Note S — Fair Value Measurements

Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:

 

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Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

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Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.

 

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Level 3 — Prices or valuation techniques that require significant unobservable data inputs. Inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:

 

						Fair Value Measurement Using (a)
		Total Fair Value				Level 1				Level 2				Level 3
		In thousands
December 2015
Financial assets:
Cash equivalents:
Money market funds		$	495,264			$	495,264			$	—			$	—
Time deposits			39,813				39,813				—				—
Derivative financial instruments			105,791				—				105,791				—
Investment securities			203,797				190,792				13,005				—
Financial liabilities:
Derivative financial instruments			28,032				—				28,032				—
Deferred compensation			252,723				—				252,723				—
December 2014
Financial assets:
Cash equivalents:
Money market funds		$	388,635			$	388,635			$	—			$	—
Time deposits			197,303				197,303				—				—
Derivative financial instruments			105,264				—				105,264				—
Investment securities			228,406				208,874				19,532				—
Other marketable securities			5,111				5,111				—				—
Financial liabilities:
Derivative financial instruments			31,769				—				31,769				—
Deferred compensation			295,226				—				295,226				—

 

(a)	There were no transfers among the levels within the fair value hierarchy during 2015 or 2014.

VF’s cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of forward foreign currency exchange contracts, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies, and considers the credit risk of the Company and its counterparties. Investment securities are held in VF’s deferred compensation plans as an economic hedge of the related deferred compensation liabilities (Note L). These investments are classified as trading securities and primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed-income fund (Level 2) with underlying investments that are valued based on quoted prices for similar assets in active markets or quoted prices in inactive markets for identical assets. Liabilities related to VF’s deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments. Prior to the second quarter of 2015, other marketable securities consisted of common stock investments classified as available-for-sale, the fair value of which was based on quoted prices in active markets. During the second quarter of 2015, VF sold all of its available-for-sale securities for $5.9 million in cash proceeds and recognized a gain of $1.5 million, which is included in other income (expense), net, in the 2015 Consolidated Statement of Income.

All other financial assets and financial liabilities are recorded in the consolidated financial statements at cost, except life insurance contracts which are recorded at cash surrender value. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At December 2015 and 2014, their carrying values approximated their fair values. Additionally, at December 2015 and 2014, the carrying value of VF’s long-term debt, including the current portion, was $1,415.1 million and $1,417.8 million, respectively, compared with fair values of $1,592.4 million and $1,684.1 million at those respective dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.

Nonrecurring Fair Value Measurements

Certain non-financial assets, primarily property, plant and equipment, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets. In the event an impairment is required, the asset is adjusted to fair value, using market-based assumptions.

There were no material impairment charges related to property, plant and equipment in 2015, 2014 or 2013.

Management performed its annual impairment testing of goodwill and indefinite-lived intangible assets during the fourth quarter of 2015, 2014 and 2013. Additionally, in both the fourth quarter of 2015 and 2014, management determined that a triggering event occurred related to the Splendid^® and Ella Moss^® and 7 For All Mankind^® long-lived customer relationship assets based on management’s fourth quarter strategic plan review, and performed impairment testing on these assets.

Impairment charges related to goodwill and intangible assets were recorded in VF’s 2015 and 2014 Consolidated Statements of Income and are summarized as follows:

 

		2015												2014
		Splendid® and Ella Moss®				7 For All Mankind®				Total				Splendid® and Ella Moss®				7 For All Mankind®				Total
		In thousands
Goodwill		$	—			$	—			$	—			$	142,361			$	—			$	142,361
Trademarks			15,334				76,097				91,431				45,700				87,572				133,272
Customer relationships			11,678				40,453				52,131				64,178				56,551				120,729
Total		$	27,012			$	116,550			$	143,562			$	252,239			$	144,123			$	396,362

No impairment charges of goodwill or intangible assets were required in 2013.

Our impairment testing of goodwill, trademarks and customer relationship assets utilizes significant unobservable inputs (Level 3) to determine fair value.

 

The fair value of reporting units for goodwill impairment testing is determined using a combination of two valuation methods: an income approach and a market approach. The income approach is based on projected future (debt-free) cash flows that are discounted to present value. The appropriate discount rate is based on the reporting unit’s weighted average cost of capital (“WACC”) that takes market participant assumptions into consideration. For the market approach, management uses both the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.

Management uses the income-based relief-from-royalty method to value trademark intangible assets. Under this method, revenues expected to be generated by the trademark are multiplied by a selected royalty rate. The royalty rate is selected based on consideration of i) royalty rates included in active license agreements, if applicable, ii) royalty rates received by market participants in the apparel industry, and iii) the current performance of the reporting unit. The estimated after-tax royalty revenue stream is then discounted to present value using the reporting unit’s WACC plus a spread that factors in the risk of the intangible asset.

For the valuation of customer relationship intangible assets, management uses the multi-period excess earnings method which is a specific application of the discounted cash flows method. Under this method, VF calculates the present value of the after-tax cash flows expected to be generated by the customer relationship asset after deducting contributory asset charges.

Management’s revenue and profitability forecasts used in the Splendid^® and Ella Moss^® and 7 For All Mankind^® reporting unit and intangible asset valuations were developed in conjunction with management’s strategic plan review performed each fourth quarter, and our resulting revised outlook for business performance, and considered recent performance and trends, strategic initiatives and negative industry trends in contemporary apparel and premium denim. Assumptions used in the valuations are similar to those that would be used by market participants performing independent valuations of these businesses.