To estimate the fair value of our financial assets and liabilities, we use valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing an asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:



Level 1	—	Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
Level 2	—	Valuations for which all significant inputs are observable either directly or indirectly—other than Level 1 inputs
Level 3	—	Valuations based on inputs that are unobservable and significant to the overall fair value measurement

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.



Fair value measurement as of December 31, 2019, using:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Available-for-sale securities:
U.S. Treasury notes	$	360	$	—	$	—	$	360
U.S. Treasury bills	—		—		—		—
Other government-related debt securities:
U.S.	—		—		—		—
Foreign and other	—		—		—		—
Corporate debt securities:
Financial	—		1,121		—		1,121
Industrial	—		834		—		834
Other	—		198		—		198
Residential-mortgage-backed securities	—		182		—		182
Other mortgage- and asset-backed securities	—		—		—		—
Money market mutual funds	5,250		—		—		5,250
Other short-term interest-bearing securities	—		289		—		289
Equity securities	303		—		—		303
Derivatives:
Foreign currency contracts	—		224		—		224
Cross-currency swap contracts	—		66		—		66
Interest rate swap contracts	—		259		—		259
Total assets	$	5,913	$	3,173	$	—	$	9,086
Liabilities:
Derivatives:
Foreign currency contracts	$	—	$	31	$	—	$	31
Cross-currency swap contracts	—		315		—		315
Interest rate swap contracts	—		—		—		—
Contingent consideration obligations	—		—		61		61
Total liabilities	$	—	$	346	$	61	$	407



Fair value measurement as of December 31, 2018, using:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Available-for-sale securities:
U.S. Treasury notes	$	2,663	$	—	$	—	$	2,663
U.S. Treasury bills	8,191		—		—		8,191
Other government-related debt securities:
U.S.	—		110		—		110
Foreign and other	—		932		—		932
Corporate debt securities:
Financial	—		2,697		—		2,697
Industrial	—		2,504		—		2,504
Other	—		562		—		562
Residential-mortgage-backed securities	—		1,422		—		1,422
Other mortgage- and asset-backed securities	—		469		—		469
Money market mutual funds	5,659		—		—		5,659
Other short-term interest-bearing securities	—		3,515		—		3,515
Equity securities	176		—		—		176
Derivatives:
Foreign currency contracts	—		182		—		182
Cross-currency swap contracts	—		170		—		170
Interest rate swap contracts	—		56		—		56
Total assets	$	16,689	$	12,619	$	—	$	29,308
Liabilities:
Derivatives:
Foreign currency contracts	$	—	$	26	$	—	$	26
Cross-currency swap contracts	—		401		—		401
Interest rate swap contracts	—		149		—		149
Contingent consideration obligations	—		—		72		72
Total liabilities	$	—	$	576	$	72	$	648

As of December 31, 2019, our corporate debt securities are investment grade and have maturity dates of three years or less from the balance sheet date. Our corporate debt securities portfolio has weighted-average credit ratings of A– or equivalent by Standard & Poor’s Financial Services LLC (S&P) or Moody’s Investors Service, Inc. (Moody’s), and A by Fitch Ratings, Inc. (Fitch). We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry-standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly to estimate fair value. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.

Our residential-mortgage-backed-securities portfolio is composed entirely of senior tranches with credit ratings of AAA by S&P, Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry-standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly to estimate fair value. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment or default projections based on historical data; and other observable inputs.

All of our foreign currency forward and option derivative contracts have maturities of three years or less, and all are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, the LIBOR, swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts include implied volatility measures. These inputs, when applicable, are at commonly quoted intervals. See Note 18, Derivative instruments.

Our cross-currency swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit default swap rates and cross-currency basis swap spreads. See Note 18, Derivative instruments.

Our interest rate swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by using an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include LIBOR, swap rates and obligor credit default swap rates. See Note 18, Derivative instruments.

As a result of our acquisitions, we have incurred contingent consideration obligations. The contingent consideration obligations are recorded at their fair values by using probability-adjusted discounted cash flows, and we revalue these obligations each reporting period until the related contingencies have been resolved. The fair value measurements of these obligations are based on significant unobservable inputs related to licensing rights and product candidates acquired in business combinations, and they are reviewed quarterly by management in our R&D and commercial sales organizations. Changes in the fair values of contingent consideration obligations are recognized in Other operating expenses in the Consolidated Statements of Income. Changes in the carrying amounts of contingent consideration obligations for the years ended December 31, 2019 and 2018, were not material. During the year ended December 31, 2017, we recorded a $110 million reduction to contingent consideration obligations due substantially to amounts associated with the Dezima Pharma B.V. (Dezima) acquisition, discussed below.

As a result of our acquisition of Dezima in 2015, we are obligated to pay its former shareholders up to $1.25 billion of additional consideration contingent upon achieving certain development and sales-related milestones and low single-digit royalties on net product sales above a certain threshold for AMG 899, an IPR&D asset. The fair values of the contingent consideration obligations had an aggregate value of $110 million at acquisition. During 2017, we decided to discontinue the internal development of AMG 899 and accordingly, we reduced from $116 million to $0 the related contingent consideration liabilities and recognized an impairment charge of $400 million on the IPR&D asset in Other operating expenses in the Consolidated Statements of Income. The remeasurement of these liabilities and the impairment charge are included in Other items, net, in the Consolidated Statements of Cash Flows.

As a result of our acquisition of BioVex Group Inc. in 2011, we are obligated to pay its former shareholders up to $325 million upon achieving separate regulatory and sales-related milestones with regard to IMLYGIC^® (talimogene laherparepvec) if certain sales thresholds are met within specified periods of time.

During the years ended December 31, 2019 and 2018, there were no transfers of assets or liabilities between fair value measurement levels, and there were no material remeasurements to the fair values of assets and liabilities that are not measured at fair value on a recurring basis, except with respect to the 2018 discontinuance of the internal development of a program that resulted in an impairment of an IPR&D asset of $330 million, which was recognized in Other operating expenses in the Consolidated Statements of Income and included in Other items, net, in the Consolidated Statements of Cash Flows.

We estimated the fair values of our borrowings by using Level 2 inputs. As of December 31, 2019 and 2018, the aggregate fair values of our borrowings were $33.7 billion and $35.0 billion, respectively, and the carrying values were $29.9 billion and $33.9 billion, respectively.