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Fair Value Measurements

3 Months Ended

Oct. 31, 2021


2. Fair Value Measurements


Fair Value Hierarchy

The authoritative guidance defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, we consider the principal or most advantageous market for an asset or liability and assumptions that market participants would use when pricing the asset or liability. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of an asset or liability.

The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:

•Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.

•Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.

•Level 3 uses one or more unobservable inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair values are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above.


	October 31, 2021				July 31, 2021
(In millions)	Level 1		Level 2		Total Fair Value		Level 1		Level 2		Total Fair Value
Assets:
Cash equivalents, primarily money market funds and time deposits	$	696	$	—	$	696	$	1,660	$	—	$	1,660
Available-for-sale debt securities:
Municipal bonds	—		—		—		—		38		38
Corporate notes	—		544		544		—		1,400		1,400
U.S. agency securities	—		40		40		—		70		70
Total available-for-sale debt securities	—		584		584		—		1,508		1,508
Total assets measured at fair value on a recurring basis	$	696	$	584	$	1,280	$	1,660	$	1,508	$	3,168
Liabilities:
Senior unsecured notes(1)	$	—	$	1,972	$	1,972	$	—	$	1,986	$	1,986

(1) Carrying value on our balance sheets at each October 31, 2021 and July 31, 2021 was $1.99 billion. See Note 6, “Long-Term Obligations and Commitments,” for more information.

The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.


	October 31, 2021				July 31, 2021
(In millions)	Level 1		Level 2		Total Fair Value		Level 1		Level 2		Total Fair Value
Cash equivalents:
In cash and cash equivalents	$	696	$	—	$	696	$	1,660	$	—	$	1,660




Available-for-sale debt securities:
In investments	$	—	$	386	$	386	$	—	$	1,308	$	1,308
In funds held for customers	—		198		198		—		200		200

Total available-for-sale debt securities	$	—	$	584	$	584	$	—	$	1,508	$	1,508

We value our Level 1 assets, consisting primarily of money market funds and time deposits, using quoted prices in active markets for identical instruments.

Financial assets whose fair values we measure on a recurring basis using Level 2 inputs consist of municipal bonds, corporate notes, and U.S. agency securities. We measure the fair values of these assets with the help of a pricing service that either provides quoted market prices in active markets for identical or similar securities or uses observable inputs for their pricing without applying significant adjustments. Our fair value processes include controls designed to ensure that we record appropriate fair values for our Level 2 investments. These controls include comparison to pricing provided by a secondary pricing service or investment manager, validation of pricing sources and models, review of key model inputs, analysis of period-over-period price fluctuations, and independent recalculation of prices where appropriate.

Financial liabilities whose fair values we measure using Level 2 inputs consist of senior unsecured notes. See Note 6, “Long-Term Obligations and Commitments,” for more information. We measure the fair value of our senior unsecured notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms.

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended October 31, 2021.


Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Long-term investments represent non-marketable equity securities in privately held companies that do not have a readily determinable fair value. They are accounted for at cost and adjusted based on observable price changes from orderly transactions for identical or similar investments of the same issuer or impairment. These investments are classified as Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold. We recognized $46 million and $8 million of upward adjustments during the three months ended October 31, 2021 and October 31, 2020, respectively. Impairments recognized during the three months ended October 31, 2021 and October 31, 2020 were immaterial. Cumulative upward adjustments were $63 million and cumulative impairments were immaterial through October 31, 2021 for measurement alternative investments held as of October 31, 2021. As of October 31, 2021 and July 31, 2021, the carrying value of long-term investments was $84 million and $43 million, 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.

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