4. FAIR VALUE OF FINANCIAL INSTRUMENTS

We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. We show the carrying values and the fair values of non-current financial assets and liabilities that qualify as financial instruments, determined in accordance with current guidance for disclosures on the fair value of financial instruments, in the following table. On November 21, 2011, we transferred all balances related to Loans to timeshare owners (both securitized and non-securitized) and non-recourse debt associated with securitized notes receivable to MVW as part of the spin-off. See Footnote No. 17, “Spin-off” for additional information.

At year-end 2010, we estimated the fair value of the securitized notes receivable using a discounted cash flow model. We believed this was comparable to a model that an independent third party would use in the then current market. Our model used default rates, prepayment rates, coupon rates and loan terms for our securitized notes receivable portfolio as key drivers of risk and relative value, that when applied in combination with pricing parameters, determined the fair value of the underlying notes receivable.

At year-end 2010, we estimated the fair value of the portion of our non-securitized notes receivable that we believed will ultimately be securitized in the same manner as securitized notes receivable. We valued the remaining non-securitized notes receivable at their carrying value, rather than using our pricing model. We believed that the carrying value of such notes receivable approximated fair value because the stated interest rates of these loans were consistent with current market rates and the reserve for these notes receivable appropriately accounted for risks in default rates, prepayment rates, and loan terms.

We estimate the fair value of our senior, mezzanine, and other loans by discounting cash flows using risk-adjusted rates. We estimate the fair value of our cost method investments by applying a cap rate to stabilized earnings (a market approach). The carrying value of our restricted cash approximates its fair value.

At year-end 2010, we estimated the fair value of our non-recourse debt associated with securitized notes receivable using internally generated cash flow estimates derived by modeling all bond tranches for our active notes receivable securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in our analysis included default rates, prepayment rates, bond interest rates and other structural factors, which we used to estimate the projected cash flows. In order to estimate market credit spreads by rating, we reviewed market spreads from timeshare notes receivable securitizations and other asset-backed transactions that occurred in the market during fiscal year 2010. We then applied those estimated market spreads to swap rates in order to estimate an underlying discount rate for calculating the fair value of the active bonds payable.

We estimate the fair value of our other long-term debt, excluding leases, using expected future payments discounted at risk-adjusted rates, and we determine the fair value of our senior notes using quoted market prices. At year-end 2011 the carrying value of our commercial paper approximated its fair value due to the short maturity. Other long-term liabilities represent guarantee costs and reserves and deposit liabilities. The carrying values of our guarantee costs and reserves approximate their fair values. We estimate the fair value of our deposit liabilities primarily by discounting future payments at a risk-adjusted rate.

We are required to carry our marketable securities at fair value. We value these securities using directly observable Level 1 inputs. The carrying value of our marketable securities at year-end 2011 was $50 million, which included debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs as well as shares of a publicly traded company. During 2011, a company in which we owned an investment that we accounted for using the cost method became a publicly traded company. Accordingly, we reclassified the investment to marketable securities and now record our investment at fair value. We determined that this security was other-than-temporarily impaired as of the end of the 2011 third quarter and, correspondingly, we recognized an $18 million loss in the 2011 third quarter which we reflected in the “(Losses) gains and other income” caption of our Income Statement. This loss included $10 million of losses that had been recorded in other comprehensive income as of the end of the 2011 second quarter.

We are also required to carry our derivative assets and liabilities at fair value. As of year-end 2011, we had no derivative instruments in a long-term asset or long-term liability position. On November 21, 2011, we transferred the long-term asset position of our derivative instruments to MVW in conjunction with the spin-off. See Footnote No. 17, “Spin-off” for additional information. Prior to the spin-off, we used Level 3 inputs to value these derivatives, using valuations that we calibrated to the initial trade prices, with subsequent valuations based on unobservable inputs to the valuation model, including interest rates and volatilities.

See the “Fair Value Measurements” caption of Footnote No. 1, “Summary of Significant Accounting Policies” for additional information.

Prior to the spin-off, in preparing our former Timeshare segment to operate as an independent, publicly traded company following our spin-off of MVW (see Footnote No. 17, “Spin-off” for additional information), management assessed the Timeshare segment’s intended use of excess undeveloped land and built inventory and the current market conditions for those assets. During the third quarter of 2011, in conjunction with our evaluation of these specific Timeshare assets and our resulting decisions to accelerate cash flow through the monetization of certain excess undeveloped land and to offer incentives to accelerate sales of excess built luxury fractional and residential inventory, we recorded $324 million ($234 million after-tax) of impairment charges, reflected in our 2011 Income Statement in the “Timeshare Strategy - Impairment Charges” caption, to write down the carrying amounts of inventory and property and equipment to their respective fair values. For additional information, see Footnote No. 18, “Timeshare Strategy - Impairment Charges.”

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