Note 4: Fair Value

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

Assets and liabilities measured and recorded at fair value on a recurring basis at the end of each period were as follows:



	December 26, 2015								December 27, 2014
	Fair Value Measured and Recorded at Reporting Date Using						Total		Fair Value Measured and Recorded at Reporting Date Using						Total
(In Millions)	Level 1		Level 2		Level 3				Level 1		Level 2		Level 3
Assets
Cash equivalents:
Corporate debt	$	—	$	1,829	$	—	$	1,829	$	—	$	48	$	—	$	48
Financial institution instruments	8,238		1,277		—		9,515		321		1,119		—		1,440
Government debt	—		130		—		130		—		—		—		—
Reverse repurchase agreements	—		2,368		—		2,368		—		268		—		268
Short-term investments:
Corporate debt	336		764		20		1,120		363		412		31		806
Financial institution instruments	145		927		—		1,072		149		1,050		—		1,199
Government debt	65		425		—		490		252		173		—		425
Trading assets:
Asset-backed securities	—		275		94		369		—		766		58		824
Corporate debt	1,744		564		—		2,308		2,625		339		—		2,964
Financial institution instruments	930		701		—		1,631		1,146		613		—		1,759
Government debt	1,107		1,908		—		3,015		1,295		2,221		—		3,516
Other current assets:
Derivative assets	32		412		1		445		—		559		2		561
Loans receivable	—		137		—		137		—		505		—		505
Marketable equity securities	5,891		69		—		5,960		7,097		—		—		7,097
Other long-term investments:
Asset-backed securities	—		—		4		4		—		2		4		6
Corporate debt	407		801		—		1,208		453		728		13		1,194
Financial institution instruments	171		381		—		552		189		319		—		508
Government debt	79		48		—		127		75		240		—		315
Other long-term assets:
Derivative assets	—		30		10		40		—		35		22		57
Loans receivable	—		342		—		342		—		216		—		216
Total assets measured and recorded at fair value	19,145		13,388		129		32,662		13,965		9,613		130		23,708
Liabilities
Other accrued liabilities:
Derivative liabilities	2		210		—		212		—		563		—		563
Other long-term liabilities:
Derivative liabilities	—		33		—		33		—		17		—		17
Total liabilities measured and recorded at fair value	$	2	$	243	$	—	$	245	$	—	$	580	$	—	$	580

Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms, such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits.

For the year ended December 26, 2015, we transferred corporate debt and financial institution instruments of approximately $628 million from Level 1 to Level 2 of the fair value hierarchy and approximately $403 million of financial institution instruments, corporate debt, and government debt from Level 2 to Level 1 ($177 million of corporate debt, financial institution instruments, and government debt from Level 1 to Level 2 and $395 million from Level 2 to Level 1 during 2014). These transfers were based on changes in market activity for the underlying instruments. 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.

Investments in Debt Instruments

Debt instruments reflected in the preceding table include investments such as asset-backed securities, corporate debt, financial institution instruments, government debt, and reverse repurchase agreements classified as cash equivalents. We classify our debt instruments as Level 2 when we use observable market prices for identical instruments that are traded in less active markets. When observable market prices for identical instruments are not available, we price the debt instruments using our own models, such as a discounted cash flow model, or non-binding market consensus prices 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 instruments; 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. When we use non-binding market consensus prices, we corroborate them with quoted market prices for similar instruments or compare them to output from internally developed pricing models such as a discounted cash flow model. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. All significant inputs are derived from or corroborated with observable market data.

The fair values of debt instruments classified as Level 3 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 help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.

Fair Value Option for Loans Receivable

We elected the fair value option for loans receivable when the interest rate or currency exchange rate risk was hedged at inception with a related derivative instrument. As of December 26, 2015 and December 27, 2014, 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 gains or losses on the related derivative instruments, resulting in an insignificant net impact on our consolidated 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 currency exchange rate risk was not hedged at inception with a related derivative instrument. Loans receivable not measured and recorded at fair value are included in the following "Financial Instruments Not Recorded at Fair Value on a Recurring Basis" section.

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 is recognized.

