Fair Value of Financial Assets and Liabilities

12 Months Ended

Dec. 31, 2011

Fair Value of Financial Assets and Liabilities

F.       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. At December 31, 2011, 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. As a result of the lack of liquidity for auction rate securities, we have classified these as long-term investments as of December 31, 2011 and 2010. At December 31, 2011 and 2010, 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, 2011 and 2010, 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 December 31, 2011 and 2010 (tables in thousands):

		December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized (Losses)		Aggregate Fair Value
U.S. government and agency obligations	$	2,474,029	$	12,420	$	(1,488)	$	2,484,961
U.S. corporate debt securities		1,400,373		9,953		(2,573)		1,407,753
High yield corporate debt securities		442,723		12,498		(7,742)		447,479
Asset-backed securities		29,101		72		(25)		29,148
Municipal obligations		814,657		2,021		(597)		816,081
Auction rate securities		82,900		0		(8,304)		74,596
Foreign debt securities		984,696		5,185		(2,807)		987,074
Total fixed income securities		6,228,479		42,149		(23,536)		6,247,092
Publicly traded equity securities		58,199		6,802		0		65,001
Total	$	6,286,678	$	48,951	$	(23,536)	$	6,312,093

We held approximately $987.1million in foreign debt securities at December 31, 2011. These securities have an average credit rating of AA-, and approximately 9% of these securities are deemed sovereign debt with an average credit rating of AA+. None of the securities deemed sovereign debt are from Greece, Italy, Ireland, Portugal or Spain. Additionally, we have an immaterial amount of exposure to French agencies and financial institutions.

	December 31, 2010
	Amortized Cost		Unrealized Gains		Unrealized (Losses)		Aggregate Fair Value
U.S. government and agency obligations	$	1,737,782	$	11,286	$	(2,674)	$	1,746,394
U.S. corporate debt securities		1,239,325		13,608		(1,307)		1,251,626
High yield corporate debt securities		421,469		18,306		(1,943)		437,832
Asset-backed securities		34,730		152		(1)		34,881
Municipal obligations		1,095,338		3,829		(3,266)		1,095,901
Auction rate securities		155,950		-		(9,906)		146,044
Foreign debt securities		653,251		6,878		(714)		659,415
Total fixed income securities		5,337,845		54,059		(19,811)		5,372,093
Publicly traded equity securities		22,376		32,448		-		54,824
Total	$	5,360,221	$	86,507	$	(19,811)	$	5,426,917

The following tables represent our fair value hierarchy for our financial assets and liabilities measured at fair value as of December 31, 2011 and 2010 (in thousands):

		December 31, 2011
	Level 1		Level 2		Level 3		Total
Cash	$	3,096,275	$	-	$	-	$	3,096,275
Cash equivalents		1,424,761		10,000		-		1,434,761
U.S. government and agency obligations		1,179,280		1,305,681		-		2,484,961
U.S. corporate debt securities		-		1,407,753		-		1,407,753
High yield corporate debt securities		-		447,479		-		447,479
Asset-backed securities		-		29,148		-		29,148
Municipal obligations		-		816,081		-		816,081
Auction rate securities		-		-		74,596		74,596
Foreign debt securities		-		987,074		-		987,074
Publicly traded equity securities		65,001		-		-		65,001
Total cash and investments	$	5,765,317	$	5,003,216	$	74,596	$	10,843,129
Other items:
Foreign exchange derivative assets	$	-	$	23,372	$	-	$	23,372
Foreign exchange derivative liabilities		-		(27,741)		-		(27,741)
Commodity derivative liabilities		-		(3,093)		-		(3,093)
Interest rate swap contracts		-		(19,872)		-		(19,872)
		December 31, 2010
	Level 1		Level 2		Level 3		Total
Cash	$	1,534,786	$	-	$	-	$	1,534,786
Cash equivalents		2,522,172		62,180		-		2,584,352
U.S. government and agency obligations		993,165		753,229		-		1,746,394
U.S. corporate debt securities		-		1,251,626		-		1,251,626
High yield corporate debt securities		-		437,832		-		437,832
Asset-backed securities		-		34,881		-		34,881
Municipal obligations		-		1,095,901		-		1,095,901
Auction rate securities		-		-		146,044		146,044
Foreign debt securities		-		659,415		-		659,415
Publicly traded equity securities		54,824		-		-		54,824
Total cash and investments	$	5,104,947	$	4,295,064	$	146,044	$	9,546,055
Other items:
Foreign exchange derivative assets	$	-	$	19,655	$	-	$	19,655
Foreign exchange derivative liabilities		-		(21,975)		-		(21,975)
Commodity derivative liabilities		-		(647)		-		(647)
Interest rate swap contracts		-		(7,762)		-		(7,762)

