|TIME WARNER INC. filed this Form 10-Q on 10/26/2017|
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company primarily applies the market approach for valuing recurring fair value measurements. As of September 30, 2017 and December 31, 2016, assets valued using significant unobservable inputs (Level 3) primarily related to warrants to purchase shares of Class A common stock of CME valued at $309 million and $159 million, respectively. The Company estimates the fair value of these warrants using a Monte Carlo Simulation model. Significant unobservable inputs used in the fair value measurement at September 30, 2017 are an expected term of 0.52 years and an expected volatility of approximately 38%. As of September 30, 2017 and December 31, 2016, the other Level 3 assets consisted of equity instruments held by employees of a former subsidiary of the Company. As of September 30, 2017, Level 3 liabilities consisted of a liability related to contingent consideration.
The following table reconciles the beginning and ending balances of net derivative assets and liabilities classified as Level 3 and identifies the total gains (losses) the Company recognized during the nine months ended September 30, 2017 and 2016 on such assets and liabilities that were included in the Consolidated Balance Sheet as of September 30, 2017 and 2016 (millions):
Other Financial Instruments
The Companys other financial instruments, including debt, are not required to be carried at fair value. Based on the interest rates prevailing at September 30, 2017, the fair value of Time Warners public debt exceeded its carrying value by approximately $2.432 billion and, based on interest rates prevailing at December 31, 2016, the fair value of Time Warners public debt exceeded its carrying value by approximately $2.238 billion. The fair value of Time Warners public debt is considered a Level 2 measurement as it is based on observable market inputs such as current interest rates and, where available, actual sales transactions. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized in the consolidated financial statements unless the debt is retired prior to its maturity.
Information as of September 30, 2017 about the Companys investments in CME that are not required to be carried at fair value on a recurring basis is as follows (millions):
The fair values of the Companys investments in CMEs Class A common stock (including Series A convertible preferred stock) and Series B convertible redeemable preferred shares are primarily determined by reference to the September 30, 2017 closing price of CMEs common stock.