Fair Value Measurements

The Company follows the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and nonrecurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a 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, based on market data obtained from sources independent of the Company. 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 in the circumstances. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Descriptions of the three levels of the fair value hierarchy are discussed in Note 6 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 25, 2014.

See the section below titled Valuation Techniques for further discussion of how the Company determines fair value for investments.

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

The authoritative guidance is principally applied to financial assets and liabilities such as marketable equity securities and debt and equity securities that are classified and accounted for as trading, available-for-sale, derivative instruments, and contingent consideration associated with acquisitions subsequent to April 24, 2009. Derivatives include cash flow hedges, freestanding derivative forward contracts, and fair value hedges. These items are marked-to-market at each reporting period.

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:



	Fair Value as of October 24, 2014		Fair Value Measurements Using Inputs Considered as
(in millions)	Fair Value as of October 24, 2014		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	5,653	$	—	$	5,644	$	9
Auction rate securities	99		—		—		99
Mortgage-backed securities	1,264		—		1,264		—
U.S. government and agency securities	2,860		1,199		1,661		—
Foreign government and agency securities	80		—		80		—
Certificates of deposit	46		—		46		—
Other asset-backed securities	471		—		471		—
Debt funds	2,742		—		2,742		—
Marketable equity securities	46		46		—		—
Exchange-traded funds	70		70		—		—
Derivative assets	350		260		90		—
Total assets	$	13,681	$	1,575	$	11,998	$	108

Liabilities:
Derivative liabilities	$	57	$	27	$	30	$	—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	91		—		—		91
Total liabilities	$	148	$	27	$	30	$	91



	Fair Value as of April 25, 2014		Fair Value Measurements Using Inputs Considered as
(in millions)	Fair Value as of April 25, 2014		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	5,542	$	—	$	5,533	$	9
Auction rate securities	97		—		—		97
Mortgage-backed securities	1,336		—		1,336		—
U.S. government and agency securities	3,116		1,251		1,865		—
Foreign government and agency securities	67		—		67		—
Certificates of deposit	54		—		54		—
Other asset-backed securities	542		—		542		—
Debt funds	2,123		—		2,123		—
Marketable equity securities	49		49		—		—
Exchange-traded funds	67		67		—		—
Derivative assets	175		89		86		—
Total assets	$	13,168	$	1,456	$	11,606	$	106

Liabilities:
Derivative liabilities	$	127	$	116	$	11	$	—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	68		—		—		68
Total liabilities	$	195	$	116	$	11	$	68

Valuation Techniques

Financial assets that are classified as Level 1 securities include highly liquid government bonds within U.S. government and agency securities, marketable equity securities, and exchange-traded funds for which quoted market prices are available. In addition, the Company has determined that foreign currency forward contracts will be included in Level 1 as these are valued using quoted market prices in active markets which have identical assets or liabilities.

The valuation for most fixed maturity securities are classified as Level 2. Financial assets that are classified as Level 2 include corporate debt securities, U.S. government and agency securities, foreign government and agency securities, certificates of deposit, other asset-backed securities, debt funds, and certain mortgage-backed securities whose value is determined using inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, interest rate swaps are included in Level 2 as the Company uses inputs other than quoted prices that are observable for the asset. The Level 2 derivative instruments are primarily valued using standard calculations and models that use readily observable market data as their basis.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Level 3 financial assets also include certain investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. Level 3 investment securities include certain corporate debt securities, auction rate securities, and certain mortgage-backed securities. With the exception of auction rate securities, these securities were valued using third-party pricing sources that incorporate transaction details such as contractual terms, maturity, timing, and amount of expected future cash flows, as well as assumptions about liquidity and credit valuation adjustments by market participants. The fair value of auction rate securities is estimated by the Company using a discounted cash flow model, which incorporates significant unobservable inputs. The significant unobservable inputs used in the fair value measurement of the Company’s auction rate securities are years to principal recovery and the illiquidity premium that is incorporated into the discount rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value of the securities. Additionally, the Company uses Level 3 inputs in the measurement of contingent consideration and related liabilities for all acquisitions subsequent to April 24, 2009. See Note 3 to the condensed consolidated financial statements for further information regarding contingent consideration.

The following table represents the range of the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 as of October 24, 2014:



	Valuation Technique	Unobservable Input	Range (Weighted Average)
Auction rate securities	Discounted cash flow	Years to principal recovery	2 yrs. - 12 yrs. (3 yrs.)
Auction rate securities	Discounted cash flow	Illiquidity premium	6%

The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended October 24, 2014 or October 25, 2013. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.

