Fair Value of Financial Assets and Liabilities

Our fixed income and equity investments are classified as available for sale and recorded at their fair market values. We determine fair value using the following hierarchy:


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


•	Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Most of our fixed income securities are classified as Level 2, with the exception of some of our U.S. government and agency obligations and our investments in publicly traded equity securities, which are classified as Level 1, and all of our auction rate securities, which are classified as Level 3. In addition, our strategic investments held at cost are classified as Level 3. At June 30, 2016, the vast majority of our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security’s market value, including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair market value.

In general, investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. Our publicly traded equity securities are classified as long-term investments and our strategic investments held at cost are classified as other assets. As a result of the lack of liquidity for auction rate securities, we have classified these as long-term investments as of December 31, 2015. During the three months ended June 30, 2016, EMC sold all of our auction rate securities. At June 30, 2016 and December 31, 2015, all of our short- and long-term investments, excluding auction rate securities, were recognized at fair value, which was determined based upon observable inputs from our pricing vendors for identical or similar assets. At December 31, 2015, auction rate securities were valued using a discounted cash flow model.

The following tables summarize the composition of our short- and long-term investments at June 30, 2016 and December 31, 2015 (tables in millions):



	June 30, 2016
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Aggregate Fair Value
U.S. government and agency obligations	$	1,639	$	8	$	(1	)	$	1,646
U.S. corporate debt securities	2,172		14		—			2,186
High yield corporate debt securities	68		1		(2		)	67
Asset-backed securities	8		—		—			8
Municipal obligations	517		—		—			517
Foreign debt securities	2,236		11		—			2,247
Total fixed income securities	6,640		34		(3		)	6,671
Publicly traded equity securities	113		18		(8		)	123
Total	$	6,753	$	52	$	(11	)	$	6,794



	December 31, 2015
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Aggregate Fair Value
U.S. government and agency obligations	$	2,449	$	—	$	(8	)	$	2,441
U.S. corporate debt securities	2,257		1		(10		)	2,248
High yield corporate debt securities	307		2		(22		)	287
Asset-backed securities	20		—		—			20
Municipal obligations	731		1		—			732
Auction rate securities	27		—		(2		)	25
Foreign debt securities	2,332		—		(9		)	2,323
Total fixed income securities	8,123		4		(51		)	8,076
Publicly traded equity securities	126		40		(8		)	158
Total	$	8,249	$	44	$	(59	)	$	8,234

We held approximately $2,247 million in foreign debt securities at June 30, 2016. These securities have an average credit rating of A+, and approximately 4% of these securities are deemed sovereign debt with an average credit rating of AA+. None of the securities deemed sovereign debt are from Argentina, Greece, Italy, Ireland, Portugal, Spain, Cyprus or Puerto Rico.

The following tables represent our fair value hierarchy for our financial assets and liabilities measured at fair value as of June 30, 2016 and December 31, 2015 (tables in millions):



	June 30, 2016
	Level 1		Level 2			Level 3		Total
Cash	$	2,284	$	—		$	—	$	2,284
Cash equivalents	6,560		510			—		7,070
U.S. government and agency obligations	1,005		641			—		1,646
U.S. corporate debt securities	—		2,186			—		2,186
High yield corporate debt securities	—		67			—		67
Asset-backed securities	—		8			—		8
Municipal obligations	—		517			—		517
Foreign debt securities	—		2,247			—		2,247
Publicly traded equity securities	123		—			—		123
Total cash and investments	$	9,972	$	6,176		$	—	$	16,148
Other items:
Strategic investments held at cost	$	—	$	—		$	404	$	404
Long-term debt carried at discounted cost	—		(5,281		)	—		(5,281		)
Foreign exchange derivative assets	—		45			—		45
Foreign exchange derivative liabilities	—		(61		)	—		(61		)
Commodity derivative liabilities	—		(4		)	—		(4		)



	December 31, 2015
	Level 1		Level 2			Level 3		Total
Cash	$	2,095	$	—		$	—	$	2,095
Cash equivalents	3,861		593			—		4,454
U.S. government and agency obligations	1,495		946			—		2,441
U.S. corporate debt securities	—		2,248			—		2,248
High yield corporate debt securities	—		287			—		287
Asset-backed securities	—		20			—		20
Municipal obligations	—		732			—		732
Auction rate securities	—		—			25		25
Foreign debt securities	—		2,323			—		2,323
Publicly traded equity securities	158		—			—		158
Total cash and investments	$	7,609	$	7,149		$	25	$	14,783
Other items:
Strategic investments held at cost	$	—	$	—		$	384	$	384
Investment in joint venture	—		—			39		39
Long-term debt carried at discounted cost	—		(4,999		)	—		(4,999		)
Foreign exchange derivative assets	—		39			—		39
Foreign exchange derivative liabilities	—		(78		)	—		(78		)
Commodity derivative liabilities	—		(4		)	—		(4		)

EMC had a 49% ownership percentage of LenovoEMC Limited, a joint venture with Lenovo that was formed in 2012. During the three months ended June 30, 2016, EMC and Lenovo entered into an agreement to terminate the joint venture. Accordingly, EMC recognized an impairment loss of $39 million which is reflected in other income (expense), net on the consolidated income statements.

The carrying value of the strategic investments held at cost were accounted for under the cost method. As part of our quarterly impairment review, we perform a fair value calculation of our strategic investments held at cost using the most currently available information. To determine the estimated fair value of private strategic investments held at cost, we use a combination of several valuation techniques including discounted cash flow models, acquisition and trading comparables. In addition, we evaluate the impact of pre- and post-money valuations of recent financing events and the impact of those on our fully diluted ownership percentages, and we consider any available information regarding the issuer’s historical and forecasted performance as well as market comparables and conditions. The fair value of these investments is considered in our review for impairment if any events and changes in circumstances occur that might have a significant adverse effect on their value.

Investment Losses

Unrealized losses on investments at June 30, 2016 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (table in millions):



	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government and agency obligations	$	128	$	(1	)	$	—	$	—		$	128	$	(1	)
High yield corporate debt securities	20		(1		)	15		(1		)	35		(2		)
Publicly traded equity securities	2		(1		)	2		(7		)	4		(8		)
Total	$	150	$	(3	)	$	17	$	(8	)	$	167	$	(11	)

For all of our securities for which the amortized cost basis was greater than the fair value at June 30, 2016, we have concluded that currently we neither plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.

Contractual Maturities

The contractual maturities of fixed income securities held at June 30, 2016 are as follows (table in millions):



	June 30, 2016
	Amortized Cost Basis		Aggregate Fair Value
Due within one year	$	2,378	$	2,379
Due after 1 year through 5 years	3,910		3,938
Due after 5 years through 10 years	162		163
Due after 10 years	190		191
Total	$	6,640	$	6,671

Short-term investments on the consolidated balance sheet include $28 million in variable rate notes which have contractual maturities in 2016, and are not classified within investments due within one year above.