Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements (Note)

v2.4.0.6
Fair Value Measurements (Note)
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
Fair Value Measurements
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value assumptions are made at a specific point in time and changes in underlying assumptions could significantly affect these estimates. HSNi applies the following framework for measuring fair value which is based on a three-level hierarchy:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these items. The following table summarizes the fair value of HSNi's other financial assets and liabilities which are measured at fair value on a recurring basis in the consolidated balance sheets (in thousands):
 
 
December 31, 2012
 
 
 
Total Fair Value and Carrying Value on Balance Sheet
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
 
 
Interest rate swap
 
 
$
755

 
$
—

 
$
755

 
$
—


HSNi's interest rate swap was carried on the balance sheet at fair value as of December 31, 2012. The swap was entered into for the purpose of hedging the variability of interest expense and interest payments on HSNi's long-term variable rate debt. Because this swap is not actively traded, the fair value was based on a valuation model. Interest rate yield curves and credit spreads are the significant inputs included in the valuation model. These inputs are observable in active markets (level 2 criteria). HSNi considers credit risk associated with its own standing as well as the credit standing of any counterparties involved in the valuation of its financial instruments.
The following table summarizes the fair value of HSNi’s financial assets and liabilities which are carried at cost (in thousands):

 
 
December 31, 2012
 
 
Carrying
Value
 
Fair Value
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Secured credit agreement expiring April 24, 2017:
 
 
 
 
 
 
 
 
 
 
Term Loan
 
$
250,000

 
$
250,000

 
$
—

 
$
250,000

 
$
—

 
 
 
December 31, 2011
 
 
Carrying
Value
 
Fair Value
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Secured credit agreement terminated April 24, 2012:
 
 
 
 
 
 
 
 
 
 
Term Loan
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Senior Notes
 
$
240,000

 
$
264,000

 
$
264,000

 
$
—

 
$
—


The fair value of the senior notes was based upon quoted market information (level 1 criteria) and the fair value of the term loan was estimated by discounting expected cash flows at the rates currently offered to HSNi for debt of the same remaining maturities, as advised by HSNi's bankers (level 2 criteria).
HSNi measures certain assets, such as property and equipment and intangible assets, at fair value on a non-recurring basis. These assets are recognized at fair value if they are deemed to be impaired. On July 1, 2012, substantially all of the assets and certain liabilities of The Territory Ahead were sold. An impairment charge of $5.9 million was recorded in the second quarter of 2012 to reduce the carrying value of the net assets to their estimated net realizable value based on the known selling price of $1.1 million and the estimated costs to sell the business. See Note 17 for further discussion of the sale of The Territory Ahead. There were no other fair value adjustments to the carrying values of HSNi's property and equipment and intangible assets during December 31, 2012.
During the year ended December 31, 2011, HSNi recognized fair value adjustments of $2.2 million for indefinite-lived intangible assets of The Territory Ahead. The fair value of the intangible assets, consisting principally of trademarks and trade names, was assessed using the relief from royalty method (level 3 criteria). Key inputs used in this calculation included revenue growth, discount, royalty and terminal growth rates. The fair value adjustment of $2.2 million is included in "Loss from discontinued operations, net of tax" in the accompanying consolidated statements of operations. See Note 3 for a discussion of this impairment charge.
Also during the year ended December 31, 2011, HSNi recognized fair value adjustments of $0.8 million for property and equipment of The Territory Ahead, consisting principally of leasehold improvements. The fair value was determined using discounted future cash flows (level 3 criteria). Key inputs used in this calculation included revenue growth, operating expenses and a discount rate that HSNi believed a buyer would assume when determining a purchase price for the assets. The fair value adjustment of $0.8 million is included in "Loss from discontinued operations, net of tax" in the accompanying consolidated statements of operations. See Note 4 for a discussion of this impairment charge.