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Financial Review

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NOTE 6 — FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:

(In millions) Level 1 Level 2 Level 3 Gross
Fair
Value
Netting(a) Net Fair
Value
June 30, 2010
Assets
Mutual funds $ 1,120 $ 0 $0 $ 1,120 $0 $ 1,120
Commercial paper 0 172 0 172 0 172
Certificates of deposit 0 348 0 348 0 348
U.S. Government and Agency securities 16,473 4,756 0 21,229 0 21,229
Foreign government bonds 239 294 0 533 0 533
Mortgage-backed securities 0 3,264 0 3,264 0 3,264
Corporate notes and bonds 0 7,460 167 7,627 0 7,627
Municipal securities 0 747 0 747 0 747
Common and preferred stock 6,988 43 5 7,036 0 7,036
Derivatives 22 745 9 776 (207) 569
Total $24,842 $17,829 $181 $42,852 $(207) $42,645
Liabilities
Derivatives and other $ 85 $ 137 $0 $ 222 $(205) $ 17
(In millions) Level 1 Level 2 Level 3 Gross
Fair
Value
Netting(a) Net Fair Value
June 30, 2009
Assets
Mutual funds $ 982 $ 0 $0 $ 982 $0 $ 982
Commercial paper 2,601 0 2,601 0 2,601
Certificates of deposit 0 555 0 555 0 555
U.S. Government and Agency securities 7,134 6,105 0 13,239 0 13,239
Foreign government bonds 501 3,022 0 3,523 0 3,523
Mortgage-backed securities 0 3,593 0 3,593 0 3,593
Corporate notes and bonds 0 4,073 253 4,326 0 4,326
Municipal securities 0 256 0 256 0 256
Common and preferred stock 4,218 28 5 4,251 0 4,251
Derivatives 5 623 5 633 (235) 398
Total $12,840 $20,856 $263 $33,959 $(235) $33,724
Liabilities
Derivatives and other $ 5 $ 344 $0 $ 349 $(231) $ 118
(a) These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.

The table below reconciles the total Net Fair Value of assets above to the balance sheet presentation of these same assets in Note 4 – Investments for June 30, 2010 and 2009.

(In millions)
June 30, 2010 2009
Net fair value of assets measured at fair value on a recurring basis $ 42,645 $ 33,724
Cash 1,661 2,064
Common and preferred stock measured at fair value on a nonrecurring basis 216 204
Other investments measured at fair value on a nonrecurring basis 502 465
Derivative assets classified as other current assets (597) (465)
Derivative liabilities under master netting agreements classified as other current assets 53 231
Other 62 157
Recorded basis of investment components $ 44,542 $ 36,380

Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis

The following tables present the changes during the fiscal years 2010 and 2009 in our Level 3 financial instruments that are measured at fair value on a recurring basis. The majority of these instruments consist of investment securities classified as available-for-sale with changes in fair value included in OCI.

(In millions) Corporate Notes and Bonds Common
and Preferred Stock
Derivative
Assets
Total
Year Ended June 30, 2010
Balance, beginning of period $253 $ 5 $ 5 $ 263
Total realized and unrealized gains (losses):
Included in other income (expense) 6 0 4 10
Included in other comprehensive income (92) 0 0 (92)
Balance, end of period $167 $ 5 $ 9 $ 181
Change in unrealized gains (losses) included in other income (expense) related to assets held as of June 30, 2010 $ 6 $ 0 $ 4 $ 10
(In millions) Corporate Notes and Bonds Common
and Preferred Stock
Derivative
Assets
Total
Year Ended June 30, 2009
Balance, beginning of period $138 $ 8 $ 71 $ 217
Total realized and unrealized gains (losses):
Included in other income (expense) (6) (6) 51 39
Included in other comprehensive income 111 0 0 111
Purchases, issuances, and settlements 0 5 (119) (114)
Transfers in (out) 10 (2) 2 10
Balance, end of period $253 $ 5 $ 5 $ 263
Change in unrealized gains (losses) included in other income (expense) related to assets held as of June 30, 2009 $ (7) $ (5) $ 4 $ (8)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During fiscal years 2010 and 2009, impairment charges of $5 million and $86 million, respectively, were recognized for certain investments measured at fair value on a nonrecurring basis, as the decline in their respective fair values below their cost was determined to be other than temporary in all instances. At June 30, 2010 and 2009, the fair values of the common and preferred stocks that we held that were required to be measured at fair value on a non-recurring basis were $0 and $164 million, respectively.