Fair Value Measurements
|12 Months Ended|
Dec. 31, 2020
|Fair Value Disclosures [Abstract]|
|Fair Value Measurements||Fair Value Measurements
The accounting standard for fair value measurements defines fair value and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value.
The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;
Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019 and the level they fall within the fair value hierarchy (in thousands):
Non-COLI assets held in the deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in its fair value are recorded as selling, general and administrative expenses.
We account for our interest rate swap agreements under the provisions of ASC 815, Derivatives and Hedging, and have determined that our swap agreements qualify as cash flow hedges. Accordingly, the fair value of the swap agreements, which is a liability recorded in accrued expenses and other current liabilities, of approximately $1.6 million and approximately $1.5 million at December 31, 2020 and 2019, respectively. The offset, net of an income tax effect of approximately $400 thousand and $367 thousand is included in accumulated other comprehensive income in the accompanying balance sheets as of December 31, 2020 and 2019, respectively. The amounts paid and received on the swap agreements are recorded in interest expense in the period during which the related floating-rate interest is incurred. We expect the hedges to remain fully effective during the remaining terms of the swap agreements. We determine the fair value of the swap agreements based on a valuation model using market data inputs.
We utilized an income approach to determine the fair value of our 1st Choice Aerospace acquisition earn-out obligation. Significant unobservable inputs used to value the contingent consideration include projected revenue and cost of services and the discount rate. If a significant increase or decrease in the discount rate occurred in isolation, the result could be significantly higher or lower fair value measurement.
Changes in earn-out obligation measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020 and 2019 are as follows (in thousands):
Measurements on a Non-recurring Basis
The following table presents changes in the Level 3 fair value of certain assets measured on a non-recurring basis for the year ended December 31, 2020 (in thousands):
Goodwill is tested annually or upon the occurrence of a triggering event indicating that an impairment loss may have been incurred. Goodwill is measured on a non-recurring basis using fair value measurements with unobservable inputs (Level 3). The goodwill fair value is determined using a weighting of fair values derived from the income and market approach. Fair value is measured as of the impairment date. Goodwill for the VSE Aviation reporting unit was determined to be impaired and was written down to its estimated fair value during the second quarter of 2020. The key assumptions used to determine the fair value of the VSE Aviation reporting unit were: (a) expected cash flows with a compounded revenue growth rate of approximately 6% for a period of seven years; (b) long-term growth rate of 3% in the terminal year; and (c) a discount rate of 13.5%. The discount rate was based on a weighted average cost of capital adjusted for relevant risks of the reporting unit's future cash flow assumptions, taking into consideration the risks due to the uncertainty surrounding the effects of the COVID-19 pandemic on our operations. A negative change in any of the key assumptions for this reporting unit could increase the likelihood of additional impairment in future periods. For further discussion of the impairment, refer to Note (7) "Goodwill and Intangible Assets."
The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef