Quarterly report pursuant to Section 13 or 15(d)

Fair Value

v2.3.0.15
Fair Value
9 Months Ended
Oct. 01, 2011
Fair Value [Abstract]  
Fair Value [Text Block]

Note 5: Fair Value

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. Our financial assets and liabilities are measured and recorded at fair value, except for equity method investments, cost method investments, cost method loans receivable, and most of our liabilities.

 

Fair Value Hierarchy

 

The three levels of inputs that may be used to measure fair value are as follows:

 

Level 1. Quoted prices in active markets for identical assets or liabilities.

 

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.

 

Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.

 

Marketable Debt Instruments

 

Marketable debt instruments include instruments such as commercial paper, corporate bonds, government bonds, bank deposits, asset-backed securities, municipal bonds, and money market fund deposits. When we use observable market prices for identical securities that are traded in less active markets, we classify our marketable debt instruments as Level 2. When observable market prices for identical securities are not available, we price our marketable debt instruments 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.

 

Our marketable debt instruments 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 non-binding market consensus prices and non-binding broker quotes using available unobservable data.

 

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 October 1, 2011 and December 25, 2010:

      October 1, 2011   December 25, 2010
      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:                                              
  Commercial paper $   $ 3,457   $   $ 3,457   $   $ 2,600   $   $ 2,600
  Government bonds   1,650             1,650     1,279     505         1,784
  Bank deposits       499         499         560         560
  Money market fund deposits   463             463     34             34
Short-term investments:                                              
  Commercial paper       2,403         2,403         2,712         2,712
  Corporate bonds   144     525     7     676     121     1,378     1     1,500
  Government bonds   82     373         455     4,890     1,320         6,210
  Bank deposits       342         342         858         858
  Asset-backed securities                           14     14
Trading assets:                                              
  Government bonds   883     1,683         2,566     311     2,115         2,426
  Corporate bonds   201     540         741     199     916         1,115
  Commercial paper       404         404         488         488
  Municipal bonds       288         288         375         375
  Asset-backed securities           130     130             190     190
  Bank deposits       89         89         108         108
  Money market fund deposits   41             41     3             3
  Marketable equity securities   6             6     388             388
Other current assets:                                              
  Marketable equity securities                                              
  Derivative assets       224         224         330         330
  Loans receivable       34         34                
Marketable equity securities   448     68         516     785     223         1,008
Other long-term investments:                                              
  Corporate bonds   34     340     59     433     104     601     50     755
  Government bonds       300         300     83     2,002         2,085
  Bank deposits       75         75         133         133
  Asset-backed securities           50     50             53     53
Other long-term assets:                                              
  Loans receivable       745         745         642         642
  Derivative assets       20     30     50         19     31     50
Total assets measured and                                              
  recorded at fair value $ 3,952   $ 12,409   $ 276   $ 16,637   $ 8,197   $ 17,885   $ 339   $ 26,421
                                                   
Liabilities                                              
Other accrued liabilities:                                              
  Derivative liabilities $   $ 279   $ 11   $ 290   $   $ 201   $ 7   $ 208
Long-term debt           129     129             128     128
Other long-term liabilities:                                              
  Derivative liabilities       32         32         47         47
Total liabilities measured and                                              
  recorded at fair value $   $ 311   $ 140   $ 451   $   $ 248   $ 135   $ 383

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, U.S. agency securities, and Federal Deposit Insurance Corporation (FDIC)-insured corporate bonds.

The tables below present reconciliations for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended October 1, 2011 and for the twelve months ended December 25, 2010:

    Fair Value Measured and Recorded Using      
    Significant Unobservable Inputs (Level 3)    
    Corporate   Asset-Backed   Derivative   Derivative   Long-term   Total Gains
(In Millions) Bonds Securities Assets Liabilities Debt (Losses)
Balance as of December 25, 2010 $ 51   $ 257   $ 31   $ (7)   $ (128)      
Total gains or losses (realized and unrealized):                                  
  Included in earnings   (2)     (2)     (1)     (4)     (1)     (10)
  Included in other comprehensive income (loss)   8     (3)                 5
Purchases   13     12     3              
Settlements and maturities   (4)     (84)                  
Transfers out of Level 3           (3)              
Balance as of October 1, 2011 $ 66   $ 180   $ 30   $ (11)   $ (129)      
                                     
