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 27, 2014 and December 28, 2013 (in millions):



	September 27, 2014		December 28, 2013
Adjusted cost	$	6	$	7
Gross unrealized gains	23		28
Fair value	$	29	$	35

During the third quarter of 2014, the Company recognized a $3 million realized gain in other income from the sale of an available-for-sale security (See Note 10).

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 27, 2014 or December 28, 2013.

Contingent Consideration Liabilities: In connection with certain business combinations the Company has agreed to provide future contingent consideration payments. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets or receiving regulatory approvals to market products. Contingent consideration is recognized on the acquisition date at the estimated fair value of the contingent milestone payment(s). The acquisition date fair value is measured based on the consideration expected to be transferred (probability-weighted), discounted back to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the contingent consideration is remeasured to its estimated fair value at each reporting period with the change in fair value recognized in selling, general and administrative expense in the Company's Condensed Consolidated Statements of Earnings. The Company measures the liability on a recurring basis using Level 3 inputs including projected revenues or cash flows, growth rates, discount rates, probabilities of payment and projected payment dates. 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 significant unobservable 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 27, 2014 and December 28, 2013 is as follows (in millions):



	Balance Sheet Classification	September 27, 2014		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	$	667	$	667	$	—	$	—
Available-for-sale securities	Other current assets	29		29		—		—
Trading securities	Other assets	298		298		—		—
Total assets		994		994		—		—

Liabilities
Contingent consideration	Other current liabilities	148		—		—		148
Contingent consideration	Other liabilities	58		—		—		58
Total liabilities		$	206	$	—	$	—	$	206



	Balance Sheet Classification	December 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	$	875	$	875	$	—	$	—
Available-for-sale securities	Other current assets	35		35		—		—
Trading securities	Other assets	279		279		—		—
Total assets		1,189		1,189		—		—

Liabilities
Contingent consideration	Other liabilities	195		—		—		195
Total liabilities		$	195	$	—	$	—	$	195

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



Contingent Consideration Liability	Fair Value as of September 27, 2014		Valuation Technique	Unobservable Input	Range

Endosense regulatory-based milestone	$	148	Probability Weighted Discounted Cash Flow	Discount Rate	1.05%	-	1.51%
				Probability of Payment			95%
				Projected Year of Payment			2014

Nanostim revenue-based milestone	58		Probability Weighted Discounted Cash Flow	Discount Rate			5.00%
				Probability of Payment			100%
				Projected Years of Three Annual Payments	2016, 2017, 2018
Total contingent consideration liability	$	206

The following table provides a reconciliation of the beginning and ending balances of the Company' contingent consideration liability associated with its Endosense and Nanostim acquisitions since December 28, 2013 as of September 27, 2014 (in millions):



	Endosense			Nanostim		Total
Balance as of December 28, 2013	$	139		$	56	$	195
Change in fair value of contingent consideration	—			1		1
Foreign currency translation	2			—		2
Balance as of March 29, 2014	141			57		198
Change in fair value of contingent consideration	7			1		8
Foreign currency translation	—			—		—
Balance as of June 28, 2014	148			58		206
Change in fair value of contingent consideration	8			—		8
Foreign currency translation	(8		)	—		(8		)
Balance as of September 27, 2014	$	148		$	58	$	206

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 including a risk-adjusted discount rate, 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 or asset groups (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 third quarter of 2014, the Company recognized $5 million of fixed asset write-offs primarily associated with projects abandoned under the new realigned structure. As the fixed assets had no alternative future use and therefore no discrete future cash flows, the assets were fully impaired. Refer to Note 7 for further details.

During the second quarter of 2014, the Company recognized $14 million of fixed asset write-offs primarily associated with the discontinuation of a clinical trial. As the fixed assets had no alternative future use and therefore no discrete future cash flows, the assets were fully impaired. Refer to Note 7 for further details.

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.

Goodwill: During the third quarter of 2014, the Company completed its realignment of resources and management toward a new organizational structure comprised of a single operating segment, which combined its existing Implantable Electronic Systems Division and Cardiovascular and Ablation Technologies Division. This change resulted in the combination of the Company’s reporting units, and accordingly, significantly changed the composition of the related net assets requiring a goodwill assessment. During the third quarter of 2014, the Company completed its goodwill impairment assessment and determined that no impairment existed. The goodwill assessment included a change to the market approach, providing for more observable inputs in the fair value estimate. The level 2 measurements used in the market approach included the Company's market capitalization plus a control premium. Under this new structure, the Company reviews the carrying value of its goodwill at least annually to determine if any adverse conditions exist that would indicate a potential impairment by considering factors such as a decrease in the Company’s market capitalization.

Indefinite-lived intangible assets: The Company also reviews its indefinite-lived intangible assets at least annually to determine if any adverse conditions exist that would indicate a potential impairment by considering qualitative factors such as macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity specific events, changes in net assets and project-based performance toward regulatory approvals. The Company recognized a total impairment charge of $25 million in the third quarter of 2014 to write-down certain IPR&D and tradename assets to their estimated fair value of $34 million. The Company utilized a discounted cash flow model. The impairments were triggered by clinical information received in the third quarter of 2014, resulting in the Company revising its expectations, including a decrease in the market opportunity and an increase in the cost and length of time to bring the related products to market. The fair value measurements of these intangible assets are considered Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value, including the terminal growth rate, royalty rate, discount rate and projected 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 carrying value of these investments approximated $70 million and $69 million at September 27, 2014 and December 28, 2013, respectively. 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.

Fair Value Measurements of Other Financial Instruments

The aggregate fair value of the Company’s fixed-rate senior notes at September 27, 2014 (measured using quoted prices in active markets) was $2,312 million compared to the aggregate carrying value of $2,291 million (inclusive of the terminated interest rate swaps and unamortized debt discounts). The fair value of the Company’s variable-rate debt obligations at September 27, 2014 approximated its aggregate $1,573 million carrying value due to the variable interest rate and short-term nature of these instruments. The Company also had $628 million and $498 million of cash equivalents invested in short-term deposits and interest and non-interest bearing bank accounts at September 27, 2014 and December 28, 2013, respectively.