Annual report pursuant to Section 13 and 15(d)

Fair Value

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Fair Value
12 Months Ended
Dec. 29, 2012
Fair Value [Abstract]  
Fair Value [Text Block]

Note 4: Fair Value

 

Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis

 

Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments as of December 29, 2012 and December 31, 2011:

      December 29, 2012   December 31, 2011
      Fair Value Measured and         Fair Value Measured and      
    Recorded at Reporting Date Using       Recorded at Reporting Date Using      
(In Millions) Level 1   Level 2   Level 3     Total   Level 1   Level 2   Level 3   Total
Assets                                              
Cash equivalents:                                              
  Bank deposits $   $ 822   $   $ 822   $   $ 795   $   $ 795
  Commercial paper       2,711         2,711         2,408         2,408
  Government bonds   400     66         466     150             150
  Money market fund deposits   1,086             1,086     546             546
  Reverse repurchase agreements       2,800         2,800         500         500
Short-term investments:                                              
  Bank deposits       540         540         196         196
  Commercial paper       1,474         1,474         1,409         1,409
  Corporate bonds   75     292     21     388     120     428     28     576
  Government bonds   1,307     290         1,597     2,690     310         3,000
Trading assets:                                              
  Asset-backed securities           68     68             115     115
  Bank deposits       247         247         135         135
  Commercial paper       336         336         305         305
  Corporate bonds   482     1,109         1,591     202     486         688
  Government bonds   1,743     1,479         3,222     1,698     1,317         3,015
  Money market fund deposits   18             18     49             49
  Municipal bonds       203         203         284         284
Other current assets:                                              
  Derivative assets   12     208     1     221         159     7     166
  Loans receivable       203         203         33         33
Marketable equity securities   4,424             4,424     522     40         562
Other long-term investments:                                              
  Asset-backed securities           11     11             36     36
  Bank deposits       56         56         55         55
  Corporate bonds   10     218     26     254         282     39     321
  Government bonds   59     113         172     177     300         477
Other long-term assets:                                              
  Derivative assets       20     18     38         34     29     63
  Loans receivable       577         577         715         715
Total assets measured and                                              
  recorded at fair value $ 9,616   $ 13,764   $ 145   $ 23,525   $ 6,154   $ 10,191   $ 254   $ 16,599
                                                   
Liabilities                                              
Other accrued liabilities:                                              
  Derivative liabilities $ 1   $ 291   $   $ 292   $   $ 280   $ 8   $ 288
Long-term debt                           131     131
Other long-term liabilities:                                              
  Derivative liabilities       20         20         27         27
Total liabilities measured and                                              
  recorded at fair value $ 1   $ 311   $   $ 312 $   $ 307   $ 139   $ 446

Government bonds include bonds issued or deemed to be guaranteed by government entities. Government bonds include instruments such as non-U.S. government bonds, U.S. Treasury securities, and U.S. agency securities. The underlying assets of substantially all of our reverse repurchase agreements presented in the preceding table are government bonds.

 

During 2012, we transferred approximately $200 million of government bonds and corporate bonds from Level 1 to Level 2, primarily based on the reduced market activity for the underlying securities. Our policy is to reflect transfers in and transfers out at the beginning of the quarter in which a change in circumstances resulted in the transfer.

 

Investments in Debt Instruments

 

Debt investments reflected in the preceding table include investments such as asset-backed securities, bank deposits, commercial paper, corporate bonds, government bonds, money market fund deposits, municipal bonds, and reverse repurchase agreements classified as cash equivalents. When we use observable market prices for identical securities that are traded in less-active markets, we classify our debt investments as Level 2. When observable market prices for identical securities are not available, we price our debt investments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. We corroborate non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.

 

Debt investments that are classified as Level 3 are classified as such due to the lack of observable market data to corroborate either the non-binding market consensus prices or the non-binding broker quotes. When observable market data is not available, we corroborate our fair value measurements using non-binding market consensus prices and non-binding broker quotes from a second source.

Fair Value Option for Loans Receivable

 

We elected the fair value option for loans made to third parties when the interest rate or foreign exchange rate risk was hedged at inception with a related derivative instrument. As of December 29, 2012, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency. Loans receivable are classified within other current assets and other long-term assets. Fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Gains and losses from changes in fair value on the loans receivable and related derivative instruments, as well as interest income, are recorded in interest and other, net. During all periods presented, changes in the fair value of our loans receivable were largely offset by changes in the related derivative instruments, resulting in an insignificant net impact on our consolidated statements of income. Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. We did not elect the fair value option for loans when the interest rate or foreign exchange rate risk was not hedged at inception with a related derivative instrument.

 

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

 

Our non-marketable equity investments (non-marketable equity method and cost method investments) and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment charge is recognized.

 

A portion of our non-marketable equity investments has been measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairment charges. We classified these investments as Level 3, as we used unobservable inputs to the valuation methodologies that were significant to the fair value measurements, and the valuations required management judgment due to the absence of quoted market prices. Impairment charges recognized on non-marketable equity investments held as of December 29, 2012 were $68 million during 2012 ($62 million during 2011 on non-marketable equity investments held as of December 31, 2011 and $121 million during 2010 on non-marketable equity investments held as of December 25, 2010). The fair value of the non-marketable equity investments impaired during 2012 was $73 million at the time of impairment ($69 million and $128 million for non-marketable equity investments impaired during 2011 and 2010, respectively).

 

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

 

We measure the fair value of our non-marketable cost method investments, indebtedness carried at amortized cost, cost method loans receivable, and reverse repurchase agreements with original maturities greater than approximately three months quarterly; however, the assets are recorded at fair value only when an impairment charge is recognized. The carrying amounts and fair values of certain financial instruments not recorded at fair value on a recurring basis as of December 29, 2012 and December 31, 2011 were as follows:

  2012
  Carrying   Fair Value Measured Using   Fair
(In Millions) Amount   Level 1     Level 2   Level 3   Value
Non-marketable cost method investments $ 1,202   $   $   $ 1,766   $ 1,766
Loans receivable $ 199   $   $ 150   $ 48   $ 198
Reverse repurchase agreements $ 50   $   $ 50   $   $ 50
Long-term debt $ 13,136   $ 11,442   $ 2,926   $   $ 14,368
Short-term debt $ 48   $   $ 48   $   $ 48
NVIDIA Corporation cross-license agreement liability $ 875   $   $ 890   $   $ 890
                             
  2011
  Carrying   Fair Value Measured Using   Fair
(In Millions) Amount   Level 1   Level 2   Level 3   Value
Non-marketable cost method investments $ 1,129   $   $   $ 1,861   $ 1,861
Loans receivable $ 132   $   $ 132   $   $ 132
Long-term debt $ 6,953   $ 5,287   $ 2,448   $   $ 7,735
Short-term debt $ 200   $   $ 200   $   $ 200
NVIDIA Corporation cross-license agreement liability $ 1,156   $   $ 1,174   $   $ 1,174

As of December 29, 2012 and December 31, 2011, the unrealized loss position of our non-marketable cost method investments was insignificant.

 

Our non-marketable cost method investments are valued using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies. The selection of comparable companies requires management judgment and is based on a number of relevant factors, including comparable companies' sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates for investees' revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenues and costs are developed using available market, historical, and forecast data. The valuation of these non-marketable cost method investments also takes into account variables such as conditions reflected in the capital markets, recent financing activities by the investees, the investees' capital structure, the terms of the investees' issued interests, and the lack of marketability of the investments.

 

The carrying amount and fair value of loans receivable exclude loans measured and recorded at a fair value of $780 million as of December 29, 2012 ($748 million as of December 31, 2011). The carrying amount and fair value of long-term debt exclude long-term debt measured and recorded at a fair value of $131 million as of December 31, 2011. Short-term debt includes our commercial paper outstanding as of December 31, 2011, and the carrying amount and fair value exclude drafts payable.

 

The fair value of our loans receivable and reverse repurchase agreements, including those held at fair value, is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. The credit quality of these assets remains high, with credit ratings of A/A2 or better for most of our loans receivable and all of our reverse repurchase agreements as of December 29, 2012. Our long-term debt recognized at amortized cost comprises our senior notes and our convertible debentures. The fair value of our senior notes is determined using active market prices, and it is therefore classified as Level 1. The fair value of our convertible long-term debt is determined using discounted cash flow models with observable market inputs, and it takes into consideration variables such as interest rate changes, comparable securities, subordination discount, and credit-rating changes.

 

The NVIDIA Corporation cross-license agreement liability in the preceding table was incurred as a result of entering into a long-term patent cross-license agreement with NVIDIA in January 2011. We agreed to make payments to NVIDIA over six years. As of December 29, 2012 and December 31, 2011, the carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, as applicable. The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.