Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v2.3.0.15
Fair Value Measurements
 12 Months Ended
Sep. 25, 2011
Notes to Financial Statements [Abstract]  
Note 2 - Fair Value Measurements
Note 2. Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
•
Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
•
Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument.
•
Level 3 includes financial instruments for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including the Company’s own assumptions.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at September 25, 2011 (in millions):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
2,495

 
$
2,129

 
$
—

 
$
4,624

Marketable securities
 
 
 
 
 
 
 
U.S. Treasury securities and government-related securities
14

 
508

 
—

 
522

Corporate bonds and notes
—

 
6,018

 
—

 
6,018

Mortgage- and asset-backed securities
—

 
667

 
11

 
678

Auction rate securities
—

 
—

 
124

 
124

Non-investment-grade debt securities
—

 
3,656

 
16

 
3,672

Common and preferred stock
1,061

 
728

 
—

 
1,789

Equity mutual and exchange-traded funds
845

 
—

 
—

 
845

Debt mutual funds
1,327

 
476

 
—

 
1,803

Total marketable securities
3,247

 
12,053

 
151

 
15,451

Derivative instruments
—

 
24

 
—

 
24

Other investments (1)
152

 
—

 
—

 
152

Total assets measured at fair value
$
5,894

 
$
14,206

 
$
151

 
$
20,251

Liabilities
 
 
 
 
 
 
 
Derivative instruments
$
—

 
$
122

 
$
—

 
$
122

Other liabilities (1)
152

 
—

 
7

 
159

Total liabilities measured at fair value
$
152

 
$
122

 
$
7

 
$
281


(1)
Level 1 measurements are comprised of the Company’s deferred compensation plan liability and related assets, which are invested in mutual funds.
     Marketable Securities. With the exception of auction rate securities, the Company obtains pricing information from quoted market prices, pricing vendors or quotes from brokers/dealers. The Company conducts reviews of its primary pricing vendors to determine whether the inputs used in the vendor’s pricing processes are deemed to be observable.
The fair value of U.S. Treasury securities and government-related securities, corporate bonds and notes and common and preferred stock are generally determined using standard observable inputs, including reported trades, quoted market prices, matrix pricing, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets and/or benchmark securities.
The fair value of debt and equity mutual funds is reported as published net asset values. The Company assesses the daily frequency and size of transactions at published net asset values and/or the fund’s underlying holdings to determine whether fair value is based on observable or unobservable inputs.
The fair value of highly rated mortgage- and asset-backed securities is derived from the use of matrix pricing (prices for similar securities) or, in some cases cash flow pricing models with observable inputs, such as contractual terms, maturity, credit rating and/or securitization structure, to determine the timing and amount of future cash flows. Certain mortgage- and asset-backed securities, principally those that are rated below AAA, may require use of significant unobservable inputs to estimate fair value, such as default likelihood, recovery rates and prepayment speed.
The fair value of auction rate securities is estimated by the Company using a discounted cash flow model that incorporates transaction details such as contractual terms, maturity and timing and amount of future cash flows, as well as assumptions related to liquidity, default likelihood and recovery, the future state of the auction rate market and credit valuation adjustments of market participants. Though certain of the securities held by the Company are pools of student loans guaranteed by the U.S. government, prepayment speeds and illiquidity discounts are considered significant unobservable inputs. These additional inputs are generally unobservable, and therefore, auction rate securities are included in Level 3.
     Derivative Instruments. Derivative instruments include foreign currency option and forward contracts to manage foreign exchange risk for certain foreign currency transactions and certain balances denominated in a foreign currency, and written put options to repurchase shares of the Company’s common stock at fixed prices. Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, such as foreign currency exchange rates, the Company’s stock price, volatilities and interest rates. Therefore, derivative instruments are included in Level 2.
     Other Liabilities. Other liabilities included in Level 3 are comprised of put rights held by third parties representing interests in certain of the Company’s subsidiaries (Note 7). These put rights are valued with a standard option pricing model using significant unobservable inputs.
     Activity between Levels of the Fair Value Hierarchy. There were no significant transfers between Level 1 and Level 2 during fiscal 2011 or 2010. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. The following table includes the activity for marketable securities and other liabilities classified within Level 3 of the valuation hierarchy (in millions):
 
2011
 
2010
 
Auction Rate
Securities
 
Other Marketable
Securities
 
Other Liabilities
 
Auction Rate
Securities
 
Other Marketable
Securities
Beginning balance of Level 3
$
126

 
$
18

 
$
—

 
$
174

 
$
31

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
 
Included in investment income, net
—

 
2

 
(1
)
 
—

 
5

Included in other comprehensive income
2

 
(1
)
 
—

 
7

 
(1
)
Purchases
4

 
6

 
—

 
—

 
—

Issuances
—

 
—

 
8

 
—

 
—

Settlements
(8
)
 
(6
)
 
—

 
(55
)
 
(21
)
Transfers into Level 3
—

 
8

 
—

 
—

 
4

Ending balance of Level 3
$
124

 
$
27

 
$
7

 
$
126

 
$
18

 
 
 
 
 
 
 
 
 
 

The Company recognizes transfers into and out of levels within the fair value hierarchy at the end of the fiscal month in which the actual event or change in circumstances that caused the transfer occurs. Transfers into Level 3 in fiscal 2011 and 2010 primarily consisted of debt securities with significant inputs that became unobservable as a result of an increased likelihood of a shortfall in contractual cash flows or a significant downgrade in credit ratings.
     Nonrecurring Fair Value Measurements. The Company measures certain assets at fair value on a nonrecurring basis. These assets include cost and equity method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in an acquisition or in a nonmonetary exchange, and property, plant and equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. During fiscal 2011, goodwill with a carrying amount of $154 million was written down to its implied fair value of $40 million, resulting in an impairment charge of $114 million (Note 4). The implied fair value was based on significant unobservable inputs, and as a result, the fair value measurement was classified as Level 3. During fiscal 2011, 2010 and 2009, the Company did not have any other significant assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.