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.

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.

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.

Derivative instruments: The Company’s derivative instruments consist of foreign currency exchange contracts and interest rate swap 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 and interest 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 as of January 3, 2015 or December 28, 2013.

Contingent consideration: 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 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 inputs may result in significantly higher or lower fair value measurements.

A summary of assets and liabilities measured at fair value on a recurring basis as of January 3, 2015 and December 28, 2013 is as follows (in millions):



	Balance Sheet Classification	January 3, 2015		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	$	729	$	729	$	—	$	—
Available-for-sale securities	Other current assets	30		30		—		—
Trading securities	Other assets	301		301		—		—
Total assets		$	1,060	$	1,060	$	—	$	—

Liabilities
Contingent consideration	Other liabilities	$	50	$	—	$	—	$	50
Total liabilities		$	50	$	—	$	—	$	50



	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 January 3, 2015		Valuation Technique	Unobservable Inputs

Nanostim regulatory-based milestone	$	50	Probability Weighted Discounted Cash Flow	Discount Rate		5.00%
				Probability of Payment		95%
				Projected Years of Three Annual Payments	2016, 2017, 2018
Total contingent consideration liability	$	50

Additionally, the following table provides a reconciliation of the beginning and ending balances of the Company's contingent consideration liabilities associated with its Endosense acquisition subsequent to the August 19, 2013 acquisition date and its Nanostim acquisition subsequent to the October 11, 2013 acquisition date, as of January 3, 2015 (in millions):



	Endosense			Nanostim			Total
Balance as of December 29, 2012	$	—		$	—		$	—
Purchase price contingent consideration	132			56			188
Change in fair value of contingent consideration	1			—			1
Foreign currency translation	6			—			6
Balance as of December 28, 2013	139			56			195
Change in fair value of contingent consideration	28			(6		)	22
Payment of contingent consideration	(155		)	—			(155		)
Foreign currency translation	(12		)	—			(12		)
Balance as of January 3, 2015	$	—		$	50		$	50

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: When events or changes in circumstances require, 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.

During 2014, 2013 and 2012, the Company recognized $25 million, $14 million and $41 million of fixed asset write-offs. During 2014, the fixed asset write-offs were associated with the discontinuation of a clinical trial and projects abandoned under the new realigned structure. During 2013 and 2012, the incremental depreciation charges and fixed asset write-offs primarily related to information technology assets no longer expected to be utilized. As all of the fixed assets identified had no alternative future use and therefore no discrete future cash flows, all of the assets were fully impaired.

During 2013 and 2012, the Company recognized $13 million and $2 million, respectively, of intangible asset impairments primarily associated with customer relationship intangible assets acquired in connection with certain legacy acquisitions of businesses involved in the distribution of the Company's products. Due to the changing dynamics of the U.S. healthcare market, specifically as it relates to hospital purchasing practices, the Company determined that these intangible assets had no future discrete cash flows and were fully impaired.

During 2012, the Company determined that certain developed technology intangible assets were impaired, as the Company's updated expectations for the future cash flows of the related neuromodulation product lines decreased, ultimately resulting in the related assets' fair value falling below carrying value. 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 using a discounted cash flow model. The fair value measurement 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. The Company also determined that certain other developed technology intangible assets were fully impaired as the related product lines were discontinued and the related intangible assets had no discrete future cash flows. As a result, the Company recognized an $8 million impairment charge to fully write-off the developed technology intangible assets.

Goodwill: During the third quarter of 2014, the Company performed an interim goodwill impairment test because it significantly changed the composition of the net assets of its reporting units whereby it combined its two legacy reporting units. For this test, the Company bypassed the qualitative assessment and proceeded directly to step one of the two-step goodwill impairment test. In performing the first step, the Company utilized the market approach as computed by its market capitalization plus an estimated control premium. As a result of performing this test, the Company determined that no impairment existed. The fair value inputs utilized in the market approach are considered Level 2 in the fair value hierarchy due to the utilization of quoted prices in active markets for similar assets or liabilities in determining the estimated control premium. During the fourth quarter of 2014, the Company performed its annual goodwill impairment test by bypassing the qualitative assessment and proceeding directly to step one using the market approach described above. As a result of performing this test, the Company determined that no impairment existed.

During the fourth quarters of 2013 and 2012, the Company assessed qualitative factors and determined that no impairments existed since it was more-likely-than-not that the fair values of its reporting units that existed at those times were more than their carrying amounts. The qualitative assessment considered such factors as macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity specific events, changes in net assets and a sustained decrease in share price.

Indefinite-lived intangible assets: During 2014, the Company recognized impairment charges of $58 million for certain IPR&D intangible assets and a tradename intangible asset to reflect their estimated fair value of $55 million. The Company utilized a discounted cash flow model for each individual asset. The impairments were triggered by clinical information received in the third and fourth quarters 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.

During 2013, the Company performed its annual qualitative assessment of its indefinite-lived intangible assets by considering many of the above factors and subsequently determined that a quantitative impairment analysis was further necessary for certain indefinite-lived tradename and IPR&D assets as the Company concluded it was more-likely-than-not that the fair value of these assets were less than their respective carrying amounts. The Company utilized a discounted cash flow model for each individual asset and recognized an impairment charge of $29 million to write-down the related assets to their estimated fair value of $50 million. The impairments were due primarily to the Company's revised expectations, including an increase in the cost and length of time to bring the related products to market through regulatory approval. The fair value measurements of these intangible assets are considered Level 3 in the fair value hierarchy due to the use of unobservable inputs used to measure fair value, including the terminal growth rate, royalty rate, discount rate and projected future cash flows.

No indefinite-lived intangible asset impairment charges were recognized during 2012.

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 was $71 million and $69 million as of January 3, 2015 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 as of January 3, 2015 (measured using quoted prices in active markets) was $2,357 million compared to the aggregate carrying value of $2,273 million (inclusive of the terminated interest rate swaps and unamortized debt discounts). The fair value of the Company’s variable-rate debt obligations as of January 3, 2015 approximated their aggregate $1,593 million carrying value due to the variable interest rate and short-term nature of these instruments. The Company also had $713 million and $498 million of cash equivalents invested in short-term deposits and interest and non-interest bearing bank accounts as of January 3, 2015 and December 28, 2013, respectively.