Our auction rate securities are predominantly rated AAA and are primarily collateralized by student loans. The underlying loans of all but two of our auction rate securities, with a market value of $18.3 million, have partial guarantees by the U.S. government as part of the Federal Family Education Loan Program (“FFELP”) through the U.S. Department of Education. FFELP guarantees at least 95% of the loans which collateralize the auction rate securities. The two securities whose underlying loans are not guaranteed by the U.S. government have credit enhancements and are insured by third party agencies. We believe the quality of the collateral underlying all of our auction rate securities will enable us to recover our principal balance in full.

To determine the estimated fair value of our investment in auction rate securities, we used a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include an incremental discount rate for the lack of liquidity in the market (“liquidity discount margin”) for an estimated period of time. The discount rate we selected was based on AA-rated banks as the majority of our portfolio is invested in student loans where EMC acts as a financier to these lenders. The liquidity discount margin represents an estimate of the additional return an investor would require for the lack of liquidity of these securities over an estimated five-year holding period. The rate used for the discount margin was 2% at December 31, 2011 compared to 1% at December 31, 2010 due to the widening of credit spreads on AA-rated banks during 2011.

The following table provides a summary of changes in fair value of our Level 3 financial assets for the years ended December 31, 2011 and 2010 (table in thousands):

	2011		2010
Balance, beginning of the year	$	146,044	$	234,452
Sales		0		(56,755)
Calls, at par value		(73,050)		(40,912)
(Increase) decrease in previously recognized unrealized losses included in other
comprehensive loss		1,602		9,259
Balance, end of the year	$	74,596	$	146,044

At December 31, 2011 and 2010, we had $159.8 million and $66.4 million, respectively, in strategic investments held at cost included in other assets, net on the consolidated balance sheets. The fair value of these investments is considered to review for impairments if any events and changes in circumstances occur that might have a significant adverse effect on their value.

Unrealized losses on investments at December 31, 2011 and 2010 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (tables in thousands):

December 31, 2011	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	$ 618,510	$ (1,434)	$ 2,107	$ (54)	$ 620,617	$ (1,488)
U.S. corporate debt securities	449,404	(2,573)	-	-	449,404	(2,573)
High yield corporate debt securities	131,112	(7,211)	840	(531)	131,952	(7,742)
Asset-backed securities	20,016	(24)	5	(1)	20,021	(25)
Municipal obligations	303,988	(566)	8,054	(31)	312,042	(597)
Auction rate securities	-	-	74,596	(8,304)	74,596	(8,304)
Foreign debt securities	372,531	(2,807)	-	-	372,531	(2,807)
Total	$ 1,895,561	$ (14,615)	$ 85,602	$ (8,921)	$ 1,981,163	$ (23,536)
December 31, 2010	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	$ 491,897	$ (2,569)	$ 5,474	$ (105)	$ 497,371	$ (2,674)
U.S. corporate debt securities	291,157	(1,307)	-	-	291,157	(1,307)
High yield corporate debt securities	66,537	(1,943)	-	-	66,537	(1,943)
Asset-backed securities	6,998	-	5	(1)	7,003	(1)
Municipal obligations	599,814	(3,266)	-	-	599,814	(3,266)
Auction rate securities	-	-	146,044	(9,906)	146,044	(9,906)
Foreign debt securities	104,934	(714)	-	-	104,934	(714)
Total	$ 1,561,337	$ (9,799)	$ 151,523	$ (10,012)	$ 1,712,860	$ (19,811)

Investment Losses

As of December 31, 2011, there were no publicly traded equity securities in a continuous unrealized loss position. For all of our securities where the amortized cost basis was greater than the fair value at December 31, 2011, 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, third party guarantees and the time to maturity.

In 2011, a realized gain of $56.0 million was recorded in other expense, net on the consolidated income statements for the sale of VMware's investment in Terremark Worldwide, Inc.

Contractual Maturities

The contractual maturities of fixed income securities held at December 31, 2011 are as follows (table in thousands):

	December 31, 2011
	Amortized		Aggregate
	Cost Basis		Fair Value
Due within one year	$	1,777,170	$	1,780,391
Due after 1 year through 5 years		3,697,240		3,714,177
Due after 5 years through 10 years		443,037		448,203
Due after 10 years		311,032		304,321
Total	$	6,228,479	$	6,247,092

Short-term investments on the consolidated balance sheet include $6.6 million of variable rate demand noteswhich have contractual maturities in 2013, and are not classified within investments due within one year above.