Medtronic 2010 Annual Report Download - page 77

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Medtronic, Inc.
Valuation Techniques Financial assets that are classified as Level 1
securities include highly liquid government bonds within the U.S.
government and agency securities, marketable equity securities
and exchange-traded funds category for which quoted market
prices are available. In addition, the Company has determined
that foreign currency forward contracts will be included in Level 1
as these are valued using quoted market prices in active markets
which have identical assets or liabilities.
The valuation for most fixed maturity securities are classified as
Level 2. Financial assets that are classified as Level 2 include
corporate debt securities, U.S. and foreign government and
agency securities, certificates of deposit, other asset backed
securities and certain mortgage backed securities whose value is
determined using inputs that are observable in the market or can
be derived principally from or corroborated by observable market
data such as pricing for similar securities, recently executed
transactions, cash flow models with yield curves and benchmark
securities. In addition, the Company has determined that interest
rate swaps will be included in Level 2 as the Company uses inputs
other than quoted prices that are observable for the asset. The
Level 2 derivative positions are primarily valued using standard
calculations and models that use readily observable market data
as their basis.
Financial assets are considered Level 3 when their fair values
are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant
model assumption or input is unobservable. Level 3 financial
assets also include certain investment securities for which there is
limited market activity such that the determination of fair value
requires significant judgment or estimation. Level 3 investment
securities primarily include certain corporate debt securities,
auction rate securities, certain mortgage backed securities and
certain other asset backed securities for which there was a
decrease in the observability of market pricing for these
investments. At April 30, 2010, these securities were valued
primarily using broker pricing models that incorporate transaction
details such as contractual terms, maturity, timing and amount of
expected future cash flows, as well as assumptions about liquidity
and credit valuation adjustments of marketplace participants.
The Company reviews the fair value hierarchy classification on
a quarterly basis. Changes in the ability to observe valuation
inputs may result in a reclassification of levels for certain securities
within the fair value hierarchy. The Company’s policy is to
recognize transfers into and out of levels within the fair value
hierarchy at the end of the fiscal quarter in which the actual event
or change in circumstances that caused the transfer occurs. There
were no significant transfers between Level 1 and Level 2 during
the fiscal years ended April 30, 2010 or April 24, 2009. 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 provides a reconciliation of the beginning and
ending balances of items measured at fair value on a recurring
basis in the table above that used significant unobservable inputs
(Level 3).
Fiscal Year
(in millions) 2010 2009
Beginning balance $205 $ 448
Total realized losses and other-than-temporary
impairment losses included in earnings (9) (38)
Total unrealized gains/(losses) included in other
comprehensive income 58 (84)
Net purchases, issuances and settlements (41) (209)
Net transfers into (out of) Level 3 —88
Ending balance $213 $ 205
Assets and Liabilities That Are Measured at Fair Value on a
Nonrecurring Basis Effective in fiscal year 2010, the authoritative
guidance for fair value measurements also applied to certain non-
financial assets and liabilities that are measured at fair value on a
nonrecurring basis. Non-financial assets such as goodwill,
intangible assets and property, plant and equipment are measured
at fair value when there is an indicator of impairment and
recorded at fair value only when an impairment is recognized.
With the exception of the property, plant and equipment
impairment charges recorded as part of the Company’s fiscal year
2009 and global realignment restructuring initiatives of $8 million
and $7 million as of April 30, 2010 and April 24, 2009, respectively,
no impairments were recognized as of April 30, 2010 or April 24,
2009. For further discussion of the property, plant and equipment
impairment charges recorded due to the restructuring initiatives
refer to Note 4.
The Company holds investments in equity and other securities
that are accounted for using the cost or equity method, which are
classified as long-term investments in the consolidated balance
sheets. The aggregate carrying amount of these investments
approximated $542 million at April 30, 2010 and $515 million at
April 24, 2009. These cost or equity method investments are
measured at fair value on a nonrecurring basis. The fair value of
the Company’s cost or equity method investments is not estimated
if there are no identified events or changes in circumstance that