Changes in unrealized gains or losses included in                                  
  earnings related to assets and liabilities still held                                  
  as of October 1, 2011 $ (2)   $ (2)   $ (1)   $ (4)   $ (1)   $ (10)
                                     
    Fair Value Measured and Recorded Using      
    Significant Unobservable Inputs (Level 3)    
    Corporate   Asset-Backed   Derivative   Derivative   Long-term   Total Gains
(In Millions) Bonds Securities Assets Liabilities Debt (Losses)
Balance as of December 26, 2009 $ 369   $ 754   $ 31   $ (65)   $ (123)      
Total gains or losses (realized and unrealized):                                  
  Included in earnings   (2)     6     (3)     (2)     (5)     (6)
  Included in other comprehensive income (loss)   4     9                 13
Purchases   6         7              
Sales   (44)     (28)     (4)              
Settlements and maturities   (75)     (484)                  
Transfers out of Level 3   (207)             60          
Balance as of December 25, 2010 $ 51   $ 257   $ 31   $ (7)   $ (128)      
                                     
Changes in unrealized gains or losses included in                                  
  earnings related to assets and liabilities still held                                  
  as of December 25, 2010 $   $ 6   $ (4)   $ (1)   $ (5)   $ (4)

For all periods presented, gains and losses (realized and unrealized) included in earnings were primarily reported outside of operating income. During 2010, we transferred corporate bonds from Level 3 to Level 2 due to improved availability of observable market data and non-binding market consensus prices to value or corroborate the value of these instruments. 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.

 

Fair Value Option for Financial Assets/Liabilities

 

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 October 1, 2011, 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. These loans receivable are classified within other long-term assets and other current 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 the three and nine months ended October 1, 2011, 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 condensed 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 and were insignificant during the three and nine months ended October 1, 2011. 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.

 

We elected this fair value option for the bonds issued in 2007 by the Industrial Development Authority of the City of Chandler, Arizona (2007 Arizona bonds). In connection with the 2007 Arizona bonds, we entered into a total return swap agreement that effectively converts the fixed-rate obligation on the bonds to a floating U.S.-dollar LIBOR-based rate. As a result, changes in the fair value of this debt are largely offset by changes in the fair value of the total return swap agreement, without the need to apply hedge accounting provisions. The 2007 Arizona bonds are included in long-term debt. As of October 1, 2011 and December 25, 2010, no other instruments were similar to the 2007 Arizona bonds for which we elected fair value treatment.

 

As of October 1, 2011, the fair value of the 2007 Arizona bonds did not significantly differ from the contractual principal balance. The fair value of the 2007 Arizona bonds was determined using inputs that are observable in the market or that can be derived from or corroborated with observable market data, as well as unobservable inputs that were significant to the fair value. Gains and losses on the 2007 Arizona bonds and the related total return swap are recorded in interest and other, net. We capitalize interest associated with the 2007 Arizona bonds. We add capitalized interest to the cost of qualified assets and amortize it over the estimated useful lives of the assets.

 

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

Our non-marketable equity 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. The following table presents the financial instruments and non-financial assets that were measured and recorded at fair value on a non-recurring basis during the nine months ended October 1, 2011, and the gains (losses) recorded during the three and nine months ended October 1, 2011 on those assets:

                          Total Gains   Total Gains
                          (Losses) for   (Losses) for
    Net Carrying                     Three Months   Nine Months Ended
    Value as of   Fair Value Measured and Recorded Using   Ended    
(In Millions) Oct. 1, 2011   Level 1   Level 2   Level 3   Oct. 1, 2011   Oct. 1, 2011
Non-marketable equity investments $ 53   $   $   $ 53   $ (12)   $ (33)
Property, plant and equipment $   $   $   $   $   $ (10)
Total gains (losses) for assets held                                  
  as of October 1, 2011                         $ (12)   $ (43)
                                     
Gains (losses) for non-marketable equity                                  
  investments no longer held                         $   $ (1)
Gains (losses) for property, plant and equipment                                  
  no longer held                         $ (23)   $ (68)
Total gains (losses) for recorded non-recurring                                  
  measurement                         $ (35)   $ (112)

