Sony 2015 Annual Report Download - page 155

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Fair value measurement -
Sony measures fair value as an exit price, or the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants as of the measurement date.
The accounting guidance for fair value measurements specifies a hierarchy of inputs to valuation techniques
based on the extent to which inputs used in measuring fair value are observable in the market. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect Sony’s assumptions
about the assumptions that market participants would use in pricing the asset or liability. Observable market data
is used if such data is available without undue cost and effort. Each fair value measurement is reported in one of
three levels which is determined by the lowest level input that is significant to the fair value measurement in its
entirety. These levels are:
Level 1 — Inputs are unadjusted quoted prices for identical assets and liabilities in active markets.
Level 2 — Inputs are based on observable inputs other than level 1 prices, such as quoted prices for
similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active and model-derived valuations, in which all significant inputs are
observable in active markets.
Level 3 — One or more significant inputs are unobservable.
When available, Sony uses unadjusted quoted market prices in active markets to measure fair value and
classifies such items within level 1. If quoted market prices are not available, fair value is based upon internally
developed valuation techniques that use, where possible, current market-based or independently sourced market
parameters, such as interest rates, currency rates and option volatilities. Items valued using internally generated
models are classified according to the lowest level input that is significant to the valuation. For certain financial
assets and liabilities, Sony determines fair value using third-party information such as indicative quotes from
dealers and quantitative input from investment advisors following Sony’s established valuation procedures
including validation against internally developed prices. Additionally, Sony considers both counterparty credit
risk and Sony’s own creditworthiness in determining fair value. Sony attempts to mitigate credit risk to third
parties by entering into netting agreements and actively monitoring the creditworthiness of counterparties and its
exposure to credit risk through the use of credit limits and by selecting major international banks and financial
institutions as counterparties.
Transfers between levels are deemed to have occurred at the beginning of the interim period in which the
transfers occur.
Derivative financial instruments -
All derivatives are recognized as either assets or liabilities in the consolidated balance sheets at fair value on
a gross basis. Changes in the fair value of derivative financial instruments are either recognized periodically in
income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on
whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes
in fair value or cash flows.
The accounting guidance for hybrid financial instruments permits an entity to elect fair value
remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that
would otherwise be required to be bifurcated and accounted for separately under accounting guidance for
derivative instruments and hedging activities. The election to measure the hybrid instrument at fair value is made
on an instrument-by-instrument basis and is irreversible. Certain subsidiaries in the Financial Services segment
had hybrid financial instruments, disclosed in Note 7 as debt securities, that contain embedded derivatives where
the entire instrument was carried at fair value.
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