FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

The fair value measurement accounting standard, codified in ASC Topic 820, Fair Value Measurement (ASC Topic 820), provides a framework for measuring fair value and defines fair value as the price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The standard establishes a valuation hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on independent market data sources. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available. The valuation hierarchy is composed of three categories. The categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The categories within the valuation hierarchy are described as follows:


•	Level 1 – Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities.


•	Level 2 – Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.


•	Level 3 – Inputs to the fair value measurement are unobservable inputs or valuation techniques.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The fair value measurement standard applies to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). These financial assets and liabilities include money-market securities, trading marketable securities, available-for-sale marketable securities, derivative instruments and contingent consideration liabilities. The Company continues to record these items at fair value on a recurring basis and the fair value measurements are applied using ASC Topic 820. The Company does not have any material nonfinancial assets or liabilities that are measured at fair value on a recurring basis. A summary of the valuation methodologies used for the respective financial assets and liabilities measured at fair value on a recurring basis is as follows:

Money-Market Securities: The Company’s money-market securities include funds that are traded in active markets and are recorded at fair value based upon the quoted market prices. The Company classifies these securities as level 1.

Trading Securities: The Company’s trading securities include publicly-traded mutual funds that are traded in active markets and are recorded at fair value based upon quoted market prices of the net asset values of the funds. The Company classifies these securities as level 1.

Available-For-Sale Securities: The Company’s available-for-sale securities include publicly-traded equity securities that are traded in active markets and are recorded at fair value based upon the closing stock prices. The Company classifies these securities as level 1.

The following table summarizes the components of the balance of the Company’s available-for-sale securities at September 28, 2013 and December 29, 2012 (in millions):



	September 28, 2013		December 29, 2012
Adjusted cost	$	7	$	9
Gross unrealized gains	26		32
Fair value	$	33	$	41

Derivative Instruments: The Company’s derivative instruments consist of foreign currency exchange contracts. The Company classifies these instruments as level 2 as the fair value is determined using inputs other than observable quoted market prices. These inputs include spot and forward foreign currency exchange rates that the Company obtains from standard market data providers. The fair value of the Company’s outstanding foreign currency exchange contracts was not material at September 28, 2013 or December 29, 2012.

Contingent Consideration Liabilities: In connection with certain business combinations or purchases of intellectual property the Company may agree to provide potential future contingent consideration payments upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. Contingent consideration is recorded at the estimated fair value of the contingent milestone payments on the acquisition date. The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense within other expense, net in the Condensed Consolidated Statements of Earnings. The Company measures the liability on a recurring basis using Level 3 inputs including projected revenues, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a probability weighted discounted cash flow model. Projected revenues are based on the Company's most recent internal operating budgets and long-term strategic plans. Increases or decreases to any of the inputs may result in significantly higher or lower fair value measurements.

A summary of financial assets measured at fair value on a recurring basis at September 28, 2013 and December 29, 2012 is as follows (in millions):



	Balance Sheet Classification	September 28, 2013		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money-market securities	Cash and cash equivalents	$	848	$	848	$	—	$	—
Available-for-sale securities	Other current assets	33		33		—		—
Trading securities	Other assets	254		254		—		—
Total assets		$	1,135	$	1,135	$	—	$	—

Liabilities
Contingent consideration	Other liabilities	$	136	$	—	$	—	$	136
Total liabilities		$	136	$	—	$	—	$	136



	Balance Sheet Classification	December 29, 2012		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money-market securities	Cash and cash equivalents	$	964	$	964	$	—	$	—
Available-for-sale securities	Other current assets	41		41		—		—
Trading securities	Other assets	231		231		—		—
Total assets		$	1,236	$	1,236	$	—	$	—

The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs (in millions):



Contingent Consideration Liability	Fair Value as of September 28, 2013		Valuation Technique	Unobservable Input	Range

Endosense regulatory-based milestone	$	136	Probability Weighted Discounted Cash Flow	Discount Rate	1.15%	-	1.71%
				Probability of Payment			90%
				Projected Year of Payment			2014