Some of our non-marketable equity investments have 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 impairments. We classified these investments as Level 3 because the valuations used unobservable inputs that were significant to the fair value measurements and required management judgment due to the absence of quoted market prices. Impairments recognized on non-marketable equity investments held as of December 26, 2015 were $160 million in 2015 ($128 million in 2014 on non-marketable equity investments held as of December 27, 2014 and $106 million in 2013 on non-marketable equity investments held as of December 28, 2013).

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

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



	December 26, 2015
	Carrying Amount		Fair Value Measured Using						Fair Value
(In Millions)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Grants receivable	$	593	$	—	$	600	$	—	$	600
Loans receivable	$	315	$	—	$	315	$	—	$	315
Non-marketable cost method investments	$	2,933	$	—	$	—	$	3,904	$	3,904
Reverse repurchase agreements	$	1,000	$	—	$	1,000	$	—	$	1,000
Short-term debt	$	2,593	$	1,513	$	1,563	$	—	$	3,076
Long-term debt	$	20,036	$	14,058	$	6,835	$	—	$	20,893
NVIDIA Corporation cross-license agreement liability	$	199	$	—	$	200	$	—	$	200



	December 27, 2014
	Carrying Amount		Fair Value Measured Using						Fair Value
(In Millions)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Grants receivable	$	676	$	—	$	679	$	—	$	679
Loans receivable	$	250	$	—	$	250	$	—	$	250
Non-marketable cost method investments	$	1,769	$	—	$	—	$	2,599	$	2,599
Reverse repurchase agreements	$	450	$	—	$	450	$	—	$	450
Short-term debt	$	1,580	$	—	$	2,145	$	—	$	2,145
Long-term debt	$	12,059	$	11,467	$	1,309	$	—	$	12,776
NVIDIA Corporation cross-license agreement liability	$	395	$	—	$	399	$	—	$	399

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 December 26, 2015 and December 27, 2014, the carrying amount of our grants receivable was classified within other current assets and other long-term assets, as applicable.

The carrying amount and fair value of loans receivable exclude loans measured and recorded at fair value on a recurring basis. 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. All significant inputs in the models are 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+/A1 for most of our loans receivable and a substantial majority of our reverse repurchase agreements as of December 26, 2015.

As of December 26, 2015, and December 27, 2014, the unrealized loss position of our non-marketable cost method investments was insignificant. Our non-marketable cost method investments are valued using a qualitative and quantitative analysis of events or circumstances that impact the fair value of the investment. Qualitative analysis of our investments involves understanding our investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects; the technological feasibility of our investee’s products and technologies; the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; and the management and governance structure of the investee. Quantitative assessments of the fair value of our investments are developed using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies, such as revenue, earnings, comparable performance multiples, recent financing rounds, the terms of the investees’ issued interests, and the level of marketability of the investments. 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 regarding investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data. We measure the fair value of our non-marketable cost method investments as close to the end of the period as feasible.

The carrying amount and fair value of short-term debt exclude drafts payable. Our short-term debt recognized at amortized cost includes our 2009 junior subordinated convertible debentures due 2039 (2009 debentures) and our 2011 senior notes due 2016. During the fourth quarter of 2015, the 2009 debentures were classified as short-term debt on the consolidated balance sheet and convertible at the option of the holder during the first quarter of 2016. For further information, see "Note 15: Borrowings." Our long-term debt recognized at amortized cost is composed of our senior notes and our convertible debentures. The fair value of our senior notes is classified as Level 1 when we use quoted prices in active markets and Level 2 when the quoted prices are from less active markets or when other observable inputs are used to determine fair value. The fair value of our 2009 and 2005 convertible debentures is determined using discounted cash flow models with observable market inputs, and takes into consideration variables such as interest rate changes, comparable instruments, subordination discount, and credit-rating changes; it is, therefore, classified as Level 2.

The NVIDIA Corporation (NVIDIA) 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, pursuant to which we agreed to make payments to NVIDIA over six years. The carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, based on the expected timing of the underlying payments ($200 million due in each of January 2015 and 2016 treated as cash used for financing activities). The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.