Fair Value Measurements
|9 Months Ended|
Sep. 30, 2014
|Fair Value Measurements [Abstract]|
|Fair Value Measurements||
Fair value is defined as the price that would be received from selling an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies accounting standards, which establish a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in valuation techniques. Accounting standards describe a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for similar assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets and liabilities, therefore requiring an entity to develop its own assumptions.
The following tables set forth the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013.
Financial assets and liabilities carried at fair value as of September 30, 2014 and December 31, 2013 were classified as follows (in thousands):
(1) Included in cash and cash equivalents
The fair value of the foreign exchange options at September 30, 2014 and December 31, 2013 was determined using readily observable market inputs from actively quoted markets obtained from various third-party data providers. These inputs, such as spot rate, forward rate and volatility have been derived from readily observable market data, meeting the criteria for Level 2 in the fair value hierarchy.
The fair value of the contingent warrant liabilities at September 30, 2014 and December 31, 2013 was determined using the Black-Scholes Model, which requires unobservable inputs such as the expected term of the warrants, volatility and risk-free interest rate. Changes in this liability are primarily related to fluctuations in the market price of XOMA’s common stock. These inputs are subjective and generally require significant analysis and judgment to derive.
The fair value of the contingent warrant liabilities was estimated using the following range of assumptions at September 30, 2014 and December 31, 2013:
The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2014 (in thousands):
The net decreases of $5.7 million and $33.7 million in the estimated fair value of the contingent warrant liabilities were recognized as gains in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2014, respectively.
For the three and nine months ended September 30, 2013, the Company recognized net increases of $11.1 million and $25.7 million, respectively in the estimated fair value of the contingent warrant liabilities as losses in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss.
The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef