Annual report pursuant to Section 13 and 15(d)

Fair Value

v3.3.1.900
Fair Value
12 Months Ended
Dec. 26, 2015
Fair Value Disclosures [Abstract]  
Fair Value [Text Block]
Note 4: Fair Value
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured and recorded at fair value on a recurring basis at the end of each period were as follows:
 
 
December 26, 2015
 
December 27, 2014
 
 
Fair Value Measured and
Recorded at Reporting Date Using
 
Total
 
Fair Value Measured and
Recorded at Reporting Date Using
 
Total
(In Millions)
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
 
$

 
$
1,829

 
$

 
$
1,829

 
$

 
$
48

 
$

 
$
48

Financial institution instruments
 
8,238

 
1,277

 

 
9,515

 
321

 
1,119

 

 
1,440

Government debt
 

 
130

 

 
130

 

 

 

 

Reverse repurchase agreements
 

 
2,368

 

 
2,368

 

 
268

 

 
268

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
 
336

 
764

 
20

 
1,120

 
363

 
412

 
31

 
806

Financial institution instruments
 
145

 
927

 

 
1,072

 
149

 
1,050

 

 
1,199

Government debt
 
65

 
425

 

 
490

 
252

 
173

 

 
425

Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 

 
275

 
94

 
369

 

 
766

 
58

 
824

Corporate debt
 
1,744

 
564

 

 
2,308

 
2,625

 
339

 

 
2,964

Financial institution instruments
 
930

 
701

 

 
1,631

 
1,146

 
613

 

 
1,759

Government debt
 
1,107

 
1,908

 

 
3,015

 
1,295

 
2,221

 

 
3,516

Other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
32

 
412

 
1

 
445

 

 
559

 
2

 
561

Loans receivable
 

 
137

 

 
137

 

 
505

 

 
505

Marketable equity securities
 
5,891

 
69

 

 
5,960

 
7,097

 

 

 
7,097

Other long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 

 

 
4

 
4

 

 
2

 
4

 
6

Corporate debt
 
407

 
801

 

 
1,208

 
453

 
728

 
13

 
1,194

Financial institution instruments
 
171

 
381

 

 
552

 
189

 
319

 

 
508

Government debt
 
79

 
48

 

 
127

 
75

 
240

 

 
315

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 

 
30

 
10

 
40

 

 
35

 
22

 
57

Loans receivable
 

 
342

 

 
342

 

 
216

 

 
216

Total assets measured and recorded at fair value
 
19,145

 
13,388

 
129

 
32,662

 
13,965

 
9,613

 
130

 
23,708

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
2

 
210

 

 
212

 

 
563

 

 
563

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
33

 

 
33

 

 
17

 

 
17

Total liabilities measured and recorded at fair value
 
$
2

 
$
243

 
$

 
$
245

 
$

 
$
580

 
$

 
$
580


Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms, such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits.
For the year ended December 26, 2015, we transferred corporate debt and financial institution instruments of approximately $628 million from Level 1 to Level 2 of the fair value hierarchy and approximately $403 million of financial institution instruments, corporate debt, and government debt from Level 2 to Level 1 ($177 million of corporate debt, financial institution instruments, and government debt from Level 1 to Level 2 and $395 million from Level 2 to Level 1 during 2014). These transfers were based on changes in market activity for the underlying instruments. Our policy is to reflect transfers between the fair value hierarchy levels at the beginning of the quarter in which a change in circumstances resulted in the transfer.
Investments in Debt Instruments
Debt instruments reflected in the preceding table include investments such as asset-backed securities, corporate debt, financial institution instruments, government debt, and reverse repurchase agreements classified as cash equivalents. We classify our debt instruments as Level 2 when we use observable market prices for identical instruments that are traded in less active markets. When observable market prices for identical instruments are not available, we price the debt instruments using our own models, such as a discounted cash flow model, or non-binding market consensus prices 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 instruments; and the internal assumptions of pricing providers or brokers that use observable market inputs and unobservable market inputs that we consider to be not significant. When we use non-binding market consensus prices, we corroborate them with quoted market prices for similar instruments or compare them to output from internally developed pricing models such as a discounted cash flow model. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. All significant inputs are derived from or corroborated with observable market data.
The fair values of debt instruments classified as Level 3 are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Fair Value Option for Loans Receivable
We elected the fair value option for loans receivable when the interest rate or currency exchange rate risk was hedged at inception with a related derivative instrument. As of December 26, 2015 and December 27, 2014, 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 gains or losses on 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 receivable when the interest rate or currency exchange rate risk was not hedged at inception with a related derivative instrument. Loans receivable not measured and recorded at fair value are included in the following "Financial Instruments Not Recorded at Fair Value on a Recurring Basis" section.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity investments, marketable equity method investments, and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment is recognized.
Some of our non-marketable equity investments have 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 impairments. We classified these investments as Level 3 because the valuations used unobservable inputs that were significant to the fair value measurements and required management judgment due to the absence of quoted market prices. Impairments recognized on non-marketable equity investments held as of December 26, 2015 were $160 million in 2015 ($128 million in 2014 on non-marketable equity investments held as of December 27, 2014 and $106 million in 2013 on non-marketable equity investments held as of December 28, 2013).
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On a quarterly basis, we measure the fair value of our grants receivable, cost method loans receivable, non-marketable cost method investments, reverse repurchase agreements with original maturities greater than approximately three months, and indebtedness carried at amortized cost plus applicable hedge adjustments; however, the assets are recorded at fair value only when an impairment is recognized. The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis at the end of each period were as follows:
 
