Medtronic 2013 Annual Report Download - page 100

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Table of Contents
Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
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. government and agency securities, 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, interest rate swaps are
included in Level 2 as the Company uses inputs other than quoted prices that are observable for the asset. The Level 2 derivative
instruments 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. With the exception of auction
rate securities, these securities were valued using third-party pricing sources 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 by market participants. The fair value of auction rate securities is estimated by the Company using a discounted cash
flow model, which incorporates significant unobservable inputs. The significant unobservable inputs used in the fair value
measurement of the Company’s auction rate securities are the years to principal recovery and the illiquidity premium that is
incorporated into the discount rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly
lower (higher) fair value of the securities. Additionally, the Company uses level 3 inputs in the measurement of contingent milestone
payments and related liabilities for all acquisitions subsequent to April 24, 2009. See Note 4 for further information regarding
contingent consideration.
The following table represents the range of the unobservable inputs utilized in the fair value measurement of the auction rate
securities classified as Level 3 as of April 26, 2013:
Valuation Range
Technique Unobservable Input (Weighted Average)
Auction rate securities Discounted cash flow Years to principal recovery 2 yrs. - 12 yrs. (3 yrs.)
Illiquidity premium 6%
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 transfers between Level 1, Level 2, or Level 3 during the fiscal
years ended April 26, 2013 or April 27, 2012. 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 investments measured at fair value on a
recurring basis that used significant unobservable inputs (Level 3):
(in millions) Total Level 3
Investments Corporate debt securities Auction rate
securities Mortgage- backed securities Other asset- backed securities
Balance as of April 27, 2012 $ 172 $ 10 $ 127 $ 29 $ 6
Total realized losses and other-than-
temporary impairment losses included in
earnings — — — — —
Total unrealized gains (losses) included
in other comprehensive income 11 — 11 — —
Settlements (56) — (35) (15) (6)
Balance as of April 26, 2013 $ 127 $ 10 $ 103 $ 14 $ —
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