Note 2: Fair Value

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. Our financial assets are measured and recorded at fair value, except for equity method investments, cost method investments, cost method loans receivable, and reverse repurchase agreements with original maturities greater than approximately three months. Most of our liabilities are not measured and recorded at fair value.

Fair Value Hierarchy

The three levels of inputs that may be used to measure fair value are as follows:

Level 1. Quoted prices in active markets for identical assets or liabilities.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets, or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.

Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.

Investments in Debt Instruments

Debt investments reflected in the following table include investments such as asset-backed securities, bank deposits, commercial paper, corporate bonds, government bonds, money market fund deposits, municipal bonds, and reverse repurchase agreements classified as cash equivalents. When we use observable market prices for identical securities that are traded in less active markets, we classify our debt investments as Level 2. When observable market prices for identical securities are not available, we price our debt investments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and unobservable market inputs that we consider to be not significant. We corroborate non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.

Debt investments classified as Level 3, are classified as such because the fair values are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.

Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis

Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments at the end of each period:



	September 28, 2013								December 29, 2012
	Fair Value Measured and Recorded at Reporting Date Using								Fair Value Measured and Recorded at Reporting Date Using
(In Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Bank deposits	$	—	$	819	$	—	$	819	$	—	$	822	$	—	$	822
Commercial paper	—		2,245		—		2,245		—		2,711		—		2,711
Corporate bonds	—		—		—		—		—		—		—		—
Government bonds	—		—		—		—		400		66		—		466
Money market fund deposits	554		—		—		554		1,086		—		—		1,086
Reverse repurchase agreements	—		750		—		750		—		2,800		—		2,800
Short-term investments:
Bank deposits	—		1,679		—		1,679		—		540		—		540
Commercial paper	—		2,413		—		2,413		—		1,474		—		1,474
Corporate bonds	453		927		19		1,399		75		292		21		388
Government bonds	477		524		—		1,001		1,307		290		—		1,597
Trading assets:
Asset-backed securities	—		533		4		537		—		—		68		68
Bank deposits	—		110		—		110		—		247		—		247
Commercial paper	—		273		—		273		—		336		—		336
Corporate bonds	2,160		623		—		2,783		482		1,109		—		1,591
Government bonds	1,879		2,031		—		3,910		1,743		1,479		—		3,222
Money market fund deposits	88		—		—		88		18		—		—		18
Municipal bonds	—		72		—		72		—		203		—		203
Other current assets:
Derivative assets	—		255		1		256		12		208		1		221
Loans receivable	—		34		—		34		—		203		—		203
Marketable equity securities	6,514		—		—		6,514		4,424		—		—		4,424
Other long-term investments:
Asset-backed securities	—		—		9		9		—		—		11		11
Bank deposits	—		139		—		139		—		56		—		56
Corporate bonds	265		609		39		913		10		218		26		254
Government bonds	235		287		—		522		59		113		—		172
Other long-term assets:
Derivative assets	—		13		23		36		—		20		18		38
Loans receivable	—		765		—		765		—		577		—		577
Total assets measured and recorded at fair value	$	12,625	$	15,101	$	95	$	27,821	$	9,616	$	13,764	$	145	$	23,525
Liabilities
Other accrued liabilities:
Derivative liabilities	$	—	$	405	$	—	$	405	$	1	$	291	$	—	$	292
Other long-term liabilities:
Derivative liabilities	—		45		—		45		—		20		—		20
Total liabilities measured and recorded at fair value	$	—	$	450	$	—	$	450	$	1	$	311	$	—	$	312

Government bonds include bonds issued or deemed to be guaranteed by government entities. Government bonds include instruments such as non-U.S. government bonds, U.S. agency securities, and U.S. Treasury securities.

During the first six months of 2013, we purchased $394 million of asset-backed securities, which were classified as Level 3 investments. In the third quarter of 2013, we observed an increase in market activity which allowed us to determine that there was sufficient observable market data available to reclassify $381 million of asset-backed securities from Level 3 to Level 2 of the fair value hierarchy. Our policy is to reflect transfers between the fair value hierarchy levels at the beginning of the quarter in which a change in circumstances resulted in the transfer.

Fair Value Option for Loans Receivable

We elected the fair value option for loans receivable when the interest rate or foreign exchange rate risk was hedged at inception with a related derivative instrument. As of September 28, 2013, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency. Loans receivable are classified within other current assets and other long-term assets. Fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Gains and losses from changes in fair value on the loans receivable and related derivative instruments, as well as interest income, are recorded in interest and other, net. During all periods presented, changes in the fair value of our loans receivable were largely offset by changes in the related derivative instruments, resulting in an insignificant net impact on our consolidated condensed statements of income. Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. We did not elect the fair value option for loans receivable when the interest rate or foreign exchange rate risk was not hedged at inception with a related derivative instrument. Loans receivable not measured and recorded at a fair value are included in the "Financial Instruments Not Recorded at Fair Value on a Recurring Basis" section that follows.