 
December 26, 2015
 
 
Carrying
Amount
 
Fair Value Measured Using
 
Fair Value
(In Millions)
 
Level 1
 
Level 2
 
Level 3
 
Grants receivable
 
$
593

 
$

 
$
600

 
$

 
$
600

Loans receivable
 
$
315

 
$

 
$
315

 
$

 
$
315

Non-marketable cost method investments
 
$
2,933

 
$

 
$

 
$
3,904

 
$
3,904

Reverse repurchase agreements
 
$
1,000

 
$

 
$
1,000

 
$

 
$
1,000

Short-term debt
 
$
2,593

 
$
1,513

 
$
1,563

 
$

 
$
3,076

Long-term debt
 
$
20,036

 
$
14,058

 
$
6,835

 
$

 
$
20,893

NVIDIA Corporation cross-license agreement liability
 
$
199

 
$

 
$
200

 
$

 
$
200

 
 
December 27, 2014
 
 
Carrying
Amount
 
Fair Value Measured Using
 
Fair Value
(In Millions)
 
Level 1
 
Level 2
 
Level 3
 
Grants receivable
 
$
676

 
$

 
$
679

 
$

 
$
679

Loans receivable
 
$
250

 
$

 
$
250

 
$

 
$
250

Non-marketable cost method investments
 
$
1,769

 
$

 
$

 
$
2,599

 
$
2,599

Reverse repurchase agreements
 
$
450

 
$

 
$
450

 
$

 
$
450

Short-term debt
 
$
1,580

 
$

 
$
2,145

 
$

 
$
2,145

Long-term debt
 
$
12,059

 
$
11,467

 
$
1,309

 
$

 
$
12,776

NVIDIA Corporation cross-license agreement liability
 
$
395

 
$

 
$
399

 
$

 
$
399


The fair value of our grants receivable is determined using a discounted cash flow model, which discounts future cash flows using an appropriate yield curve. As of December 26, 2015 and December 27, 2014, the carrying amount of our grants receivable was classified within other current assets and other long-term assets, as applicable.
The carrying amount and fair value of loans receivable exclude loans measured and recorded at fair value on a recurring basis. 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. All significant inputs in the models are 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+/A1 for most of our loans receivable and a substantial majority of our reverse repurchase agreements as of December 26, 2015.
As of December 26, 2015, and December 27, 2014, the unrealized loss position of our non-marketable cost method investments was insignificant. Our non-marketable cost method investments are valued using a qualitative and quantitative analysis of events or circumstances that impact the fair value of the investment. Qualitative analysis of our investments involves understanding our investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects; the technological feasibility of our investee’s products and technologies; the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; and the management and governance structure of the investee. Quantitative assessments of the fair value of our investments are developed using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies, such as revenue, earnings, comparable performance multiples, recent financing rounds, the terms of the investees’ issued interests, and the level of marketability of the investments. The selection of comparable companies requires management judgment and is based on a number of 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 regarding investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data. We measure the fair value of our non-marketable cost method investments as close to the end of the period as feasible.
The carrying amount and fair value of short-term debt exclude drafts payable. Our short-term debt recognized at amortized cost includes our 2009 junior subordinated convertible debentures due 2039 (2009 debentures) and our 2011 senior notes due 2016. During the fourth quarter of 2015, the 2009 debentures were classified as short-term debt on the consolidated balance sheet and convertible at the option of the holder during the first quarter of 2016. For further information, see "Note 15: Borrowings." Our long-term debt recognized at amortized cost is composed of our senior notes and our convertible debentures. The fair value of our senior notes is classified as Level 1 when we use quoted prices in active markets and Level 2 when the quoted prices are from less active markets or when other observable inputs are used to determine fair value. The fair value of our 2009 and 2005 convertible debentures is determined using discounted cash flow models with observable market inputs, and takes into consideration variables such as interest rate changes, comparable instruments, subordination discount, and credit-rating changes; it is, therefore, classified as Level 2.
The NVIDIA Corporation (NVIDIA) 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, pursuant to which we agreed to make payments to NVIDIA over six years. The carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, based on the expected timing of the underlying payments ($200 million due in each of January 2015 and 2016 treated as cash used for financing activities). The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.