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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934.

For the transition period from                                 to                                 .

Commission file number 001-33099

 

LOGO

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

    

32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

         (I.R.S. Employer Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(Zip Code)

(212) 810-5300

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

             X               No                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

             X               No                                

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or, a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer           X      

   Accelerated filer                         Non-accelerated filer              

Smaller reporting company                  

   (Do not check if a smaller

reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                                

   No           X        

As of October 31, 2014, there were 165,213,996 shares of the registrant’s common stock outstanding.


Table of Contents

BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

          Page  
Item 1.    Financial Statements (unaudited)   
       Condensed Consolidated Statements of Financial Condition      1   
       Condensed Consolidated Statements of Income      2   
       Condensed Consolidated Statements of Comprehensive Income      3   
       Condensed Consolidated Statements of Changes in Equity      4   
       Condensed Consolidated Statements of Cash Flows      6   
       Notes to Condensed Consolidated Financial Statements      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      36   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      68   
Item 4.    Controls and Procedures      70   

PART II

OTHER INFORMATION

 

Item 1.    Legal Proceedings      71   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      72   
Item 6.    Exhibits      73   

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(unaudited)

 

(in millions, except share data)    September 30, 
2014
    December 31,
2013
 

Assets

    

Cash and cash equivalents

     $    6,149        $    4,390   

Accounts receivable

     2,631        2,247   

Investments

     1,951        2,151   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     175        161   

Bank loans, other investments and other assets

     2,883        2,325   

Separate account assets

     156,479        155,113   

Separate account collateral held under securities lending agreements

     20,966        21,788   

Property and equipment (net of accumulated depreciation of $680 and $611 at September 30, 2014 and December 31, 2013, respectively)

     468        525   

Intangible assets (net of accumulated amortization of $1,176 and $1,057 at September 30, 2014 and December 31, 2013, respectively)

     17,378        17,501   

Goodwill

     12,966        12,980   

Other assets

     766        692   
  

 

 

   

 

 

 

Total assets

                     $222,812                        $219,873   
  

 

 

   

 

 

 

Liabilities

    

Accrued compensation and benefits

     $    1,487        $    1,747   

Accounts payable and accrued liabilities

     1,576        1,084   

Liabilities of consolidated variable interest entities:

    

Borrowings

     2,889        2,369   

Other liabilities

     167        74   

Borrowings

     5,937        4,939   

Separate account liabilities

     156,479        155,113   

Separate account collateral liabilities under securities lending agreements

     20,966        21,788   

Deferred income tax liabilities

     5,056        5,085   

Other liabilities

     971        1,004   
  

 

 

   

 

 

 

Total liabilities

     195,528        193,203   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Temporary equity

    

Redeemable noncontrolling interests

     49        54   

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     2        2   

Shares authorized: 500,000,000 at September 30, 2014 and December 31, 2013;

    

Shares issued: 171,252,185 at September, 30, 2014 and December 31, 2013;

    

Shares outstanding: 165,475,182 and 166,589,688 at September 30, 2014 and December 31, 2013, respectively

    

Preferred stock (Note 16)

     -        -   

Additional paid-in capital

     19,270        19,473   

Retained earnings

     9,673        8,208   

Appropriated retained earnings

     (13     22   

Accumulated other comprehensive loss

     (169     (35

Treasury stock, common, at cost (5,777,003 and 4,662,497 shares held at September 30, 2014 and December 31, 2013, respectively)

     (1,657     (1,210
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     27,106        26,460   

Nonredeemable noncontrolling interests

     114        135   

Nonredeemable noncontrolling interests of consolidated variable interest entities

     15        21   
  

 

 

   

 

 

 

Total permanent equity

     27,235        26,616   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

     $222,812        $219,873   
  

 

 

   

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Income

(unaudited)

 

(in millions, except shares and per share data)   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  

Revenue

     

Investment advisory, administration fees and securities lending revenue:

     

Related parties

    $1,744        $1,478        $5,044        $4,403   

Other third parties

    724        675        2,149        2,056   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment advisory, administration fees and securities lending revenue

    2,468        2,153        7,193        6,459   

Investment advisory performance fees

    133        96        406        293   

BlackRock Solutions and advisory

    165        156        465        420   

Distribution fees

    17        19        54        54   

Other revenue

    66        48        179        177   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,849        2,472        8,297        7,403   

Expense

     

Employee compensation and benefits

    973        866        2,903        2,635   

Distribution and servicing costs

    90        85        268        266   

Amortization of deferred sales commissions

    14        14        43        38   

Direct fund expense

    199        167        565        490   

General and administration

    376        334        1,066        1,130   

Amortization of intangible assets

    40        40        122        120   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expense

    1,692        1,506        4,967        4,679   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,157        966        3,330        2,724   

Nonoperating income (expense)

     

Net gain (loss) on investments

    46        32        167        235   

Net gain (loss) on consolidated variable interest entities

    (47     (6     (35     (2

Interest and dividend income

    10        8        23        18   

Interest expense

    (61     (52     (174     (159
 

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense)

    (52     (18     (19     92   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    1,105        948        3,311        2,816   

Income tax expense

    232        219        853        715   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    873        729        2,458        2,101   

Less:

     

Net income (loss) attributable to redeemable noncontrolling interests

    -        -        2        (1

Net income (loss) attributable to nonredeemable noncontrolling interests

    (44     (1     (25     11   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

    $917        $730        $2,481        $2,091   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to BlackRock, Inc. common stockholders:

     

Basic

    $5.46        $4.30        $14.72        $12.26   

Diluted

    $5.37        $4.21        $14.48        $12.02   

Cash dividends declared and paid per share

    $1.93        $1.68        $5.79        $5.04   

Weighted-average common shares outstanding:

       

Basic

    167,933,040        169,811,633        168,571,354        170,581,930   

Diluted

    170,778,766        173,371,508        171,351,276        174,012,876   

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

(in millions)       Three Months Ended    
September 30,
        Nine Months Ended    
September 30,
 
      2014          2013         2014         2013    

Net income

  $ 873      $ 729      $ 2,458      $ 2,101   

Other comprehensive income:

       

Change in net unrealized gains (losses) from available-for-sale investments, net of tax:

       

Unrealized holding gains (losses), net of tax(1)

    (1     2        3        3   

Less: reclassification adjustment included in net income(1)

    2        1        8        10   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net change from available-for-sale investments, net of tax

    (3     1        (5     (7

Foreign currency translation adjustments

    (167     118        (129     (13
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    (170     119        (134     (20
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    703        848        2,324        2,081   

Less: Comprehensive income (loss) attributable to noncontrolling interests

    (44     (1     (23     10   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to BlackRock, Inc.

  $ 747      $ 849      $ 2,347      $ 2,071   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

The tax benefit (expense) was not material for the three and nine months ended September 30, 2014 and 2013.

