Medtronic 2012 Annual Report Download - page 103

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Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
86
Fair Value Measurements
Fair Value as of Using Inputs Considered as
__________________________________ ____________
(in millions) April 29, 2011 Level 1 Level 2 Level 3
___________ _______________ _____________ _____________ _____________
Assets:
Corporate debt securities . . . . . . . . . . . . . . . . $ 1,961 $ –$ 1,944 $ 17
Auction rate securities . . . . . . . . . . . . . . . . . . . 133 ––133
Mortgage-backed securities . . . . . . . . . . . . . . 785 – 750 35
U.S. government and agency securities . . . . . 2,756 1,453 1,303 –
Foreign government and agency securities . . 131 – 131 –
Certificates of deposit . . . . . . . . . . . . . . . . . . . 119 – 119 –
Other asset-backed securities . . . . . . . . . . . . . 349 – 343 6
Marketable equity securities . . . . . . . . . . . . . . 237 237 ––
Exchange-traded funds . . . . . . . . . . . . . . . . . . 39 39 ––
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . 130 21 109 –
_______________ _____________ _____________ _____________
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,640 $ 1,750 $ 4,699 $ 191
_______________ _____________ _____________ _____________
_______________ _____________ _____________ _____________
Liabilities:
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . $ 303 $ 303 $–$–
_______________ _____________ _____________ _____________
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303 $ 303 $–$–
_______________ _____________ _____________ _____________
_______________ _____________ _____________ _____________
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 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. 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 for which there was a decrease
in the observability of market pricing for these investments. At April 27, 2012, 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 of marketplace 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 time to principal recovery and 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 5 for further information regarding contingent consideration.