Assets Measured and Recorded at Fair Value on a Non-Recurring Basis

Our non-marketable equity investments, marketable equity method investments, and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment charge is recognized.

A portion of our non-marketable equity investments has been measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairment charges. We classified these measurements as Level 3, as we used unobservable inputs to the valuation methodologies that were significant to the fair value measurements, and the valuations required management judgment due to the absence of quoted market prices. Impairment charges recognized on non-marketable equity investments held as of September 28, 2013 were $23 million during the third quarter of 2013 and $93 million during the first nine months of 2013 (impairment charges recognized on non-marketable equity investments held as of September 29, 2012 were $19 million during the third quarter of 2012 and $88 million during the first nine months of 2012). The fair value of the non-marketable equity investments impaired during the first nine months of 2013 was $33 million at the time of impairment ($51 million for non-marketable equity investments impaired during the first nine months of 2012).

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

On a quarterly basis, we measure the fair value of our non-marketable cost method investments, indebtedness carried at amortized cost, cost method loans receivable, grants receivable, and reverse repurchase agreements with original maturities greater than approximately three months; however, the assets are recorded at fair value only when an impairment charge is recognized. The carrying amounts and fair values of certain financial instruments not recorded at fair value on a recurring basis at the end of each period were as follows:



	September 28, 2013
(In Millions)	Carrying Amount		Fair Value Measured Using						Fair Value
(In Millions)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Non-marketable cost method investments	$	1,203	$	—	$	—	$	1,952	$	1,952
Loans receivable	$	175	$	—	$	150	$	25	$	175
Reverse repurchase agreements	$	150	$	—	$	150	$	—	$	150
Grants receivable	$	447	$	—	$	444	$	—	$	444
Long-term debt	$	13,157	$	10,892	$	2,652	$	—	$	13,544
Short-term debt	$	24	$	—	$	24	$	—	$	24
NVIDIA Corporation cross-license agreement liability	$	584	$	—	$	596	$	—	$	596



	December 29, 2012
(In Millions)	Carrying Amount		Fair Value Measured Using						Fair Value
(In Millions)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Non-marketable cost method investments	$	1,202	$	—	$	—	$	1,766	$	1,766
Loans receivable	$	199	$	—	$	150	$	48	$	198
Reverse repurchase agreements	$	50	$	—	$	50	$	—	$	50
Grants receivable	$	198	$	—	$	205	$	—	$	205
Long-term debt	$	13,136	$	11,442	$	2,926	$	—	$	14,368
Short-term debt	$	48	$	—	$	48	$	—	$	48
NVIDIA Corporation cross-license agreement liability	$	875	$	—	$	890	$	—	$	890

As of September 28, 2013 and December 29, 2012, the unrealized loss position of our non-marketable cost method investments was insignificant.

Our non-marketable cost method investments are valued using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates for investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenues and costs are developed using available market, historical, and forecast data. The valuation of these non-marketable cost method investments also takes into account variables such as conditions reflected in the capital markets, recent financing activities by the investees, the investees’ capital structure, the terms of the investees’ issued interests, and the lack of marketability of the investments.

The carrying amount and fair value of loans receivable exclude loans measured and recorded at a fair value of $799 million as of September 28, 2013 ($780 million as of December 29, 2012). The carrying amount and fair value of short-term debt exclude drafts payable.

The fair value of our loans receivable and reverse repurchase agreements, including those held at fair value, is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. The credit quality of these assets remains high, with credit ratings of A/A2 or better for a substantial majority of our loans receivable and all of our reverse repurchase agreements as of September 28, 2013. Our long-term debt recognized at amortized cost is comprised of our senior notes and our convertible debentures. The fair value of our senior notes is determined using active market prices, and it is therefore classified as Level 1. The fair value of our convertible long-term debt is determined using discounted cash flow models with observable market inputs, and it takes into consideration variables such as interest rate changes, comparable securities, subordination discount, and credit-rating changes, and it is therefore classified as Level 2.

The fair value of our grants receivable is determined using a discounted cash flow model, which discounts future cash flows using an appropriate yield curve. As of September 28, 2013 and December 29, 2012, the carrying amount of our grants receivable was classified within other current assets and other long-term assets, as applicable.

The NVIDIA Corporation cross-license agreement liability in the preceding table was incurred as a result of entering into a long-term patent cross-license agreement with NVIDIA in January 2011. We agreed to make payments to NVIDIA over six years. As of September 28, 2013 and December 29, 2012, the carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, as applicable. The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.