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

(in millions)   Additional
Paid-in
Capital(1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
Common
    Total
BlackRock
Stockholders’
Equity
    Nonredeemable
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Noncontrolling
Interests /
Temporary
Equity
 

December 31, 2013

    $19,475         $8,208         $22         ($35)         ($1,210)         $26,460         $135         $21         $26,616         $54    

Net income

    -         2,481         -         -         -         2,481          10         (35)         2,456         2    

Allocation of gains (losses) of consolidated collateralized loan obligations

    -         -         (35)         -         -         (35)         -         35         -         -    

Dividends paid

    -         (1,016)         -         -         -         (1,016)         -         -         (1,016)         -    

Stock-based compensation

    336         -         -         -         -         336         -         -         336         -    

Issuance of common shares related to employee stock transactions

    (632)         -         -         -         641         9         -         -         9         -    

Employee tax withholdings related to employee stock transactions

    -         -         -         -         (338)         (338)         -         -         (338)         -    

Shares repurchased

    -         -         -         -         (750)         (750)         -         -         (750)         -    

Net tax benefit (shortfall) from stock-based compensation

    93         -         -         -         -         93         -         -         93         -    

Subscriptions (redemptions/ distributions)-noncontrolling interest holders

    -         -         -         -         -         -         (31)         (6)         (37)         247    

Net consolidations (deconsolidations) of sponsored investment funds

    -         -         -         -         -         -         -         -         -         (254)    

Other comprehensive income (loss)

    -         -         -         (134)         -         (134)         -         -         (134)         -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2014

      $19,272           $9,673         ($13)             ($169)             ($1,657)             $27,106             $114             $15             $27,235             $49    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

Amounts include $2 million of common stock at both September 30, 2014 and December 31, 2013.

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

(in millions)   Additional
Paid-in
Capital(1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
Common
    Total
BlackRock
Stockholders’
Equity
    Nonredeemable
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Noncontrolling
Interests /
Temporary
Equity
 

December 31, 2012

    $19,421         $6,444          $29         ($59)         ($432)         $25,403         $155         $27         $25,585         $32    

Net income

    -         2,091          -         -         -         2,091         13         (2)         2,102         (1)    

Allocation of gains (losses) of consolidated collateralized loan obligations

    -         -         (4)         -         -         (4)         -         4         -         -    

Dividends paid

    -         (882)          -         -         -         (882)         -         -         (882)         -    

Stock-based compensation

    339         -         -         -         1         340         -         -         340         -    

Issuance of common shares related to employee stock transactions

    (402)         -         -         -         422         20         -         -         20         -    

Employee tax withholdings related to employee stock transactions

    -         -         -         -         (234)         (234)         -         -         (234)         -    

Shares repurchased

    -         -         -         -         (750)         (750)         -         -         (750)         -    

Net tax benefit (shortfall) from stock-based compensation

    35         -         -         -         -         35         -         -         35         -    

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -         -         -         -         -         -         (41)         124         83         104    

Net consolidations (deconsolidations) of sponsored investment funds

    -         -         -         -         -         -         -         (134)         (134)         (94)    

Other comprehensive income (loss)

    -         -         -         (20)         -         (20)         -         -         (20)         -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

      $19,393           $7,653             $25             ($79)             ($993)             $25,999             $127             $19             $26,145             $41    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

Amounts include $2 million of common stock at both September 30, 2013 and December 31, 2012.

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

(in millions)        Nine Months Ended    
September 30,
 
     2014     2013  

Cash flows from operating activities

    

Net income

     $2,458        $2,101   

Adjustments to reconcile net income to cash flows from operating activities:

    

Depreciation and amortization

     215        215   

Amortization of deferred sales commissions

     43        38   

Stock-based compensation

     336        340   

Deferred income tax expense (benefit)

     (31     (44

Net (gains) losses on nontrading investments

     (53     (46

Purchases of investments within consolidated sponsored investment funds

     (151     (45

Proceeds from sales and maturities of investments within consolidated sponsored investment funds

     113        112   

Gain related to PennyMac initial public offering

     -        (39

Gain related to the charitable contribution

     -        (80

Charitable contribution

     -        124   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     10        204   

Net (gains) losses within consolidated VIEs

     35        2   

Net (purchases) proceeds and distributions within consolidated VIEs

     (540     15   

(Earnings) losses from equity method investees

     (133     (110

Distributions of earnings from equity method investees

     44        39   

Other adjustments

     7        -   

Changes in operating assets and liabilities:

    

Accounts receivable

     (426     (2,061

Investments, trading

     (189     (205

Other assets

     (139     (139

Accrued compensation and benefits

     (272     (225

Accounts payable and accrued liabilities

     473        2,264   

Other liabilities

     10        16   
  

 

 

   

 

 

 

Cash flows from operating activities

     1,810        2,476   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (304     (188

Proceeds from sales and maturities of investments

     504        225   

Distributions of capital from equity method investees

     130        51   

Net consolidations (deconsolidations) of sponsored investment funds

     (33     (63

Acquisitions, net of cash acquired

     -        (240

Purchases of property and equipment

     (40     (60
  

 

 

   

 

 

 

Cash flows from investing activities

     257        (275
  

 

 

   

 

 

 

Cash flows from financing activities

    

Repayments of short-term borrowings

     -        (100

Repayments of long-term borrowings

     -        (750

Proceeds from long-term borrowings

     997        -   

Cash dividends paid

     (1,016     (882

Repurchases of common stock

     (1,088     (984

Net proceeds from (repayments of) borrowings by consolidated VIEs

     536        (343

Net (redemptions/distributions paid) / subscriptions received from noncontrolling interests holders

     210        187   

Excess tax benefit from stock-based compensation

     93        40   

Other financing activities

     5        20   
  

 

 

   

 

 

 

Cash flows from financing activities

     (263     (2,812
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (45     (8
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,759        (619

Cash and cash equivalents, beginning of period

     4,390        4,606   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $6,149        $3,987   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest

     $140        $125   

Interest on borrowings of consolidated VIEs

     $112        $82   

Income taxes

     $992        $746   

Supplemental schedule of noncash investing and financing transactions:

    

Issuance of common stock

     $632        $402   

Increase (decrease) in noncontrolling interests due to net consolidation (deconsolidation) of sponsored investment funds

     ($254     ($228

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.  Business Overview

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide.

BlackRock’s diverse platform of active (alpha) and index (beta) investment strategies across asset classes enables the Company to tailor investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. Products are offered directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”), separate accounts, collective investment funds and other pooled investment vehicles. BlackRock also offers the BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics and advisory services and solutions to a broad base of institutional investors.

At September 30, 2014, The PNC Financial Services Group, Inc. (“PNC”) held 21.0% of the Company’s voting common stock and 22.0% of the Company’s capital stock, which includes outstanding common and nonvoting preferred stock.

2.  Significant Accounting Policies

Basis of Presentation.    These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Noncontrolling interests on the condensed consolidated statements of financial condition represents the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Accounts and transactions between consolidated entities have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from those estimates.

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2014 (“2013 Form 10-K”).

The interim financial information at September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Fair Value Measurements.

Hierarchy of Fair Value Inputs.    The provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 Inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.

 

   

Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”), which in accordance with GAAP, are calculated under fair value measures and the changes in fair values are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives.

 

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Level 2 Inputs:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company uses the NAV (or its equivalent) of certain investments as their fair value.

 

   

Level 2 assets may include debt securities, bank loans, short-term floating-rate notes, asset-backed securities, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds valued based on NAV (or its equivalent) where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data.

Level 3 Inputs:

Unobservable inputs for the valuation of the asset or liability, which may include nonbinding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV (or its equivalent) and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.

 

   

Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds.

 

   

Level 3 liabilities include borrowings of consolidated collateralized loan obligations (“CLOs”) valued based upon nonbinding single-broker quotes.

 

   

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices.

Significance of Inputs.    The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Valuation Techniques. The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of the current market environment and other analytical procedures.

As a practical expedient, the Company uses NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships generally are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information from third-party sources, including independent appraisals. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

A significant number of inputs used to value equity, debt securities and bank loans is sourced from third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRock’s internal valuation committee or other designated groups review both the valuation methodologies, including the general assumptions and methods used to value various asset classes, and operational processes with these vendors. On a quarterly basis, meetings are held with key vendors to identify any significant changes to the vendors’ processes.

In addition, quotes obtained from brokers generally are nonbinding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.

