FAIR VALUE MEASUREMENTS

The fair value measurement accounting standard 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. 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.

The following table summarizes the components of the balance of the Company’s available-for-sale securities at July 4, 2015 and January 3, 2015 (in millions):



	July 4, 2015		January 3, 2015
Adjusted cost	$	5	$	6
Gross unrealized gains	19		24
Fair value	$	24	$	30

Derivative instruments: Fair values for the Company’s derivative financial instruments are based on quoted market prices of comparable instruments, if available, or more commonly on standard pricing models that use as their basis readily observable market parameters from industry standard data providers. These models reflect contractual terms of the derivatives, including period to maturity and market-based parameters such as foreign currency exchange rates. They do not contain a high level of subjectivity as the techniques used in the models do not require significant judgment and inputs are readily observable from actively quoted markets. The Company classifies these instruments as level 2 (see Note 9).

Contingent consideration: The initial 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 regulatory approval timing, 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. Changes 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 at July 4, 2015 and January 3, 2015 is as follows (in millions):



	Balance Sheet Classification	July 4, 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	$	462	$	462	$	—	$	—
Available-for-sale securities	Other current assets	24		24		—		—
Foreign currency forward contracts	Other current assets	15		—		15		—
Trading securities	Other assets	318		318		—		—
Foreign currency forward contracts	Other assets	3		—		3		—
Total assets		$	822	$	804	$	18	$	—

Liabilities
Foreign currency forward contracts	Other current liabilities	$	3	$	—	$	3	$	—
Contingent consideration	Other current liabilities	119		—		—		119
Foreign currency forward contracts	Other liabilities	2		—		2		—
Contingent consideration	Other liabilities	45		—		—		45
Total liabilities		$	169	$	—	$	5	$	164



	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

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



Contingent Consideration Liabilities	Fair Value as of July 4, 2015		Valuation Technique	Unobservable Input	Value or Range

Spinal Modulation regulatory-based milestone	$	117	Probability Weighted Discounted Cash Flow	Discount Rate			1.9%
				Probability of Payment			95%
				Projected Year of Payment			2016

Spinal Modulation revenue-based milestone	43		Monte Carlo Simulation	Discount Rates	1.1%	-	17.0%
				Expected Revenue Volatility			25.0%
				Projected Years of Payments	2017, 2018

Nanostim, Inc. (Nanostim) revenue-based milestone	4		Probability Weighted Discounted Cash Flow	Discount Rate			5.0%
				Probability of Payment			10%
				Projected Years of Three Annual Payments	2016, 2017, 2018
Total contingent consideration liabilities	$	164

Additionally, the following table provides a reconciliation of the beginning and ending balances of the Company's contingent consideration liabilities (in millions):



	Spinal Modulation		Nanostim			Total
Balance as of January 3, 2015	$	—	$	50		$	50
Change in fair value of contingent consideration	—		(23		)	(23		)
Balance as of April 4, 2015	—		27			27
Initial fair value measurement of contingent consideration	155		—			155
Change in fair value of contingent consideration	5		(23		)	(18		)
Balance as of July 4, 2015	$	160	$	4		$	164

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

Disclosures are required for certain assets and liabilities that are measured at fair value but are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For St. Jude Medical, such measurements of fair value primarily relate to long-lived assets, goodwill, indefinite-lived intangible assets and cost method investments.

Other than the long-lived asset impairments discussed as follows, there were no other material impairments that were measured at fair value on a nonrecurring basis for the three and six months ended July 4, 2015 or June 28, 2014.

Long-lived assets: During the first quarter of both 2015 and 2014, the Company recognized $1 million of fixed asset write-offs associated with projects abandoned under the new realigned structure. 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. Typically 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. However, as these fixed assets had no alternative future use and therefore no discrete future cash flows, the assets were fully impaired.

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 $75 million and $71 million as of July 4, 2015 and January 3, 2015, respectively. The fair value of the Company’s cost method investments was not estimated during the second quarter of 2015 since there were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments.

Fair Value Measurements of Other Financial Instruments

The aggregate fair value of the Company’s fixed-rate senior notes at July 4, 2015 (measured using quoted prices in active markets) was $2,274 million compared to the aggregate carrying value of $2,265 million (inclusive of unamortized debt discounts or premiums). The fair value of the Company’s variable-rate debt obligations at July 4, 2015 approximated its aggregate $1,476 million carrying value due to the variable interest rate and short-term nature of these instruments. The Company also had $448 million and $713 million of cash equivalents invested in short-term deposits and interest and non-interest bearing bank accounts at July 4, 2015 and January 3, 2015, respectively.