The following table presents the financial instruments and non-financial assets that were measured and recorded at fair value on a non-recurring basis during the nine months ended September 25, 2010, and the gains (losses) recorded during the three and nine months ended September 25, 2010 on those assets:

                          Total Gains   Total Gains
                          (Losses) for   (Losses) for
    Net Carrying                     Three Months   Nine Months Ended
    Value as of   Fair Value Measured and Recorded Using   Ended    
(In Millions) Sept. 25, 2010   Level 1   Level 2   Level 3   Sept. 25, 2010   Sept. 25, 2010
Non-marketable equity investments $ 123   $   $   $ 125   $ (32)   $ (94)
Total gains (losses) for assets held                                  
  as of September 25, 2010                         $ (32)   $ (94)
                                     
Gains (losses) for non-marketable equity                                  
  investments no longer held                         $   $ (1)
Gains (losses) for property, plant and equipment                                  
  no longer held                         $ (9)   $ (49)
Total gains (losses) for recorded non-recurring                                  
  measurement                         $ (41)   $ (144)

In the preceding tables, the carrying value of our impaired non-marketable equity investments at the end of the period may not equal our fair value measurement at the time of impairment due to the subsequent recognition of equity method adjustments. In addition, the carrying value of our impaired property, plant and equipment at the end of the period may not equal our fair value measurement at the time of impairment due to the subsequent recognition of depreciation expense.

 

A portion of our non-marketable equity investments were measured and recorded at fair value in the first nine months of 2011 and 2010 due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairment charges. We classified these measurements 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. We determine the fair value of our non-marketable equity investments 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 factors, including comparable companies' sizes, growth rates, industries, development stages, and other relevant factors. The income approach includes the use of a discounted cash flow model, which requires the following significant estimates for the investee: revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenues and costs are developed using historical data and available market data. The valuation of these non-marketable equity 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.

 

Additionally, certain of our property, plant and equipment was measured and recorded at fair value during the first nine months of 2011 and 2010 due to events or circumstances we identified that indicated that the carrying value of the assets or the asset grouping was not recoverable, resulting in impairment charges. Most of these asset impairments related to manufacturing assets.

       

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

 

We measure the fair value of our non-marketable equity investments, marketable equity method investment, debt carried at amortized cost, and cost method loans receivable quarterly for disclosure purposes; however, they are recorded at fair value only when an impairment charge is recognized. The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis as of October 1, 2011 and December 25, 2010 were as follows:

  October 1, 2011   December 25, 2010
  Carrying   Fair   Carrying   Fair
(In Millions) Amount   Value   Amount   Value
Non-marketable equity investments $ 2,795   $ 5,588   $ 2,633   $ 5,144
Marketable equity method investment $ 37   $ 73   $ 31   $ 167
Loans receivable $ 258   $ 258   $ 208   $ 208
Long-term debt $ 6,947   $ 7,533   $ 1,949   $ 2,283

As of October 1, 2011 and December 25, 2010, the unrealized loss position of our non-marketable equity investments was not significant.

 

Our marketable equity method investment is our ownership interest in SMART Technologies, Inc. The fair value of our ownership interest in SMART was based on the quoted closing stock price as of October 1, 2011 and December 25, 2010.

 

The carrying amount and fair value of loans receivable exclude loans measured and recorded at a fair value of $779 million as of October 1, 2011 ($642 million as of December 25, 2010). The carrying amount and fair value of long-term debt exclude long-term debt measured and recorded at a fair value of $129 million as of October 1, 2011 ($128 million as of December 25, 2010).

 

The fair value of our loans receivable is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. The credit quality of our loans receivable remains high, with credit ratings of BBB+/A2 or better as of October 1, 2011. The fair value of our long-term debt is determined using third party market prices and discounted cash flow models that take into consideration variables such as credit-rating changes and interest rate changes.

 

In addition to the financial instruments in the table above, we incurred a liability as result of entering into a long-term patent cross-license agreement with NVIDIA Corporation in January 2011. We agreed to make payments to NVIDIA over six years. For further information on the payment terms and recognition of licensed technology intangible assets, see “Note 18: Identified Intangible Assets.” As of October 1, 2011, the carrying amount of the liability arising from the agreement was $1.2 billion and is classified within other accrued liabilities and other long-term liabilities, as applicable. The fair value of the liability arising from the NVIDIA cross-license agreement approximates the carrying amount. The fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data.