 

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Fair Value Option.    ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies an irrevocable election to use fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, which must be applied to an entire instrument, and not only specified risks, specific cash flows, or portions of that instrument, and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method.

The Company applies the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings, held by consolidated CLOs to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplification. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference is reflected as net income (loss) attributable to nonredeemable noncontrolling interests on the condensed consolidated statements of income and offset by a change in appropriated retained earnings on the condensed consolidated statements of financial condition.

Derivative Instruments and Hedging Activities.    ASC 815-10, Derivatives and Hedging (“ASC 815-10”), establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. ASC 815-10 generally requires an entity to recognize all derivatives as either assets or liabilities on the condensed consolidated statements of financial condition and to measure those investments at fair value.

The Company does not use derivative financial instruments for trading or speculative purposes. The Company may use derivative financial instruments primarily for purposes of hedging: (i) exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, (ii) market exposures for certain seed investments and (iii) future cash flows on floating-rate notes. The Company may also use derivatives within its separate account assets, which are segregated funds held for purposes of funding individual and group pension contracts. In addition, certain consolidated sponsored investment funds may also invest in derivatives as a part of their investment strategy.

Changes in the fair value of the Company’s derivative financial instruments are generally recognized in earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities or hedged investments, on the condensed consolidated statements of income.

Separate Account Assets and Liabilities.    Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The life insurance company does not underwrite any insurance contracts that involve any insurance risk transfer from the insured to the life insurance company. The separate account assets primarily include equity securities, debt securities, money market funds and derivatives. The separate account assets are not subject to general claims of the creditors of BlackRock. These separate account assets and the related equal and offsetting liabilities are recorded as separate account assets and separate account liabilities on the condensed consolidated statements of financial condition in accordance with ASC 944-80, Financial Services – Separate Accounts.

The net investment income attributable to separate account assets supporting individual and group pension contracts accrues directly to the contract owner and is not reported on the condensed consolidated statements of income. While BlackRock has no economic interest in these separate account assets and liabilities, BlackRock earns policy administration and management fees associated with these products, which are included in investment advisory, administration fees and securities lending revenue on the condensed consolidated statements of income.

Separate Account Collateral Assets Held and Liabilities Under Securities Lending Agreements.    The Company facilitates securities lending arrangements whereby securities held by separate account assets maintained by BlackRock Life Limited are lent to third parties under global master securities lending agreements. In exchange, the Company receives collateral with minimum values generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. The required collateral value is calculated on a daily basis. The global master securities lending agreements provide the Company the right to request additional collateral or, in the event of borrower default, the right to liquidate collateral. Under the Company’s securities lending arrangements, the Company can resell or repledge the collateral and the borrower can resell or repledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales under ASC 860, Transfers and Servicing.

 

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As a result of the Company’s ability to resell or repledge the collateral, the Company records on the condensed consolidated statements of financial condition the cash and noncash collateral received under these arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. During the nine months ended September 30, 2014 and 2013, the Company had not resold or repledged any of the collateral received under these arrangements. At September 30, 2014 and December 31, 2013, the fair value of loaned securities held by separate account assets was approximately $19.1 billion and $19.7 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $21.0 billion and $21.8 billion, respectively.

Appropriated Retained Earnings.    Upon the consolidation of CLOs, BlackRock records an adjustment to appropriated retained earnings on the condensed consolidated statements of financial condition equal to the difference between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. The net change in the fair value of the CLOs’ assets and liabilities is recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as a change to appropriated retained earnings.

Accounting Pronouncements Adopted in the Nine Months Ended September 30, 2014

Cumulative Translation Adjustment.    In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The adoption of ASU 2013-05 on January 1, 2014 was not material to the condensed consolidated financial statements.

Investment Company Guidance.    In June 2013, the FASB issued ASU 2013-08, Financial Services – Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 amends the current criteria for an entity to qualify as an investment company, creates new disclosure requirements and amends the measurement criteria for certain interests in other investment companies. The adoption of ASU 2013-08 on January 1, 2014 was not material to the condensed consolidated financial statements.

Presentation of an Unrecognized Tax Benefit.    In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The adoption of ASU 2013-11 on January 1, 2014 was not material to the condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Revenue from Contracts with Customers.    In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The Company is currently evaluating the impact of adopting ASU 2014-09, which is effective for the Company on January 1, 2017.

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.    In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”). ASU 2014-13 provides an entity that consolidates a collateralized financing entity (“CFE”) that had elected the fair value option for the financial assets and financial liabilities of such CFE an alternative to current fair value measurement guidance. If elected, the Company could measure both the financial assets and the financial liabilities of the CFE by using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The election would effectively eliminate any measurement difference previously recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as an adjustment to appropriated retained earnings. ASU 2014-13 is effective for the Company on January 1, 2016, with retrospective or modified retrospective approach required. The Company currently expects to early adopt ASU 2014-13 and does not expect the adoption to be material to the consolidated financial statements.

 

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3.  Investments

A summary of the carrying value of total investments is as follows:

 

(in millions)   September 30,
2014
   December 31,
2013

Available-for-sale investments

    $221           $183     

Held-to-maturity investments

    64           83     

Trading investments:

        

Consolidated sponsored investment funds

    396           385     

Other equity and debt securities

    18           43     

Deferred compensation plan mutual funds

    63           58     
 

 

 

  

 

 

Total trading investments

    477           486     

Other investments:

        

Consolidated sponsored investment funds

    288           441     

Equity method investments

    658           697     

Deferred compensation plan hedge fund equity method investments

    21           39     

Cost method investments(1)

    96           119     

Carried interest

    126           103     
 

 

 

  

 

 

Total other investments

    1,189           1,399     
 

 

 

  

 

 

Total investments

                $1,951                       $2,151     
 

 

 

  

 

 

 

(1) Amounts primarily include Federal Reserve Bank Stock.

At September 30, 2014, the Company consolidated $684 million of investments held by consolidated sponsored investment funds (excluding variable interest entities (“VIEs”)) of which $396 million and $288 million were classified as trading investments and other investments, respectively. At December 31, 2013, the Company consolidated $826 million of investments held by consolidated sponsored investment funds (excluding VIEs) of which $385 million and $441 million were classified as trading investments and other investments, respectively.

Available-for-Sale Investments

A summary of the cost and carrying value of investments classified as available-for-sale investments is as follows:

 

(in millions)                                    
        Gross Unrealized   Carrying
Value
 
September 30, 2014   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $222          $7          ($8)          $221   
December 31, 2013                  

Equity securities of sponsored investment funds

    $180          $4          ($4)          $180   

Other securities

    1          2          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

            $181                  $6                  ($4)                  $183   
 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale investments primarily included seed investments in BlackRock sponsored mutual funds.

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $64 million and $83 million at September 30, 2014 and December 31, 2013, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and the amortized cost (carrying value) of these investments approximated fair value. At September 30, 2014, $48 million of these investments mature in one year or less, $2 million mature after one year through five years, and $14 million mature after 10 years.

 

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Table of Contents

Trading Investments

A summary of the cost and carrying value of trading investments is as follows:

 

(in millions)        September 30, 2014              December 31, 2013      
     Cost      Carrying
Value
     Cost      Carrying
Value
 
  

 

 

    

 

 

 

Trading investments:

     

Deferred compensation plan mutual funds

     $  48         $  63         $  49         $  58   

Equity securities/multi-asset mutual funds

     195         212         174         184   

Debt securities/fixed income mutual funds:

           

Corporate debt

     87         88         128         128   

Government debt

     97         101         121         116   

Asset/mortgage backed debt

     13         13         -         -   
  

 

 

    

 

 

 

Total trading investments

         $440                 $477             $472                 $486   
  

 

 

    

 

 

 

At September 30, 2014, trading investments included $204 million of equity securities and $192 million of debt securities held by consolidated sponsored investment funds, $63 million of certain deferred compensation plan mutual fund investments and $18 million of other equity and debt securities.