The following tables provide a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) for the three and six months ended October 24, 2014 and October 25, 2013:



Three months ended October 24, 2014
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities
Balance as of July 25, 2014	$	108		$	9		$	99		$	—
Total unrealized gains included in other comprehensive income	—			—			—			—
Balance as of October 24, 2014	$	108		$	9		$	99		$	—

Three months ended October 25, 2013
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities
Balance as of July 26, 2013	$	132		$	10		$	107		$	15
Total realized losses and other-than-temporary impairment losses included in earnings	(2		)	—			(2		)	—
Total unrealized gains included in other comprehensive income	1			—			1			—
Settlements	(13		)	(1		)	(1		)	(11		)
Balance as of October 25, 2013	$	118		$	9		$	105		$	4

Six months ended October 24, 2014
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities
Balance as of April 25, 2014	$	106		$	9		$	97		$	—
Total unrealized gains included in other comprehensive income	2			—			2			—
Balance as of October 24, 2014	$	108		$	9		$	99		$	—

Six months ended October 25, 2013
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities
Balance as of April 26, 2013	$	127		$	10		$	103		$	14
Total realized losses and other-than-temporary impairment losses included in earnings	(2		)	—			(2		)	—
Total unrealized gains included in other comprehensive income	6			—			5			1
Settlements	(13		)	(1		)	(1		)	(11		)
Balance as of October 25, 2013	$	118		$	9		$	105		$	4

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

Non-financial assets such as equity and other securities that are accounted for using the cost or equity method, goodwill and IPR&D, intangible assets, and property, plant, and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized.

The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the condensed consolidated balance sheets. The aggregate carrying amount of these investments was $563 million as of October 24, 2014 and $666 million as of April 25, 2014. These cost or equity method investments are measured at fair value on a nonrecurring basis. The fair value of the Company’s cost or equity method investments is not estimated if there are no identified events or changes in circumstance that may have a significant adverse effect on the fair value of these investments. During the three and six months ended October 24, 2014, the Company determined that the fair values of certain cost method investments were below their carrying values and that the carrying values of these investments were not expected to be recoverable within a reasonable period of time. As a result, the Company recognized $13 million in impairment charges during the three and six months ended October 24, 2014, which were recorded in other expense, net in the condensed consolidated statements of earnings. The Company did not record any significant impairment charges related to cost method investments during the three and six months ended October 25, 2013. These investments fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are privately-held entities without quoted market prices. To determine the fair value of these investments, the Company used all pertinent financial information available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings.

The Company assesses the impairment of goodwill annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of goodwill was $11.024 billion and $10.593 billion as of October 24, 2014 and April 25, 2014, respectively.

Impairment testing for goodwill is performed at the reporting unit level. The test for impairment of goodwill requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculates the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. The Company did not record any goodwill impairments during the three and six months ended October 24, 2014 or October 25, 2013.

The recently acquired businesses of Cardiocom, LLC (Cardiocom) and Kanghui are separate reporting units and are tested for goodwill impairment independently; therefore, they are more sensitive to changes in assumptions impacting fair value. The carrying amount of goodwill was $410 million and $123 million for the Kanghui and Cardiocom reporting units, respectively, as of October 24, 2014. As of the date of the annual goodwill impairment test, the fair values of these two reporting units exceeded their respective carrying values by more than 10 percent.

The Company assesses the impairment of IPR&D annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of IPR&D was $138 million and $119 million as of October 24, 2014 and April 25, 2014, respectively. The majority of IPR&D at October 24, 2014 is related to IN.PACT family of drug-eluting balloons. Similar to the goodwill impairment test, the IPR&D impairment test requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculates the excess of IPR&D asset fair values over their carrying values utilizing a discounted future cash flow analysis. The Company did not record any IPR&D impairments during the three or six months ended October 24, 2014 or October 25, 2013. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of such clinical trials, delays or failures to obtain required market clearances or other failures to achieve a commercially viable product, and as a result, may record impairment losses in the future.

The Company assesses intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset (asset group) may not be recoverable. The aggregate carrying amount of intangible assets, excluding IPR&D, was $2.299 billion as of October 24, 2014 and $2.167 billion as of April 25, 2014. When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recorded based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company did not record any significant intangible asset impairments during the three or six months ended October 24, 2014 or October 25, 2013.

The Company assesses the impairment of property, plant, and equipment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. The Company did not record any significant impairments of Property, plant, and equipment during the three months ended October 24, 2014. As part of the Company’s restructuring initiatives, the Company recorded Property, plant, and equipment impairments of $9 million during the six months ended October 24, 2014 in restructuring charges, net in the condensed consolidated statements of earnings. For further discussion of the restructuring initiatives refer to Note 5. The Company did not record any significant impairments of Property, plant, and equipment during the three or six months ended October 25, 2013.

Financial Instruments Not Measured at Fair Value

The estimated fair value of the Company’s long-term debt, including the short-term portion, as of October 24, 2014 was $11.842 billion compared to a principal value of $11.375 billion, and as of April 25, 2014 was $11.856 billion compared to a principal value of $11.375 billion. Fair value was estimated using quoted market prices for the publicly registered senior notes, classified as Level 1 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.