Fair Value Measurements

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

Certain financial assets and liabilities are measured at fair value on a recurring basis. VMware determines fair value using the following hierarchy:


•	Level 1 - Quoted prices in active markets for identical assets or liabilities


•	Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are noted active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities


•	Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

VMware’s fixed income securities are primarily classified as Level 2, with the exception of some of the U.S. Government and agency obligations which are classified as Level 1. Additionally, VMware’s Level 2 classification includes foreign currency forward contracts and notes payable to EMC. At June 30, 2015 and December 31, 2014, VMware’s Level 2 securities were generally priced using non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques.

VMware does not have any material assets or liabilities that fall into Level 3 of the fair value hierarchy as of June 30, 2015 and December 31, 2014, and there have been no transfers between fair value measurement levels during the three and six months ended June 30, 2015 and 2014.

The following tables set forth the fair value hierarchy of VMware’s money-market funds, available-for-sale securities, and foreign currency forward contracts, that were required to be measured at fair value as of June 30, 2015 and December 31, 2014 (tables in millions):



	June 30, 2015
	Level 1		Level 2			Total
Cash equivalents:
Money-market funds	$	990	$	—		$	990
U.S. and foreign corporate debt securities	—		7			7
Municipal obligations	—		7			7
Total cash equivalents	$	990	$	14		$	1,004
Short-term investments:
U.S. Government and agency obligations	$	443	$	212		$	655
U.S. and foreign corporate debt securities	—		3,292			3,292
Foreign governments and multi-national agency obligations	—		27			27
Municipal obligations	—		888			888
Asset-backed securities	—		36			36
Mortgage-backed securities	—		307			307
Total short-term investments	$	443	$	4,762		$	5,205
Other assets:
Marketable available-for-sale equity securities	$	15	$	—		$	15
Accrued expenses and other:
Foreign currency forward contracts	$	—	$	(3	)	$	(3	)



	December 31, 2014
	Level 1		Level 2			Total
Cash equivalents:
Money-market funds	$	1,130	$	—		$	1,130
U.S. and foreign corporate debt securities	—		54			54
Foreign governments and multi-national agency obligations	—		2			2
Total cash equivalents	$	1,130	$	56		$	1,186
Short-term investments:
U.S. Government and agency obligations	$	353	$	189		$	542
U.S. and foreign corporate debt securities	—		3,234			3,234
Foreign governments and multi-national agency obligations	—		23			23
Municipal obligations	—		932			932
Asset-backed securities	—		53			53
Mortgage-backed securities	—		220			220
Total short-term investments	$	353	$	4,651		$	5,004
Other current assets:
Foreign currency forward contracts	$	—	$	1		$	1
Accrued expenses and other:
Foreign currency forward contracts	$	—	$	(1	)	$	(1	)

VMware has elected not to record its notes payable to EMC at fair value, but has measured the notes at fair value for disclosure purposes. As of June 30, 2015 and December 31, 2014, the fair value of the notes payable to EMC was $1,510 million and $1,503 million, respectively. Fair value was estimated based on observable market interest rates (Level 2 inputs).

VMware offers a deferred compensation plan for eligible employees that allows participants to defer payment for part or all of their compensation. VMware’s results of operations are not significantly affected by this plan since changes in the fair value of the assets substantially offset changes in the fair value of the liabilities. As such, assets and liabilities associated with this plan have not been included in the above tables. Assets and liabilities associated with this plan were both approximately $14 million and $8 million as of June 30, 2015 and December 31, 2014, respectively, and are included in other assets and other liabilities on the condensed consolidated balance sheets.

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

VMware evaluated the strategic investments in its portfolio accounted for under the cost method to assess whether any of its strategic investments were other-than-temporarily impaired. VMware uses Level 3 inputs as part of its impairment analysis, including, pre- and post-money valuations of recent financing events and the impact of those on its fully diluted ownership percentages, as well as other available information regarding the issuer’s historical and forecasted performance. The estimated fair value of these investments is considered in VMware’s impairment review if any events or changes in circumstances occur that might have a significant adverse effect on their value. During the three and six months ended June 30, 2015 and 2014, VMware did not recognize an other-than-temporary impairment charge for a non-recoverable strategic investment.

During the three and six months ended June 30, 2015 and 2014, VMware did not have material realized gains or losses on strategic investments. Strategic investments are included in other assets on the condensed consolidated balance sheets. The carrying value of VMware’s strategic investments was $98 million and $110 million as of June 30, 2015 and December 31, 2014, respectively.