At December 31, 2013, trading investments included $172 million of equity securities and $213 million of debt securities held by consolidated sponsored investment funds, $58 million of certain deferred compensation plan mutual fund investments and $43 million of other equity and debt securities.

Other Investments

A summary of the cost and carrying value of other investments is as follows:

 

        (in millions)    September 30, 2014      December 31, 2013  
     Cost      Carrying
Value
     Cost      Carrying
Value
 
  

 

 

    

 

 

 

Other investments:

           

Consolidated sponsored investment funds

     $274         $288         $420         $441   

Equity method

     559         658         613         697   

Deferred compensation plan equity method investments

     22         21         37         39   

Cost method investments:

           

Federal Reserve Bank stock

     91         91         90         90   

Other

     5         5         17         29   
  

 

 

    

 

 

 

Total cost method investments

     96         96         107         119   

Carried interest

     -         126         -         103   
  

 

 

    

 

 

 

Total other investments

             $951                 $1,189                 $1,177                 $1,399   
  

 

 

    

 

 

 

Consolidated sponsored investment funds include third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.

Equity method investments primarily include BlackRock’s direct investments in certain BlackRock sponsored investment funds. See Note 10, Other Assets, for information on the Company’s investment in PennyMac Financial Services, Inc. (“PennyMac”), which is included in other assets on the condensed consolidated statements of financial condition.

Cost method investments include nonmarketable securities, including Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale. At September 30, 2014 and December 31, 2013, there were no indicators of impairment on these investments.

Carried interest represents allocations to BlackRock’s general partner capital accounts from certain funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds.

 

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4. Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. The investments owned by these consolidated sponsored investment funds are classified as trading or other investments. The following table presents the balances related to these consolidated funds that were included on the condensed consolidated statements of financial condition as well as BlackRock’s net interest in these funds:

 

(in millions)    September 30,
2014
    December 31,
2013
 

Cash and cash equivalents

     $  127        $114   

Investments:

    

Trading investments

     396        385   

Other investments

     288        441   

Other assets

     17        20   

Other liabilities

     (11     (39

Noncontrolling interests

     (163     (189
  

 

 

   

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

                       $654                          $732   
  

 

 

   

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds represents the value of its economic ownership interest in these sponsored investment funds. Valuation changes associated with investments held at fair value by these consolidated investment funds are reflected in nonoperating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.

In addition, at September 30, 2014 and December 31, 2013, several consolidated CLOs and one sponsored investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion on these consolidated investment products.

The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in the Company’s operations.

 

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5.  Fair Value Disclosures

Fair Value Hierarchy

Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value

 

September 30, 2014

(in millions)

 

Quoted
Prices in

Active

Markets for
Identical
Assets

(Level 1)

    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other Assets
Not Held at Fair
Value(1)
   

September 30,

2014

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities of sponsored investment funds

  $ 218      $ 3      $ -      $ -      $ 221   

Held-to-maturity debt securities

    -        -        -        64        64   

Trading:

         

Deferred compensation plan mutual funds

    63        -        -        -        63   

Equity/Multi-asset mutual funds

    212        -        -        -        212   

Debt securities / fixed income mutual funds

    10        192        -        -        202   
 

 

 

 

Total trading

    285        192        -        -        477   

Other investments:

         

Consolidated sponsored investment funds:

         

Private / public equity(2)

    6        21        258        -        285   

Hedge funds / Funds of funds

    -        -        3        -        3   
 

 

 

 

Total consolidated sponsored investment funds

    6        21        261        -        288   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        241        73        5        319   

Private equity investments

    -        -        104        -        104   

Real estate funds

    -        21        92        8        121   

Fixed income mutual funds

    19        -        -        -        19   

Other

    95        -        -        -        95   
 

 

 

 

Total equity method

    114        262        269        13        658   

Deferred compensation plan equity method investments

    -        -        21        -        21   

Cost method investments

    -        -        -        96        96   

Carried interest

    -        -        -        126        126   
 

 

 

 

Total investments

    623        478        551        299        1,951   
 

 

 

 

Separate account assets

    111,222        44,460        -        797        156,479   

Separate account collateral held under securities lending agreements:

         

Equity securities

    17,197        -        -        -        17,197   

Debt securities

    -        3,769        -        -        3,769   
 

 

 

 

Total separate account collateral held under securities lending agreements

    17,197        3,769        -        -        20,966   

Assets of consolidated VIEs:

         

Bank loans and other assets

    -        2,546        204        65        2,815   

Bonds

    -        33        17        -        50   

Private / public equity(3)

    2        5        11        -        18   
 

 

 

 

Total assets of consolidated VIEs

    2        2,584        232        65        2,883   
 

 

 

 

Total

  $ 129,044      $ 51,291      $ 783        1,161      $ 182,279   
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

  $ -      $ -      $ 2,889      $ -      $ 2,889   

Separate account collateral liabilities under securities lending agreements

    17,197        3,769        -        -        20,966   

Other liabilities(4)

    -        5        39        -        44   
 

 

 

 

Total

  $ 17,197      $ 3,774      $ 2,928      $ -      $ 23,899   
 

 

 

 

 

  (1) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

  (2) 

Level 3 amounts include $181 million and $77 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Level 3 amounts include $11 million of underlying third-party private equity funds held by a consolidated private equity fund of fund.

  (4) 

Amounts include a derivative (see Note 7, Derivatives and Hedging, for more information) and contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA (see Note 12, Commitments and Contingencies, for more information).

 

14


Table of Contents

Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value

 

December 31, 2013

(in millions)

 

Quoted
Prices in

Active

Markets for
Identical
Assets

(Level 1)

    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other Assets
Not Held at
Fair Value(1)
   

December 31,

2013

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities of sponsored investment funds

  $ 180      $ -      $ -      $ -      $ 180   

Other securities

    -        3        -        -        3   
 

 

 

 

Total available-for-sale

    180        3        -        -        183   

Held-to-maturity debt securities

    -        -        -        83        83   

Trading:

         

Deferred compensation plan mutual funds

    58        -        -        -        58   

Equity/Multi-asset mutual funds

    184        -        -        -        184   

Debt securities / fixed income mutual funds

    31        213        -        -        244   
 

 

 

 

Total trading

    273        213        -        -        486   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    -        135        24        -        159   

Private / public equity(2)

    5        13        223        41        282   
 

 

 

 

Total consolidated sponsored investment funds

    5        148        247        41        441   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        177        99        63        339   

Private equity investments

    -        -        101        -        101   

Real estate funds

    -        20        98        7        125   

Fixed income mutual funds

    113        -        -        -        113   

Equity/Multi-asset, alternative mutual funds

    19        -        -        -        19   
 

 

 

 

Total equity method

    132        197        298        70        697   

Deferred compensation plan equity method investments

    -        10        29        -        39   

Cost method investments

    -        -        -        119        119   

Carried interest

    -        -        -        103        103   
 

 

 

 

Total investments

    590        571        574        416        2,151   
 

 

 

 

Separate account assets

    113,382        40,841        -        890        155,113   

Separate account collateral held under securities lending agreements:

         

Equity securities

    20,856        -        -        -        20,856   

Debt securities

    -        932        -        -        932   
 

 

 

 

Total separate account collateral held under securities lending agreements

    20,856        932        -        -        21,788   

Other assets(3)

    -        39        -        -        39   

Assets of consolidated VIEs:

         

Bank loans and other assets

    -        2,047        129        19        2,195   

Bonds

    -        71        35        -        106   

Private / public equity(4)

    -        10        14        -        24   
 

 

 

 

Total assets of consolidated VIEs

    -        2,128        178        19        2,325   
 

 

 

 

Total

  $ 134,828      $ 44,511      $ 752      $ 1,325      $ 181,416   
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

  $ -      $ -      $ 2,369      $ -      $ 2,369   

Separate account collateral liabilities under securities lending agreements

    20,856        932        -        -        21,788   

Other liabilities(5)

    18        4        42        -        64   
 

 

 

 

Total

  $ 20,874      $ 936      $ 2,411      $ -      $ 24,221   
 

 

 

 

 

  (1) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

  (2) 

Level 3 amounts include $195 million and $28 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Amount includes company-owned and split-dollar life insurance policies and unrealized gains on forward foreign currency exchange contracts.