Additionally, the following table provides a reconciliation of the beginning and ending balances of the Company's contingent consideration liability associated with its Endosense acquisition subsequent to August 19, 2013 as of September 28, 2013 (in millions):



	Fiscal Year 2013
Beginning balance	$	—
Purchase price contingent consideration	132
Change in fair value of contingent consideration	1
Foreign currency translation	3
Ending balance	$	136

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

The fair value measurement standard also applies to certain nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. A summary of the valuation methodologies used for the respective nonfinancial assets and liabilities measured at fair value on a nonrecurring basis is as follows:

Long-Lived Assets: The Company reviews the carrying amount of its long-lived assets other than goodwill and indefinite-lived intangible assets for potential impairment whenever events or changes in circumstance include a significant decrease in market price, a significant adverse change in the extent or manner in which an asset is being used or a significant adverse change in the legal or business climate. The Company measures the fair value of its long-lived assets, such as its definite-lived intangible assets and property, plant and equipment using independent appraisals, market models and discounted cash flow models. A discounted cash flow model requires inputs to a present value cash flow calculation such as a risk-adjusted discount rate, terminal values, operating budgets, long-term strategic plans and remaining useful lives of the asset or asset group. If the carrying value of the Company’s long-lived assets (excluding goodwill and indefinite-lived intangible assets) exceeds the related undiscounted future cash flows, the carrying value is written down to the fair value in the period identified.

During the second quarter of 2013, the Company recognized $13 million of impairments associated with customer relationship intangible assets, as it determined that these intangible assets had no discrete future cash flows and were fully impaired. Refer to Note 7 for further details of these charges.

During the third quarter of 2012, the Company determined that certain purchased technology intangible assets in the Company's neuromodulation business were considered impaired as their future expected undiscounted cash flows did not exceed the carrying value of the related assets. As a result, the Company recognized a $23 million impairment charge to write-down the intangible assets to their estimated fair value of $3 million as of September 29, 2012. The fair value measurements of these intangible assets are considered Level 3 in the fair value hierarchy due to the use of unobservable inputs, specifically the discounted cash flows income approach method, to measure fair value.

During the second quarter of 2012, the Company determined that certain purchased technology intangible assets in CATD were considered impaired as their future expected undiscounted cash flows did not exceed the carrying value of the related assets. As a result, the Company recognized a $5 million impairment charge to write-down the intangible assets to their estimated fair value of $4 million as of June 30, 2012. The fair value measurements of these intangible assets are considered Level 3 in the fair value hierarchy due to the use of unobservable inputs, specifically the discounted cash flows income approach method, to measure fair value. The product lines were later discontinued in the fourth quarter of 2012, and the related remaining intangible asset value was fully impaired as there were no discrete future cash flows.

Cost Method Investments: The Company also holds investments in equity securities that are accounted for as cost method investments, which are classified as other assets and measured at fair value on a nonrecurring basis. The fair value of the Company’s cost method investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of these investments. When measured on a nonrecurring basis, the Company’s cost method investments are considered Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value.

The carrying value of these investments approximated $101 million and $151 million as of September 28, 2013 and December 29, 2012, respectively. The decrease in the Company's cost method investments since December 29, 2012 was primarily due to the consolidation of CardioMEMS and the elimination of the pre-existing equity investment which had been previously accounted for as a cost method investment. Effective February 27, 2013, the Company determined that CardioMEMS was a VIE for which the Company is considered the primary beneficiary (see Note 2).

Fair Value Measurements of Other Financial Instruments

The aggregate fair value of the Company’s fixed-rate senior notes at September 28, 2013 (measured using quoted prices in active markets) was $2,269 million compared to the aggregate carrying value of $2,317 million (inclusive of the terminated interest rate swaps). The fair value of the Company’s variable-rate debt obligations at September 28, 2013 approximated its aggregate $1,152 million carrying value due to the variable interest rate and short-term nature of these instruments.