Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
 3 Months Ended
Dec. 25, 2011
Notes to Financial Statements [Abstract]  
Note 10 - Fair Value Measurements
Note 10 — 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 December 25, 2011 (in millions):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
1,192

 
$
2,857

 
$
—

 
$
4,049

Marketable securities
 
 
 
 
 
 
 
U.S. Treasury securities and government-related securities
371

 
792

 
—

 
1,163

Corporate bonds and notes
—

 
6,320

 
—

 
6,320

Mortgage- and asset-backed securities
—

 
671

 
23

 
694

Auction rate securities
—

 
—

 
122

 
122

Non-investment-grade debt securities
—

 
4,045

 
34

 
4,079

Common and preferred stock
1,212

 
694

 
—

 
1,906

Equity mutual and exchange-traded funds
922

 
—

 
—

 
922

Debt mutual funds
1,327

 
481

 
—

 
1,808

Total marketable securities
3,832

 
13,003

 
179

 
17,014

Derivative instruments
—

 
17

 
—

 
17

Other investments
175

 
—

 
—

 
175

Total assets measured at fair value
$
5,199

 
$
15,877

 
$
179

 
$
21,255

Liabilities
 
 
 
 
 
 
 
Derivative instruments
$
—

 
$
56

 
$
—

 
$
56

Other liabilities
175

 
—

 
6

 
181

Total liabilities measured at fair value
$
175

 
$
56

 
$
6

 
$
237



Cash Equivalents and Marketable Securities. The Company considers all highly liquid investments, including repurchase agreements, with original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of money market funds, certificates of deposit, commercial paper, government agencies’ securities and repurchase agreements fully collateralized by government agencies’ 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 rated below AAA, may require the 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; option, forward and swap contracts to acquire or reduce foreign exchange risk and/or equity and credit risks for portfolios of marketable securities classified as trading; and written put options to repurchase shares of the Company’s common stock at fixed prices. Derivative instruments that are traded on an exchange are valued using quoted market prices and are included in Level 1. Derivative instruments that are not traded on an exchange 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, and therefore, such derivative instruments are included in Level 2.
Other Investments and Other Liabilities. Other investments and other liabilities included in Level 1 are comprised of the Company’s deferred compensation plan liability and related assets, which are invested in mutual funds. Other liabilities included in Level 3 are comprised of put rights held by third parties representing interests in certain of the Company’s subsidiaries. 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 the three months ended December 25, 2011 or December 26, 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):
 
Three Months Ended December 25, 2011
 
Auction Rate
Securities
 
Other Marketable
Securities
 
Other Liabilities
Beginning balance of Level 3
$
124

 
$
27

 
$
7

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

 
—

 
(1
)
Included in other comprehensive income
(1
)
 
—

 
—

Purchases
—

 
35

 
—

Settlements
(1
)
 
(5
)
 
—

Ending balance of Level 3
$
122

 
$
57

 
$
6


 
Three Months Ended December 26, 2010
 
Auction Rate
Securities
 
Other Marketable
Securities
Beginning balance of Level 3
$
126

 
$
18

Total realized and unrealized gains or losses:
 
 
 
Included in other comprehensive income
2

 
—

Settlements
(2
)
 
(1
)
Ending balance of Level 3
$
126

 
$
17


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. There were no transfers into or out of Level 3 during the three months ended December 25, 2011 and December 26, 2010.
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 the three months ended December 25, 2011 and December 26, 2010, the Company did not have any significant assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.