  (4) 

Level 3 amounts include $14 million of underlying third-party private equity funds held by a sponsored private equity fund of fund.

  (5) 

Amounts include a derivative (see Note 7, Derivatives and Hedging, for more information), securities sold short within consolidated sponsored investment funds and contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA (see Note 12, Commitments and Contingencies, for more information).

 

15


Table of Contents

Level 3 Assets.    Level 3 investments of $551 million and $574 million at September 30, 2014 and December 31, 2013, respectively, primarily related to equity method investments and private equity funds held by consolidated sponsored investment funds. Level 3 assets within investments, except for direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal and third-party fund managers.

Direct investments in private equity companies held by private equity funds totaled $77 million and $28 million at September 30, 2014 and December 31, 2013, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used is evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the expected cash flows to a single present value amount using current expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For investments utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For investments utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

Level 3 assets of consolidated VIEs include bank loans and bonds valued based on single-broker nonbinding quotes and direct private equity investments and private equity funds valued based upon internal as well as third-party fund managers, which may be adjusted by using the returns of certain market indices.

Level 3 Liabilities.    Level 3 borrowings of consolidated VIEs include CLO borrowings valued based upon single-broker nonbinding quotes.

Level 3 other liabilities include contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA, which were valued based upon discounted cash flow analyses using unobservable market data inputs.

 

16


Table of Contents

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2014

 

(in millions)   June 30,
2014
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2014
    Total net
unrealized
gains (losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    $5        $-        $-        ($2     $-        $-        $-        $3        $1   

Private equity

    272        1        12        (26     (1     -        -        258        (3

Equity method:

                 

Hedge funds / Funds of hedge funds

    84        2        5        (4     (14     -        -        73        -   

Private equity investments

    106        1        4        -        (7     -        -        104        2   

Real estate funds

    96        3        1        (2     (6     -        -        92        1   

Deferred compensation plan equity method investments

    27        (3     -        -        (3     -        -        21        (2
 

 

 

   

 

 

 

Total Level 3 investments

    590        4        22        (34     (31     -        -        551        (1
 

 

 

   

 

 

 

Assets of consolidated VIEs:

                 

Bank loans

    153        (3     63        (36     -        87        (60     204     

Bonds

    25        -        -        (8     -        -        -        17     

Private equity

    13        -        -        (2     -        -        -        11     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    191        (3     63        (46     -        87        (60     232        n/a (3) 
 

 

 

   

Total Level 3 assets

    $781        $1        $85        ($80     ($31     $87        ($60     $783     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

            $2,699        $26        $-        $-        $216        $-        $-        $2,889        n/a (3) 

Other liabilities

    43        -        -        -        (4     -        -        39        -   
 

 

 

   

Total Level 3 liabilities

    $2,742        $26        $-        $-        $212        $-        $-        $2,928     
 

 

 

   

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees and net proceeds from (repayments of) borrowings by consolidated VIEs.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

17


Table of Contents

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2014

 

(in millions)   December 31,
2013
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2014
    Total net
unrealized
gains (losses)
included in
earnings(3)
 

Assets:

                 

Investments

                 

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    $24        $-        $-        ($20     ($1     $-        $-        $3        $-   

Private equity

    223        14        37        (56     (1     41 (2)      -        258        9   

Equity method:

                 

Hedge funds / Funds of hedge funds

    99        6        13        (11     (34     -        -        73        4   

Private equity investments

    101        10        11        -        (18     -        -        104        11   

Real estate funds

    98        12        5        (5     (18     -        -        92        10   

Deferred compensation plan equity method investments

    29        (1     -        -        (7     -        -        21        -   
 

 

 

   

 

 

 

Total Level 3 investments

    574        41        66        (92     (79     41        -        551        34   
 

 

 

   

 

 

 

Assets of consolidated VIEs:

                 

Bank loans

    129        (3     155        (79     -        196        (194     204     

Bonds

    35        -        -        (18     -        -        -        17     

Private equity

    14        1        -        (4     -        -        -        11     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    178        (2     155        (101     -        196        (194     232        n/a (4) 
 

 

 

   

Total Level 3 assets

            $752        $39        $221        ($193     ($79     $237        ($194     $783     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

    $2,369        $40        $-        $-        $560        $-        $-        $2,889        n/a (4) 

Other liabilities

    42        (1     -        -        (4     -        -        39        -   
 

 

 

   

Total Level 3 liabilities

    $2,411        $39        $-        $-        $556        $-        $-        $2,928     
 

 

 

   

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees and net proceeds from (repayments of) borrowings by consolidated VIEs.

  (2) 

Includes investments previously held at cost.

  (3) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

18


Table of Contents

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2013

 

(in millions)   June 30,
2013
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2013
     Total net 
gains (losses)
included in
earnings(2)
 

Assets:

                  

Investments

                  

Available-for-sale:

                  

Equity securities (CDOs)

    $1        $-        $-        $-        $-        $-        $-        $1         $-   

Consolidated sponsored investment funds:

                  

Hedge funds / Funds of funds

    47        2        -        (2     (2     -        -        45         -   

Private equity

    249        10        -        (23     -        -        (2     234         7   

Equity method:

                  

Hedge funds / Funds of hedge funds

    157        1        1        (1     (13     -        -        145         1   

Private equity investments

    105        4        1        (10     (2     -        -        98         4   

Real estate funds

    97        6        2        -        (2     -        -        103         6   
 

 

 

    

 

 

 

Total Level 3 investments

    656        23        4        (36     (19     -        (2     626         18   
 

 

 

    

 

 

 

Assets of consolidated VIEs:

                  

Bank loans

    93        -        18        (8     -        40        (46     97      

Bonds

    35        1        -        (1     -        -        -        35      

Private equity

    19        -        -        (2     -        -        -        17      
 

 

 

    

Total Level 3 assets of consolidated VIEs

    147        1        18        (11     -        40        (46     149         n/a (3) 
 

 

 

    

Total Level 3 assets

    $803        $24        $22        ($47     ($19     $40        ($48     $775      
 

 

 

    

Liabilities:

                  

Borrowings of consolidated VIEs

    $2,145        ($5     $-        $-        ($82     $-        $-        $2,068         n/a (3) 

Other liabilities

    -        -        -        -        33        -        -        33      
 

 

 

    

Total Level 3 liabilities

            $2,145        ($5     $-        $-        ($49     $-        $-        $2,101      
 

 

 

    

 

  n/a – not applicable
  (1) 

Amounts primarily include distributions from equity method investees, repayments of borrowings of consolidated VIEs and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

19


Table of Contents

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2013

 

(in millions)   December 31,
2012
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2013
     Total net
gains
(losses)
included in
earnings(2)
 

Assets:

                  

Investments

                  

Available-for-sale:

                  

Equity securities (CDOs)

    $1        $-        $-        $-        $-        $-        $-        $1         $-   

