NOTE 12 – Fair value measurement:

Teva’s financial instruments consist mainly of cash and cash equivalents, investment in securities, current and non-current receivables, short-term debt, current and non-current payables, contingent consideration, senior notes and loans, convertible senior debentures and derivatives.

The fair value of the financial instruments included in working capital and non-current receivables and payables approximates their carrying value. The fair value of term loans and bank facilities mostly approximates their carrying value, since they bear interest at rates close to the prevailing market rates.

Financial instruments measured at fair value

The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price 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.

The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable inputs that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

There were no transfers between Level 1, Level 2 and Level 3 during the first quarter of 2018.

Financial items carried at fair value as of March 31, 2018 and December 31, 2017 are classified in the tables below in one of the three categories described above:


	March 31, 2018
	Level 1		Level 2			Level 3			Total
	(U.S. $ in millions)
Cash and cash equivalents:
Money markets	$	6	$	—		$	—		$	6
Cash, deposits and other		1,412		—			—			1,412
Investment in securities:
Equity securities		58		—			—			58
Other, mainly debt securities		13		—			19			32
Derivatives:
Asset derivatives - options and forward contracts		—		15			—			15
Asset derivatives - cross currency swaps		—		4			—			4
Liabilities derivatives - options and forward contracts		—		(18	)		—			(18	)
Liabilities derivatives - interest rate and cross-currency swaps		—		(141	)		—			(141	)
Contingent consideration*		—		—			(708	)		(708	)

Total	$	1,489	$	(140	)	$	(689	)	$	660


	December 31, 2017
	Level 1		Level 2			Level 3			Total
	(U.S. $ in millions)
Cash and cash equivalents:
Money markets	$	5	$	—		$	—		$	5
Cash, deposits and other		958		—			—			958
Investment in securities:
Equity securities		65		—			—			65
Structured investment vehicles		—		—			—			—
Other, mainly debt securities		14		—			18			32
Derivatives:
Asset derivatives - options and forward contracts		—		17			—			17
Asset derivatives - cross-currency swaps		—		25			—			25
Liability derivatives - options and forward contracts		—		(15	)		—			(15	)
Liabilities derivatives - interest rate and cross-currency swaps		—		(98	)		—			(98	)
Contingent consideration*		—		—			(735	)		(735	)

Total	$	1,042	$	(71	)	$	(717	)	$	254

*	Contingent consideration represents liabilities recorded at fair value in connection with acquisitions.

Teva determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration is based on several factors, such as: the cash flows projected from the success of unapproved product candidates; the probability of success of product candidates, including risks associated with uncertainty regarding achievement and payment of milestone events; the time and resources needed to complete the development and approval of product candidates; the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the U.S. and Europe, and the risk adjusted discount rate for fair value measurement.

The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in earnings.

Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liability.

The following table summarizes the activity for those financial assets and liabilities where fair value measurements are estimated utilizing Level 3 inputs:


	Three months ended March 31, 2018
	Three months ended March 31, 2018
	(U.S. $ in millions)
Fair value at the beginning of the period	$	(717	)
Revaluation of debt securities		1
Adjustments to provisions for contingent consideration:
Actavis Generics transaction		(6	)
Labrys transaction		(1	)
Eagle transaction		(1	)
Settlement of contingent consideration:
Eagle transaction		35

Fair value at the end of the period	$	(689	)

Financial instruments not measured at fair value

Financial instruments measured on a basis other than fair value mostly consist of senior notes and convertible senior debentures and are presented in the table below in terms of fair value:


	Estimated fair value*
	March 31, 2018		December 31, 2017
	(U.S. $ in millions)
Senior notes included under senior notes and loans	$	26,365	$	23,459
Senior notes and convertible debentures included under short-term debt		1,242		2,713

Total	$	27,607	$	26,172

*	The fair value was estimated based on quoted market prices, where available.