value hierarchy. Changes in Level 3 Recurring Fair Value Measurements The following table presents a reconciliation of the financial assets, which were measured at fair value on a recurring basis using Level 3 inputs (in thousands):
|  | Finance Receivables of Consolidated CFEs |  |  | Finance Receivables at Fair Value |  |  | Securitization Debt of Consolidated CFEs |
Fair value as of January 1, 2022 |  | $ | — |  |  | $ | — |  |  | $ | — |
Acquired in business combination |  |  | 262,644 |  |  |  | 34,283 |  |  |  | 275,394 |
Transfer out of Level 3 |  |  | — |  |  |  | — |  |  |  | (275,394 | )
Transfer within Level 3 categories |  |  | (10,019 | ) |  |  | 10,019 |  |  |  | — |
Losses included in other income |  |  | (15,807 | ) |  |  | (1,730 | ) |  |  | — |
Sales |  |  | (24,312 | ) |  |  | — |  |  |  | — |
Paydowns |  |  | (26,070 | ) |  |  | (7,500 | ) |  |  | — |
Other |  |  | 3,033 |  |  |  | 882 |  |  |  | — |
Fair value as of March 31, 2022 |  | $ | 189,469 |  |  | $ | 35,954 |  |  | $ | — |
Transfers out of Level 3 The Company's transfers between levels of the fair value hierarchy are assumed to have occurred at the beginning of the reporting period on a quarterly basis, except for assets and liabilities acquired during the period as described below. There were no transfers into Level 3 during the three-months ended March 31, 2022. During the three months ended March 31, 2022, transfers out of Level 3 liabilities related to securitization debt of consolidated CFEs. The transfer out of Level 3 was the result of achieving consensus pricing from third-party broker dealers who utilize market observable inputs to price the liabilities. Upon acquisition, the Company utilized unobservable pricing information and an internal discounted cash flows model to value the CFEs liabilities. The Company obtained consensus broker dealers quotes as of March 31, 2022. For the CFEs liabilities acquired during the period, the transfer was presumed to occur immediately after the Acquisition Date. As of March 31, 2021, there were no financial assets or liabilities measured using Level 3 inputs on a recurring basis. Other Relevant Data for Financial Assets and Liabilities for which FVO Was Elected The following table presents the gains or losses recorded in "Other loss (income), net" in the condensed consolidated statements of operations related to the eligible financial instruments for which the fair value option was elected (in thousands):
|  | Three Months Ended March 31, 2022 |
Financial Assets |  |  |
Finance receivables of CFEs |  | $ | (14,371 | )
Finance receivables at fair value |  |  | 613 |
Beneficial interests in securitizations |  |  | (156 | )
Financial Liabilities |  |  |
Debt of securitized VIEs |  |  | 2,364 |
Total net loss included in other income |  | $ | (11,550 | )
The following table presents other relevant data related to the finance receivables carried at fair value (in thousands):
As of March 31, 2022 |  | Finance Receivables of CFEs at Fair Value |  |  | Finance Receivable at Fair Value |
Aggregate unpaid principal balance included within finance receivables that are reported at fair value |  | $ | 218,243 |  |  | $ | 44,593 |
Aggregate fair value of finance receivables that are reported at fair value |  | $ | 189,469 |  |  | $ | 35,954 |
Unpaid principal balance of receivables within finance receivables that are reported at fair value and are on nonaccrual status (90 days or more past due) |  | $ | 2,476 |  |  | $ | 3,286 |
Aggregate fair value of receivables carried at fair value that are on nonaccrual status (90 days or more past due) |  | $ | 2,154 |  |  | $ | 2,390 |
All finance receivables of CFEs are pledged to the CFEs trusts. The following table presents other relevant data related to securitization debt of consolidated VIEs carried at fair value (in thousands):
As of March 31, 2022 |  | Securitization debt of consolidated VIEs at Fair Value |
Aggregate unpaid principal balance of debt of securitized VIEs |  | $ | 206,991 |
Aggregate fair value of debt of securitized VIEs |  | $ | 204,627 |
As of March 31, 2021, there were no financial assets or liabilities for which the fair value option was elected. Fair Value of Financial Instruments Not Carried at Fair Value The carrying amounts of restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term nature. The carrying value of the 2020 Vehicle Floorplan Facility was determined to approximate fair value due to its short-term duration and variable interest rate that approximates prevailing interest rates as of each reporting period. Finance receivables held for sale, net: For finance receivables eligible to be sold, the Company determines the fair value of finance receivables utilizing sales prices based on estimated securitization transactions, adjusted for transformation costs, risk and a normal profit margin associated with securitization transactions. The Company uses a discounted cash flow model to estimate the present value of future recoveries for finance receivables that become delinquent and no longer meet the expected sales criteria. Such fair value measurement of finance receivables held for sale, net is considered Level 3 of the fair value hierarchy. The carrying value and fair value of the finance receivables held for sale, net were as follows (in thousands):
|  | March 31, |
|  | 2022 |
Carrying value |  | $ | 117,658 |
Fair value |  | $ | 123,163 |
As of March 31, 2021, the Company did no t have any finance receivables held for sale. Convertible Senior Notes (the “Notes”): The fair value of the Notes, which are not carried at fair value on the accompanying consolidated balance sheets, was determined utilizing actual bids and offer prices of the Notes in markets that are not active and are classified within Level 2 of the fair value hierarchy.
|  | March 31, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
Carrying value |  | $ | 611,424 |  |  | $ | 610,618 |
Fair value |  | $ | 293,750 |  |  | $ | 386,100 |
Junior Subordinated Debentures: The fair value of the junior subordinated debentures, which are not carried at fair value on the accompanying consolidated balance sheets, approximated their carrying value as of March 31, 2022 and are classified within Level 3 of the fair value hierarchy. Fair Value of Financial Instruments on a Nonrecurring Basis Assets and liabilities acquired as part of a business combination and goodwill attributable to each of the Company's reporting units are recorded at fair value on a nonrecurring basis. Refer to Note 5 – Acquisitions and Note 8 - Goodwill and Intangible Assets for additional information. From time to time the Company may mark certain receivables classified as held for sale to fair value and classified as financial instruments recorded at fair value on a non-recurring basis. As of March 31, 2022 there were no material finance receivables that were marked to fair value on a non-recurring basis.

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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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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