Consolidated sponsored investment funds:

                  

Hedge funds / Funds of hedge funds

    73        8        12        (11     (30     -        (7     45         6   

Private equity

    266        26        12        (62     -        -        (8     234         21   

Equity method:

                  

Hedge funds / Funds of hedge funds

    161        10        2        (1     (27     -        -        145         10   

Private equity investments

    90        14        10        (10     (6     -        -        98         14   

Real estate funds

    88        14        5        -        (4     -        -        103         14   
 

 

 

    

 

 

 

Total Level 3 investments

    679        72        41        (84     (67     -        (15     626         65   
 

 

 

    

 

 

 

Separate account assets

    2        -        -        (2     -        -        -        -         n/a (3) 

Assets of consolidated VIEs:

                  

Bank loans

    106        (1     91        (48     -        71        (122     97      

Bonds

    46        -        4        (15     -        -        -        35      

Private equity

    22        1        -        (6     -        -        -        17      

Fund of hedge funds

    -        -        134        -        (134     -        -        -      
 

 

 

    

Total Level 3 assets of consolidated VIEs

    174        -        229        (69     (134     71        (122     149         n/a (4) 
 

 

 

    

Total Level 3 assets

            $855        $72        $270        ($155     ($201     $71        ($137     $775      
 

 

 

    

Liabilities:

                  

Borrowings of consolidated VIEs

    $2,402        ($9     $-        $-        ($343     $-        $-        $2,068         n/a (4) 

Other liabilities

    -        -        -        -        33        -        -        33      
 

 

 

    

Total Level 3 liabilities

    $2,402        ($9     $-        $-        ($310     $-        $-        $2,101      
 

 

 

    

 

  n/a – not applicable
  (1) 

Amounts primarily include distributions from equity method investees, repayments of borrowings of consolidated VIEs, elimination of investment related to a deconsolidation of a consolidated VIE, a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the condensed consolidated statements of income.

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

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Table of Contents

Realized and Unrealized Gains (Losses) for Level 3 Assets and Liabilities.    Realized and unrealized gains (losses) recorded for Level 3 assets and liabilities are reported in nonoperating income (expense) on the condensed consolidated statements of income. A portion of net income (loss) for consolidated investments and all of the net income (loss) for consolidated VIEs are allocated to noncontrolling interests to reflect net income (loss) not attributable to the Company.

Transfers in and/or out of Levels.    Transfers in and/or out of levels are reflected when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable/unobservable, or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a NAV (or a capital account), or when the carrying value of certain equity method investments no longer represents fair value as determined under valuation methodologies.

Assets of Consolidated VIEs.    During the three and nine months ended September 30, 2014, there were $60 million and $194 million, respectively, of transfers out of Level 3 to Level 2 related to bank loans. In addition, during the three and nine months ended September 30, 2014, there were $87 million and $196 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of levels were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

During the three and nine months ended September 30, 2013, there were $46 million and $122 million, respectively, of transfers out of Level 3 to Level 2 related to bank loans. In addition, during the three and nine months ended September 30, 2013, there were $40 million and $71 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of Levels 2 and 3 were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

Significant Issuances and Other Settlements.    During the three and nine months ended September 30, 2014, other settlements included $409 million and $1,021 million, respectively, of borrowings due to a consolidation of CLOs. In addition, during the three and nine months ended September 30, 2014, other settlements included $193 million and $461 million, respectively, of repayments of borrowings of consolidated CLOs.

During the three and nine months ended September 30, 2014, there were $30 million and $77 million, respectively, of distributions from equity method investees categorized in Level 3.

During the three and nine months ended September 30, 2013, there were $17 million and $37 million, respectively, of distributions from equity method investees categorized in Level 3.

During the nine months ended September 30, 2013, other settlements included $134 million related to a deconsolidation of a consolidated fund of hedge funds, which was previously classified as a VIE. This fund was deconsolidated during the second quarter of 2013 due to the granting of additional substantive rights to unaffiliated investors of the fund.

In addition, during the nine months ended September 30, 2013, there was a $28 million reclassification of a Level 3 investment from a consolidated sponsored investment fund to an equity method investment due to a change in BlackRock’s ownership percentage.

Disclosures of Fair Value for Financial Instruments Not Held at Fair Value.    At September 30, 2014 and December 31, 2013, the fair value of the Company’s financial instruments not held at fair value are categorized in the table below:

 

     September 30, 2014      December 31, 2013         
(in millions)    Carrying 
Amount
     Estimated 
Fair Value
     Carrying 
Amount
     Estimated 
Fair Value
     Fair Value 
Hierarchy
 

Financial Assets:

              

Cash and cash equivalents

   $ 6,149       $ 6,149       $ 4,390       $ 4,390         Level 1 (1)(2) 

Accounts receivable

     2,631         2,631         2,247         2,247         Level 1 (3) 

Cash and cash equivalents of consolidated VIEs

     175         175         161         161         Level 1 (1) 

Financial Liabilities:

              

Accounts payable and accrued liabilities

     1,576         1,576         1,084         1,084         Level 1 (3) 

Long-term borrowings

     5,937         6,295         4,939         5,284         Level 2 (4) 

 

  (1) 

Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value due to their short-term maturities.

 

  (2) 

At September 30, 2014 and December 31, 2013, approximately $94 million and $64 million, respectively, of money market funds were recorded within cash and cash equivalents on the condensed consolidated statements of financial condition. Money market funds are valued based on quoted market prices, or $1.00 per share, which generally is the NAV of the fund. At September 30, 2014 and December 31, 2013, approximately $127 million and $114 million, respectively, related to cash and cash equivalents held by consolidated sponsored investment funds.

 

  (3) 

The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term nature.

 

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  (4) 

Long-term borrowings are recorded at amortized cost. The fair value of the long-term borrowings, including the current portion of long-term borrowings, is estimated using market prices at the end of September 2014 and December 2013, respectively. See Note 11, Borrowings, for the fair value of each of the Company’s long-term borrowings.

Investments in Certain Entities that Calculate Net Asset Value Per Share.

As a practical expedient to value certain investments that do not have a readily determinable fair value and have attributes of an investment company, the Company uses NAV as the fair value. The following tables list information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a NAV per share (or its equivalent).

September 30, 2014

 

(in millions)   Ref     Fair Value     Total Unfunded
Commitments
 

Redemption
Frequency

  Redemption
Notice Period

Consolidated sponsored investment funds:

         

Private equity funds/funds of funds

    (a     $181      $  24   n/r   n/r

Other funds of hedge funds

    (b     2      -   Quarterly(100%)   60 –
90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (c     314        43  

Monthly(31%)

 

Quarterly(47%)

 

n/r(22%)

  15 –
90 days

Private equity funds

    (d     104        67   n/r   n/r

Real estate funds

    (e     113          9  

Quarterly(19%)

 

n/r(81%)

  60 days

Deferred compensation plan investments

    (f     21          5   n/r   n/r

Consolidated VIEs:

         

Private equity fund

    (g     11          1   n/r   n/r
   

 

 

   

 

   

Total

      $746      $149    
   

 

 

   

 

   

December 31, 2013

 

(in millions)   Ref     Fair Value     Total
Unfunded
Commitments
 

Redemption
Frequency

  Redemption
Notice Period

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (a     $195      $23   n/r   n/r

Other funds of hedge funds

    (b     155      -  

Monthly(13%)

Quarterly(78%)

n/r(9%)

  30 – 90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (c     276      84  

Monthly(55%)

Quarterly(11%)

n/r(34%)

  15 – 90 days

Private equity funds

    (d     101      62   n/r   n/r

Real estate funds

    (e     118      12  

Quarterly(17%)

n/r(83%)

  60 days

Deferred compensation plan investments

    (f     39      7  

Monthly(8%)

Quarterly(18%)

n/r(74%)

  60 – 90 days

Consolidated VIEs:

         

Private equity fund

    (g     14      1   n/r   n/r
   

 

 

   

 

   

Total

      $898      $189    
   

 

 

   

 

   

 

  n/r – not redeemable

 

  (1) 

Comprised of equity method investments, which include investment companies, which account for their financial assets and most financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees approximates fair value.

