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FAIR VALUE MEASUREMENTS (Notes)

3 Months Ended

Jan. 31, 2022

The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

Level 1- applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2- applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.

Level 3- applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2022 were as follows:


			Fair Value Measurement at January 31, 2022 Using
	January 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)
Assets:
Short-term
Cash equivalents (money market funds)	$	465	$	465	$	—	$	—
Derivative instruments (foreign exchange contracts)	16		—		16		—
Short-term investments - Equity securities with RDFV	45		40		5		—
Long-term
Trading securities	37		37		—		—
Other investments	29		—		29		—

Total assets measured at fair value	$	592	$	542	$	50	$	—
Liabilities:
Short-term
Derivative instruments (foreign exchange contracts)	$	5	$	—	$	5	$	—
Contingent consideration	65		—		—		65
Long-term
Deferred compensation liability	37		—		37		—
Contingent consideration	27		—		—		27
Total liabilities measured at fair value	$	134	$	—	$	42	$	92

Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2021 were as follows:


			Fair Value Measurement at October 31, 2021 Using
	October 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)
Assets:
Short-term
Cash equivalents (money market funds)	$	919	$	919	$	—	$	—
Derivative instruments (foreign exchange contracts)	9		—		9		—
Short-term investments - Equity securities with RDFV	91		83		8		—
Long-term
Trading securities	34		34		—		—
Other investments	31		—		31		—
Total assets measured at fair value	$	1,084	$	1,036	$	48	$	—
Liabilities:
Short-term
Derivative instruments (foreign exchange contracts)	$	5	$	—	$	5	$	—
Contingent consideration	62		—		—		62
Long-term
Deferred compensation liability	34		—		34		—
Contingent consideration	27		—		—		27
Total liabilities measured at fair value	$	128	$	—	$	39	$	89

Our money market funds and trading securities are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as level 2 because, although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.

Short- term investments - equity securities with readily determinable fair value ("RDFV") are shares in marketable equity securities which are classified as level 1 in the fair value hierarchy as they are measured based on quotes in active markets. Equity securities with RDFV also includes potential shares received from an equity investment in a company that went public and can vest under certain stock performance circumstances, and these have been classified as level 2 because the fair value was calculated using the Monte Carlo simulation method in which quoted market price and other observable inputs are used.

Other investments represent shares we own in a special fund that targets underlying investments of approximately 40 percent in debt securities and 60 percent in equity securities. These shares have been classified as level 2 because, although the shares of the fund are not traded on any active stock exchange, each of the individual underlying securities are or can be derived from and hence we have a readily determinable value for the underlying securities, from which we are able to determine the fair market value for the special fund itself.

Trading securities, which are comprised of mutual funds, bonds and other similar instruments, other investments and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss) within stockholders' equity. Realized gains and losses from the sale of these instruments are recorded in net income.

For the three months ended January 31, 2022 and 2021, an unrealized loss of $47 million and an unrealized gain of $2 million, respectively, were included in other income (expense), net as an adjustment to the carrying value of equity securities.

Contingent Consideration. The fair value of the contingent consideration liability relates to milestone payments in connection with the April 2021 acquisition of Resolution Bioscience. The fair value of the potential future milestone payments, which are set to certain revenue and technical targets, was based on (i) the probability of achieving the relevant revenue targets and technical milestones and (ii) the timing of achieving such milestones, which are significant unobservable inputs, and has been classified as Level 3. We used the Monte Carlo simulation approach to estimate the fair value of the revenue component with an asset volatility of 54.9 percent and revenue volatilities ranging from 12.2 to 13.9 percent. The probability-weighted expected return method was used to estimate the fair value of the technical target component. Assumptions used in the calculations include probability of success, duration of the earn-out and discount rate. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration.

As of January 31, 2022, the expected maximum earn-out period for the contingent payments does not exceed 2.9 years and potential future payments will not exceed $145 million. The fair value of the contingent consideration liability as of January 31, 2022 was estimated to be $92 million of which $65 million was recorded in other accrued liabilities and $27 million was recorded in other long-term liabilities on the condensed consolidated balance sheet. The increase in the fair value of the contingent consideration was primarily driven by a change in the probability of achieving the technical milestone.

The contingent consideration liability is our only Level 3 asset or liability. A summary of the Level 3 activity follows:


	Three Months Ended
	January 31,
	2022		2021
	(in millions)
Beginning balance	$	89	$	—

Change in fair value (included within selling, general and administrative expenses)	$	3	$	—
Ending balance	$	92	$	—

Impairment of Investments. There were no impairments of investments for the three months ended January 31, 2022 and 2021.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

For the three months ended January 31, 2022 and 2021, there were no impairments of long-lived assets held and used or long-lived assets held for sale.

For the three months ended January 31, 2022 and 2021, there were no impairments or adjustments to the carrying value of non-marketable securities without readily determinable fair value based on an observable market transaction. As of January 31, 2022 and October 31, 2021, the carrying amount of non-marketable equity securities without readily determinable fair values was $125 million and $120 million, respectively.

Fair values for the non-marketable securities included in long-term investments on the condensed consolidated balance sheet were measured using Level 3 inputs because they are primarily equity stock issued by private companies without quoted market prices. To estimate the fair value of our non-marketable securities, we use the measurement alternative to record these investments at cost and adjust for impairments and observable price changes (orderly transactions for the identical or a similar security from the same issuer) as and when they occur.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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