Fair Value Measurements

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

The authoritative guidance is principally applied to financial assets and liabilities such as marketable equity securities and debt and equity securities that are classified and accounted for as trading and available-for-sale, as well as derivative instruments and contingent consideration associated with acquisitions subsequent to April 24, 2009. Derivatives include cash flow hedges, freestanding derivative forward contracts, and fair value hedges. These items are marked-to-market at each reporting period.

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:



	Fair Value as of July 31, 2015		Fair Value Measurements Using Inputs Considered as
(in millions)	Fair Value as of July 31, 2015		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	6,601	$	—	$	6,600	$	1
Auction rate securities	102		—		—		102
Mortgage-backed securities	1,544		—		1,544		—
U.S. government and agency securities	3,249		1,600		1,649		—
Foreign government and agency securities	63		—		63		—
Certificates of deposit	45		—		45		—
Other asset-backed securities	502		—		502		—
Debt funds	2,921		—		2,921		—
Marketable equity securities	61		61		—		—
Exchange-traded funds	79		79		—		—
Derivative assets	594		527		67		—
Total assets	$	15,761	$	2,267	$	13,391	$	103

Liabilities:
Derivative liabilities	114		73		41		—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	291		—		—		291
Total liabilities	$	405	$	73	$	41	$	291



	Fair Value as of April 24, 2015		Fair Value Measurements Using Inputs Considered as
(in millions)	Fair Value as of April 24, 2015		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	6,378	$	—	$	6,377	$	1
Auction rate securities	105		—		—		105
Mortgage-backed securities	1,478		—		1,478		—
U.S. government and agency securities	3,139		1,541		1,598		—
Foreign government and agency securities	85		—		85		—
Certificates of deposit	44		—		44		—
Other asset-backed securities	507		—		507		—
Debt funds	2,930		—		2,930		—
Marketable equity securities	80		80		—		—
Exchange-traded funds	77		77		—		—
Derivative assets	733		644		89		—
Total assets	$	15,556	$	2,342	$	13,108	$	106

Liabilities:
Derivative liabilities	$	116	$	45	$	71	$	—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	264		—		—		264
Total liabilities	$	380	$	45	$	71	$	264

The following table represents the range of the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 as of July 31, 2015:



	Valuation Technique	Unobservable Input	Range (Weighted Average)
Auction rate securities	Discounted cash flow	Years to principal recovery	2 yrs. - 12 yrs. (3 yrs.)
Auction rate securities	Discounted cash flow	Illiquidity premium	6%

The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three months ended July 31, 2015 or July 25, 2014. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.

The following tables provide a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3):



Three months ended July 31, 2015
(in millions)	Total Level 3 Investments			Corporate Debt Securities		Auction Rate Securities
Balance as of April 24, 2015	$	106		$	1	$	105
Total unrealized (losses) included in other comprehensive income	(3		)	—		(3		)
Balance as of July 31, 2015	$	103		$	1	$	102

Three months ended July 25, 2014
(in millions)	Total Level 3 Investments			Corporate Debt Securities		Auction Rate Securities
Balance as of April 25, 2014	$	106		$	9	$	97
Total unrealized gains included in other comprehensive income	2			—		2
Balance as of July 25, 2014	$	108		$	9	$	99

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

Non-financial assets such as equity and other securities that are accounted for using the cost or equity method, goodwill and IPR&D, intangible assets, and property, plant, and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized.

The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the condensed consolidated balance sheets. The aggregate carrying amount of these investments was $497 million as of July 31, 2015 and $520 million as of April 24, 2015. These cost or equity method investments are measured at fair value on a nonrecurring basis. The fair value of the Company’s cost or equity method investments is not estimated if there are no identified events or changes in circumstance that may have a significant adverse effect on the fair value of these investments. The Company did not record any significant impairment charges related to cost method investments during the three months ended July 31, 2015. The Company recognized $9 million in impairment charges during the three months ended July 25, 2014. These investments fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are privately-held entities without quoted market prices. To determine the fair value of these investments, the Company used all pertinent financial information available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings.

The Company assesses the impairment of goodwill annually in the third quarter at the reporting unit level and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of goodwill was $40.657 billion and $40.530 billion as of July 31, 2015 and April 24, 2015, respectively. The Company did not record any goodwill impairment during the three months ended July 31, 2015 or July 25, 2014.

The Company assesses IPR&D for impairment annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of IPR&D was $556 million and $470 million as of July 31, 2015 and April 24, 2015, respectively. Similar to the goodwill impairment test, the IPR&D impairment test requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculates the excess of IPR&D asset fair values over their carrying values utilizing a discounted future cash flow analysis. During the three months ended July 31, 2015 and July 25, 2014, the Company did not record any significant IPR&D impairments. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of such clinical trials, delays or failures to obtain required market clearances or other failures to achieve a commercially viable product, and as a result, may record impairment losses in the future.

The Company assesses intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset (asset group) may not be recoverable. The aggregate carrying amount of intangible assets, excluding IPR&D and non-amortizable tradenames, was $27.143 billion as of July 31, 2015 and $27.381 billion as of April 24, 2015. When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recorded based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company did not record any significant intangible asset impairments during the three months ended July 31, 2015 or July 25, 2014.

The Company assesses property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. The Company did not record any significant impairments of property, plant, and equipment during the three months ended July 31, 2015. As part of the Company’s restructuring initiatives, the Company recorded property, plant, and equipment impairments of $9 million during the three months ended July 25, 2014 within restructuring charges, net in the condensed consolidated statements of income. For further discussion of the restructuring initiatives refer to Note 4 to the condensed consolidated financial statements.

Financial Instruments Not Measured at Fair Value

As of July 31, 2015, the total estimated fair value of the Company’s long-term debt, including the short-term portion, was $31.924 billion compared to a principal value of $31.125 billion; as of April 24, 2015, the total estimated fair value was $34.637 billion compared to a principal value of $32.125 billion.The fair value was estimated using quoted market prices for the publicly registered senior notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.