 

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  (a) 

This category includes the underlying third-party private equity funds within consolidated BlackRock sponsored private equity funds of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds, the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately six years and seven years at September 30, 2014 and December 31, 2013. The total remaining unfunded commitments to other third-party funds were $24 million and $23 million at September 30, 2014 and December 31, 2013, respectively. The Company had contractual obligations to the consolidated funds of $33 million and $30 million at September 30, 2014 and December 31, 2013, respectively.

  (b) 

This category includes consolidated funds of hedge funds that invest in multiple strategies to diversify risks. The fair values of the investments have been estimated using the NAV of the fund’s ownership interest in partners’ capital of each fund in the portfolio. Certain of the underlying funds can be redeemed as long as there are no restrictions in place.

  (c) 

This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit, opportunistic and mortgage instruments and other third-party hedge funds. The fair values of the investments have been estimated using the NAV of the Company’s ownership interest in partners’ capital. It was estimated that the investments in the funds that are not subject to redemption will be liquidated over a weighted-average period of approximately two years and three years at September 30, 2014 and December 31, 2013, respectively.

  (d) 

This category includes several private equity funds that initially invest in nonmarketable securities of private companies, which ultimately may become public in the future. The fair values of these investments have been estimated using capital accounts representing the Company’s ownership interest in the funds as well as other performance inputs. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the private equity funds. It was estimated that the investments in these funds will be liquidated over a weighted-average period of approximately four years and five years at September 30, 2014 and December 31, 2013, respectively.

  (e) 

This category includes several real estate funds that invest directly in real estate and real estate related assets. The fair values of the investments have been estimated using capital accounts representing the Company’s ownership interest in the funds. A majority of the Company’s investments are not subject to redemption or are not currently redeemable and are normally returned through distributions as a result of the liquidation of the underlying assets of the real estate funds. It is estimated that the investments in these funds not subject to redemptions will be liquidated over a weighted-average period of approximately seven years at both September 30, 2014 and December 31, 2013.

  (f) 

This category includes investments in several real estate funds and certain hedge funds that invest in energy and health science related equity securities. The fair values of the investments in this category have been estimated using capital accounts representing the Company’s ownership interest in partners’ capital as well as performance inputs. The investments in hedge funds will be redeemed upon settlement of certain deferred compensation liabilities. The real estate investments are not subject to redemption; however, distributions as a result of the liquidation of the underlying assets will be used to settle certain deferred compensation liabilities over time.

  (g) 

This category includes the underlying third-party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying third-party funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately one and two years at September 30, 2014 and December 31, 2013, respectively. Total remaining unfunded commitments to other third-party funds were not material at both September 30, 2014 and December 31, 2013, which commitments are required to be funded by capital contributions from noncontrolling interest holders.

Fair Value Option.

The following table summarizes information at September 30, 2014 and December 31, 2013 related to those assets and liabilities for which the fair value option was elected:

 

(in millions)    September 30,
2014
         December 31,     
2013
 

CLO Bank Loans:

     

Aggregate principal amounts outstanding

     $2,799         $2,181   

Fair value

     2,750         2,176   
  

 

 

    

 

 

 

Aggregate unpaid principal balance in excess of (less than) fair value

     $49         $5   
  

 

 

    

 

 

 

Unpaid principal balance of loans more than 90 days past due

     $6         $14   

Aggregate fair value of loans more than 90 days past due

     2         9   
  

 

 

    

 

 

 

Aggregate unpaid principal balance in excess of fair value for loans more than 90 days past due

     $4         $5   
  

 

 

    

 

 

 

CLO Borrowings:

     

Aggregate principal amounts outstanding

     $2,970         $2,455   

Fair value

     $2,889         $2,369   

 

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At September 30, 2014, the principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2026.

During the three and nine months ended September 30, 2014, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $6 million loss and a $73 million gain, respectively, which were offset by a $23 million and a $73 million loss, respectively, from the change in fair value of the CLO borrowings.

During the three and nine months ended September 30, 2013, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $25 million and $104 million gain, respectively. The gains were offset by a $28 million and $92 million loss during the three and nine months ended September 30, 2013, respectively, from the change in fair value of the CLO borrowings.

The net gains (losses) were recorded in net gain (loss) on consolidated VIEs on the condensed consolidated statements of income.

The change in fair value of the assets and liabilities included interest income and expense, respectively.

6.  Variable Interest Entities

In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including CDOs/CLOs and sponsored investment funds, which may be considered VIEs. The Company receives advisory fees and/or other incentive-related fees for its services and may from time to time own equity or debt securities or enter into derivatives with the vehicles, each of which are considered variable interests. The Company enters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Company’s involvement in financing the operations of the VIEs is generally limited to its equity interests.

The primary beneficiary (“PB”) of a VIE that is an investment fund that meets the conditions of ASU 2010-10, Amendments to Statement 167 for Certain Investment Funds (“ASU 2010-10”), is the enterprise that has a variable interest (or combination of variable interests, including those of related parties) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns or both. In order to determine whether the Company is the PB of a VIE, management must make significant estimates and assumptions of probable future cash flows of the VIEs. Assumptions made in such analyses may include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, prepayments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.

The PB of a CDO/CLO or other entity that is a VIE that does not meet the conditions of ASU 2010-10 is the enterprise that has the power to direct activities of the entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the entity.

 

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Consolidated VIEs.    Consolidated VIEs included CLOs in which BlackRock did not have an investment; however, BlackRock, as the collateral manager, was deemed to have both the power to control the activities of the CLOs and the right to receive benefits that could potentially be significant to the CLOs. In addition, BlackRock was the PB of one investment fund because it absorbed the majority of the variability due to its de facto related-party relationships with other partners in the fund. The assets of these VIEs are not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company. At September 30, 2014 and December 31, 2013, the following balances related to VIEs were consolidated on the condensed consolidated statements of financial condition:

 

(in millions)      September 30, 2014          December 31, 2013    

Assets of consolidated VIEs:

     

Cash and cash equivalents

     $175         $161   

Bank loans

     2,750         2,176   

Bonds

     50         106   

Other investments and other assets

     83         43   
  

 

 

    

 

 

 

Total bank loans, bonds, other investments and other assets

     2,883         2,325   

Liabilities of consolidated VIEs:

     

Borrowings

     (2,889)         (2,369)   

Other liabilities

     (167)         (74)   

Appropriated retained earnings

     13         (22)   

Noncontrolling interests of consolidated VIEs

     (15)         (21)   
  

 

 

    

 

 

 

Total BlackRock net interests in consolidated VIEs

     $-         $-   
  

 

 

    

 

 

 

For the three and nine months ended September 30, 2014, the Company recorded nonoperating expense of $47 million and $35 million, respectively, offset by a $47 million and a $35 million net expense attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

For the three and nine months ended September 30, 2013, the Company recorded nonoperating expense of $6 million and $2 million, respectively, offset by a $6 million and $2 million net expense attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

At September 30, 2014 and December 31, 2013, the weighted-average maturity of the bank loans and bonds were approximately 4.9 and 4.7 years, respectively.

