Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.21.2
Fair Value Measurements
 6 Months Ended
Jun. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value Measurements
13. Fair Value Measurements
Accounting standards establish a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair values as follows:
Level
 1.
Observable inputs such as quoted prices for identical assets in active markets;
Level
 2.
Inputs other than quoted prices for identical assets in active markets, that are observable either directly or indirectly; and
Level
 3.
Unobservable inputs in which there is little or no market data which requires the use of valuation techniques and the development of assumptions.
The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level of input that is significant to the fair value measure in its entirety.
The carrying amount of financial assets and liabilities reported in the Consolidated Statements of Financial Position for Cash and cash equivalents, Commissions and fees receivable—net, Other current assets, and Accounts payable and accrued liabilities at June 30, 2021 and December 31, 2020, approximate fair value because of the short-term duration of these instruments.
Derivative Instruments
The fair value of the combined embedded derivatives on the redeemable preferred units is based on the likelihood of a mandatorily redeemable triggering event, a Realization Event as defined by the Onex Purchase Agreement, and the present value of any remaining unpaid dividends between the reporting period and the fifth anniversary of the issuance date, which is a Level 3 fair value measurement. In determining the fair value, the Company will first estimate the likelihood of a Realization Event based on discussions with management. The Company then estimated the present value of any remaining dividends using a 10.5% discount rate derived from a review of comparable issuances and benchmarking. The present value of the remaining dividends was then combined with the estimated likelihood of a Realization Event to arrive at the estimated fair value. Changes in the timing and likelihood of a Realization Event and/or the discount rates used would result in a change in the fair value of recorded embedded derivative obligations. The fair value of the make-whole provisions as of June 30, 2021 was $51.0
 million.
Contingent Consideration
Any contingent consideration arising upon a business combination is initially recorded as a component of the total consideration of that business combination at fair value with an offsetting liability in the opening balance sheet under Other
Non-current
liabilities in the Statements of Financial Position.
The fair value of these contingent consideration obligations is based on the present value of the future expected payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, the Company estimates cash payments based on management’s financial projections of the performance of each acquired business relative to the formula specified by each purchase agreement. The Company utilizes Monte Carlo simulations to evaluate financial projections of each acquired business. The Monte Carlo models consider forecasted EBITDA and market risk adjusted EBITDA which are then run through a series of simulations. The risk-free rates and expected volatility used in the models range from 0.05% to 0.10% and 15% to 35%, respectively. The Company then discounts the expected payments created by the Monte Carlo model to present value using a risk-adjusted rate that takes into consideration the market-based rates of return that reflect the ability of the acquired entity to achieve its targets. These discount rates generally range from 5.5% to 12.1% for the acquisitions.
Each period, RSG revalues the contingent consideration obligations associated with certain prior acquisitions to their fair value and records subsequent changes to the fair value of these estimated obligations in Change in contingent consideration within Operating income when incurred.
Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related EBITDA and percentage milestones, the estimated timing in which milestones are achieved, and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as the Company’s revenue growth rate and EBITDA estimates evolve and additional data is obtained, impacting the Company’s assumptions. The use of different assumptions and judgements could result in a materially different estimate of fair value which may have a material impact on the results from operations and financial position.
As of June 30, 2021 and December 31, 2020, the current portion of the fair value of contingent consideration was $16.2
million
and $5.5
 million
, respectively, recorded in Accounts payable and accrued liabilities. The
non-current
portion of the fair value of the contingent consideration was
$6.0
million
and $16.6
 million
, respectively, recorded in Other
non-current
liabilities in the Statement of Financial Position.
The following fair value hierarchy table presents information about the Company’s liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.
 
    
June 30, 2021
     
December 31, 2020
  
    
Quoted prices in
active markets
for identical
assets
(Level 1)
     
Significant
other
observable
inputs
(Level 2)
     
Significant
unobservable
inputs
(Level 3)
     
Quoted prices in
active markets
for identical
assets
(Level 1)
     
Significant
other
observable
inputs
(Level 2)
     
Significant
unobservable
inputs
(Level 3)
  
Liabilities:
                                                      
Debt (1)
    $ 1,641,719      $ —        $ —        $ 1,648,997      $ —        $ —    
Contingent purchase consideration (2)
      —          —          22,135        —          —          22,096  
Make-whole provision on Class B
Preferred Units 
(3)
      —          —          51,035        —          —          30,423  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total liabilities measured at fair value
   
$
1,641,719
 
   
$
—  
 
   
$
73,170
 
   
$
1,648,997
 
   
$
—  
 
   
$
52,519
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
(1)
See Note 8,
Debt.
(2)
Contingent purchase considerations are listed in Accounts payable and accrued liabilities and Other
non-current
liabilities in the Statement of Financial Position and in Change in contingent consideration in the Statements of Income.
(3)
Make-Whole Provisions are listed as Accounts payable and accrued liabilities in the Statements of Financial Position and in Other
non-operating
(loss) income in the Statement of Income.
There were no assets or liabilities that were transferred between fair value hierarchy levels during the six months ended June 30, 2021 and December 31, 2020.
The following is a reconciliation of the beginning and ending balances for the Level 3 liabilities measured at fair value:
 
    
June 30, 2021
    
June 30, 2020
  
    
Make-Whole

provision
 
on
 
class B units
     
Contingent
consideration
    
Total
    
Make-Whole

provision on class
B units
     
Contingent
consideration
    
Total
  
Opening balance
   
$
30,423
 
   
$
22,096
 
  
$
52,519
 
  
$
891
 
   
$
 23,527
 
  
$
24,418
 
Total gains/losses included in earnings
      20,612        2,712       23,324       —          1,619       1,619  
Settlements
      —          (2,673 )      (2,673 )      —          (497 )      (497 ) 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Ending balance
   
$
 51,035
 
   
$
22,135
 
  
$
 73,170
 
  
$
 891
 
   
$
24,649
 
  
$
 25,540
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
During the six months ended June 30, 2021 and 2020, there were no purchases, issues, sales or transfers related to fair value measurements. The Company settled contingent consideration of $2.7
million
and $0.5
million
during the six months ended June 30, 2021 and June 30, 2020, respectively. Additionally, no unrealized gains or losses were recorded in the Consolidated Statements of Comprehensive Income for liabilities held during the period.