FAIR VALUE MEASUREMENTS

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) and certain financial assets and liabilities that are measured at fair value on a nonrecurring basis. The Company also maintains other financial instruments that approximate their fair value due to their short maturities, and include such instruments as its cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and current and long-term debt obligations.

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

The Company's financial assets and liabilities that are measured at fair value on a recurring basis include money-market securities, available-for-sale marketable securities, trading marketable securities, derivative instruments and contingent consideration liabilities. 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.

The following table summarizes the components of the balance of the Company’s available-for-sale securities at April 2, 2016 and January 2, 2016 (in millions):



	April 2, 2016		January 2, 2016
Adjusted cost	$	4	$	5
Gross unrealized gains	5		6
Gross unrealized losses	—		(1		)
Fair value	$	9	$	10

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: 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 readily observable market parameters from industry standard data providers as their basis. 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 liabilities: The fair value of the Company's contingent liabilities is initially 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 April 2, 2016 and January 2, 2016 is as follows (in millions):



	Balance Sheet Classification	April 2, 2016		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	$	55	$	55	$	—	$	—
Available-for-sale securities	Other current assets	9		9		—		—
Trading securities	Other assets	294		294		—		—
Total assets		$	358	$	358	$	—	$	—

Liabilities
Foreign currency forward contracts	Other current liabilities	$	28	$	—	$	28	$	—
Contingent consideration	Other liabilities	36		—		—		36
Foreign currency forward contracts	Other liabilities	8		—		8		—
Total liabilities		$	72	$	—	$	36	$	36



	Balance Sheet Classification	January 2, 2016		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	$	273	$	273	$	—	$	—
Available-for-sale securities	Other current assets	10		10		—		—
Foreign currency forward contracts	Other current assets	14		—		14		—
Trading securities	Other assets	302		302		—		—
Foreign currency forward contracts	Other assets	2		—		2		—
Total assets		$	601	$	585	$	16	$	—

Liabilities
Contingent consideration	Other current liabilities	$	118	$	—	$	—	$	118
Foreign currency forward contracts	Other current liabilities	6		—		6		—
Contingent consideration	Other liabilities	33		—		—		33
Foreign currency forward contracts	Other liabilities	3		—		3		—
Total liabilities		$	160	$	—	$	9	$	151

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



Contingent Consideration Liabilities	Fair Value as of April 2, 2016		Valuation Technique	Unobservable Input	Value or Range

Spinal Modulation revenue-based milestones and earn-outs	$	6	Monte Carlo Simulation	Discount Rates	0.9%	-	16.0%
				Expected Revenue Volatility			25.0%
				Projected Years of Payments	2017, 2018

Nanostim, Inc. (Nanostim) revenue-based milestones	2		Probability Weighted Discounted Cash Flow	Discount Rate			5.0%
				Probability of Payments			10.0%
				Projected Years of Payments	2017, 2018

Assumed from Thoratec regulatory-based and revenue-based milestones	28		Probability Weighted Discounted Cash Flow	Discount Rate			4.9%
				Probabilities of Payments	—%	-	90.0%
				Projected Years of Payments	2017	-	2020
Total contingent consideration liabilities	$	36

Additionally, the following table provides a reconciliation of the beginning and ending balances of the Company's recurring Level 3 fair value measurements (in millions):



	Nanostim			Spinal Modulation			Assumed from Thoratec			Total
Balance as of January 3, 2015	$	50		$	—		$	—		$	50
Initial fair value measurement of contingent consideration	—			155			—			155
Liabilities assumed from Thoratec acquisition	—			—			33			33
Change in fair value of contingent consideration	(48		)	(33		)	(6		)	(87		)
Balance as of January 2, 2016	2			122			27			151
Change in fair value of contingent consideration	—			8			1			9
Transfer out of Level 3 fair value measurement due to contractual settlement	—			(124		)	—			(124		)
Balance as of April 2, 2016	$	2		$	6		$	28		$	36

In April 2016, the Company paid $124 million to settle the contingent consideration liability associated with the Spinal Modulation regulatory-based milestone.

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 impairment discussed as follows, there were no other material impairments that were measured at fair value on a nonrecurring basis for the three months ended April 2, 2016 or April 4, 2015.

Long-lived assets: During the first quarter of 2016, the Company recognized $5 million of fixed asset write-offs primarily associated with projects abandoned as the Company continues to integrate its recent acquisitions. Additionally, during the first quarter of 2015, the Company recognized $1 million of fixed asset write-offs primarily related to projects abandoned under the realigned structure. Typically the Company measures these assets 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 $59 million and $80 million as of April 2, 2016 and January 2, 2016, respectively. During the first quarter of 2016, the Company concluded that adverse regulatory rulings and subsequent operational decisions made by an entity in which the Company had strategic debt and equity investments had an adverse impact on the fair values of those investments. As a result, the Company recognized other-than-temporary impairments of approximately $50 million in other (income) expense in the Condensed Consolidated Statements of Earnings to fully write-down its cost method equity investment and convertible debt investment. The fair value of the Company’s remaining cost method investments was not estimated during the first quarter of 2016 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 April 2, 2016 (measured using quoted prices in active markets) was $3,402 million compared to the aggregate carrying value of $3,253 million (inclusive of unamortized debt discounts). The fair value of the Company’s variable-rate debt obligations at April 2, 2016 approximated its aggregate $2,805 million carrying value due to the variable interest rate and short-term nature of these instruments. The Company also had $270 million and $393 million of cash equivalents invested in short-term deposits and interest and non-interest bearing bank accounts at April 2, 2016 and January 2, 2016, respectively, the cost basis of which approximated the fair value.