 

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Nonconsolidated VIEs.    At September 30, 2014 and December 31, 2013, the Company’s carrying value of assets and liabilities and its maximum risk of loss related to VIEs for which it was the sponsor or in which it held a variable interest, but for which it was not the PB, was as follows:

 

(in millions)    Variable Interests on the Condensed
Consolidated
Statement of Financial Condition
        
At September 30, 2014    Investments      Advisory
Fee
Receivables
     Other Net
Assets
(Liabilities)
     Maximum
Risk of Loss(1)
 

CDOs/CLOs

     $-         $1         ($5)         $18   

Other sponsored investment funds:

           

Collective trusts

     -         209         -         209   

Other

     34         179         (4)         213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $34         $389         ($9)         $440   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013

  

CDOs/CLOs

     $-         $1         ($4)         $18   

Other sponsored investment funds:

           

Collective trusts

     -         184         -         184   

Other

     37         137         (6)         174   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $37         $322         ($10)         $376   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

At both September 30, 2014 and December 31, 2013, BlackRock’s maximum risk of loss associated with these VIEs primarily related to advisory fee receivables and BlackRock’s investments.

The net assets related to the above CDOs/CLOs that the Company does not consolidate were as follows:

 

(in billions)        September 30, 2014              December 31, 2013      

Assets at fair value

     $1         $1   

Liabilities(1)

     2         2   
  

 

 

    

 

 

 

Net assets

     ($1)         ($1)   
  

 

 

    

 

 

 

 

(1) 

Amounts primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.

The net assets of other sponsored investment funds that are nonconsolidated VIEs approximated $1.7 trillion to $1.8 trillion at September 30, 2014 and $1.6 trillion to $1.7 trillion at December 31, 2013. Net assets included $1.4 trillion of collective trusts at both September 30, 2014 and at December 31, 2013. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts. The net assets of these VIEs primarily are comprised of cash and cash equivalents and investments, partially offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.

7.  Derivatives and Hedging

The Company maintains a program to enter into swaps to hedge against market price and interest rate exposures with respect to certain seed investments in sponsored investment products. At September 30, 2014, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $176 million and $79 million, respectively. At December 31, 2013, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $117 million and $71 million, respectively.

The Company has entered into a derivative, providing credit protection to a counterparty of approximately $17 million, representing the Company’s maximum risk of loss with respect to the provision of credit protection. The Company carries the derivative at fair value based on the expected future cash flows under the arrangement.

 

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The fair values of the outstanding derivatives were not material to the condensed consolidated statements of financial condition at both September 30, 2014 and December 31, 2013.

The Company executes forward foreign currency exchange contracts to mitigate the risk of foreign exchange movements. At September 30, 2014, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $180 million. The fair value of the forward foreign currency exchange contracts at September 30, 2014 was not material to the condensed consolidated statements of financial condition. At December 31, 2013, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $792 million and a fair value of approximately $26 million.

Gains (losses) on the derivatives were not material to the condensed consolidated statements of income for the three and nine months ended September 30, 2014 and 2013.

The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the funds’ investment strategies. The fair value of such derivatives at September 30, 2014 and December 31, 2013 was not material. The change in fair value of such derivatives, which is recorded in nonoperating income (expense), was not material for the three and nine months ended September 30, 2014 and 2013.

8.  Goodwill

Goodwill activity during the nine months ended September 30, 2014 was as follows:

 

(in millions)       

December 31, 2013

                 $12,980   

Goodwill adjustment related to Quellos(1)

     (14
  

 

 

 

September 30, 2014

     $12,966   
  

 

 

 

 

(1) 

The decrease in goodwill during the nine months ended September 30, 2014 resulted from a decline related to tax benefits realized from tax-deductible goodwill in excess of book goodwill from the acquisition of the fund-of-funds business of Quellos Group, LLC in October 2007 (the “Quellos Transaction”). Goodwill related to the Quellos Transaction will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill from the Quellos Transaction. The balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $269 million and $293 million at September 30, 2014 and December 31, 2013, respectively.

9.  Intangible Assets

The carrying amounts of identifiable intangible assets are summarized as follows:

 

(in millions)    Indefinite-lived
 intangible assets 
    Finite-lived
 intangible assets 
    Total
 intangible assets 
 

December 31, 2013

                 $16,991                    $510                    $17,501   

Amortization expense

     -        (122     (122

Other

     (1     -        (1
  

 

 

   

 

 

   

 

 

 

September 30, 2014

     $16,990        $388        $17,378   
  

 

 

   

 

 

   

 

 

 

10.  Other Assets

At March 31, 2013, BlackRock held an approximately one-third economic equity interest in Private National Mortgage Acceptance Company, LLC (“PNMAC”), which is accounted for as an equity method investment and is included in other assets on the condensed consolidated statements of financial condition. On May 8, 2013, PennyMac became the sole managing member of PNMAC in connection with an initial public offering of PennyMac (the “PennyMac IPO”). As a result of the PennyMac IPO, BlackRock recorded a noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment.

Subsequent to the PennyMac IPO, the Company contributed 6.1 million units of its PennyMac investment to a new donor advised fund (the “Charitable Contribution”). The fair value of the Charitable Contribution was $124 million and is included in general and administration expense on the condensed consolidated statements of income for the nine months ended September 30, 2013. In connection with the Charitable Contribution, the Company also recorded a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment and a tax benefit of approximately $57 million in the second quarter of 2013.

 

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The carrying value and fair value of the Company’s interest (approximately 20% or 16 million shares and units) was approximately $155 million and $228 million, respectively, at September 30, 2014 and approximately $127 million and $273 million, respectively, at December 31, 2013. The fair value of the Company’s interest reflected the PennyMac stock price at September 30, 2014 and December 31, 2013, respectively (a Level 1 input).

See Note 11, Other Assets, in the 2013 Form 10-K for more information.

11.  Borrowings

Short-Term Borrowings

2014 Revolving Credit Facility.    In March 2014, the Company’s credit facility was amended to extend the maturity date by one year to March 2019. The amount of the aggregate commitment is $3.990 billion (the “2014 credit facility”). The 2014 credit facility permits the Company to request up to an additional $1.0 billion of borrowing capacity, subject to lender credit approval, increasing the overall size of the 2014 credit facility to an aggregate principal amount not to exceed $4.990 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 2014 credit facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at September 30, 2014. At September 30, 2014, the Company had no amount outstanding under the 2014 credit facility.

Commercial Paper Program.    In April 2013, BlackRock increased the maximum aggregate amount for which the Company could issue unsecured commercial paper notes (the “CP Notes”) on a private-placement basis up to a maximum aggregate amount outstanding at any time of $3.990 billion. The commercial paper program is currently supported by the 2014 credit facility. At September 30, 2014 and December 31, 2013, BlackRock had no CP Notes outstanding.

Long-Term Borrowings

The carrying value and fair value of long-term borrowings determined using market prices at the end of September 2014 included the following:

 

(in millions)     Maturity Amount      

 Unamortized 

  Discount  

     Carrying Value       Fair Value   
 

 

 

 

3.50% Notes due 2014

    $1,000        $-        $1,000        $1,005   

1.375% Notes due 2015

    750        -        750        755   

6.25% Notes due 2017

    700        (1)        699        793   

5.00% Notes due 2019

    1,000        (2)        998        1,150   

4.25% Notes due 2021

    750        (3)        747        814   

3.375% Notes due 2022

    750        (4)        746        765   

3.50% Notes due 2024

    1,000        (3)        997        1,013   
 

 

 

 

Total Long-term Borrowings

    $5,950        ($13)        $5,937        $6,295   
 

 

 

 

Long-term borrowings at December 31, 2013 had a carrying value of $4.939 billion and a fair value of $5.284 billion determined using market