Fair Value Measurements

6 Months Ended

Jun. 30, 2019

FAIR VALUE MEASUREMENTS

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:


•	Level 1 inputs include quoted prices in active markets for identical assets or liabilities;

•

Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities 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 asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

•

Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

Our financial instruments consist primarily of cash and cash equivalents, marketable debt securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable debt securities, certain equity securities and foreign currency exchange contracts are reported at their respective fair values on our Condensed Consolidated Balance Sheets. Equity securities without readily determinable fair values are recorded using the measurement alternative of cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. Short-term and long-term debt are reported at their amortized costs on our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported in our Condensed Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):



	June 30, 2019								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Available-for-sale debt securities:
U.S. treasury securities	$	3,916	$	—	$	—	$	3,916	$	3,969	$	—	$	—	$	3,969
Certificates of deposit	—		5,385		—		5,385		—		4,361		—		4,361
U.S. government agencies securities	—		1,531		—		1,531		—		938		—		938
Non-U.S. government securities	—		420		—		420		—		305		—		305
Corporate debt securities	—		13,271		—		13,271		—		13,067		—		13,067
Residential mortgage and asset-backed securities	—		536		—		536		—		1,524		—		1,524
Equity securities:
Money market funds	3,007		—		—		3,007		5,305		—		—		5,305
Publicly traded equity securities	1,172		16		—		1,188		881		—		—		881
Deferred compensation plan	156		—		—		156		124		—		—		124
Foreign currency derivative contracts	—		48		—		48		—		78		—		78
Total	$	8,251	$	21,207	$	—	$	29,458	$	10,279	$	20,273	$	—	$	30,552
Liabilities:
Deferred compensation plan	$	156	$	—	$	—	$	156	$	124	$	—	$	—	$	124
Foreign currency derivative contracts	—		6		—		6		—		1		—		1
Total	$	156	$	6	$	—	$	162	$	124	$	1	$	—	$	125

Changes in the fair value of equity securities resulted in net unrealized gains of $57 million and $254 million for the three and six months ended June 30, 2019, respectively, and net unrealized losses of $64 million and $19 million for the three and six months ended June 30, 2018, respectively, which were included in Other income (expense), net on our Condensed Consolidated

Statements of Income. Investments in equity securities without readily determinable fair values were not material for the periods presented.

The following table summarizes the classification of our equity securities in our Condensed Consolidated Balance Sheets (in millions):



	June 30, 2019		December 31, 2018
Cash and cash equivalents	$	3,007	$	5,305
Prepaid and other current assets	1,178		863
Other long-term assets	166		142
Total	$	4,351	$	6,310

Our available-for-sale debt securities are classified as cash equivalents, short-term marketable securities and long-term marketable securities on our Condensed Consolidated Balance Sheets. See Note 4. Available-for-Sale Debt Securities for additional information.

Level 2 Inputs

We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate the fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.

Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration the valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.

The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $28.0 billion and $27.1 billion as of June 30, 2019 and December 31, 2018, respectively, and the carrying values were $26.1 billion and $27.3 billion as of June 30, 2019 and December 31, 2018, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details