Fair Value Measurements

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

The authoritative guidance is principally applied to financial assets and liabilities such as marketable equity securities and debt and equity securities that are classified and accounted for as trading, available-for-sale, and derivative instruments and contingent consideration associated with acquisitions subsequent to April 24, 2009. Derivatives include cash flow hedges, freestanding derivative forward contracts, and fair value hedges. These items are marked-to-market at each reporting period.

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:



	Fair Value as of		Fair Value Measurements Using Inputs Considered as
(in millions)	April 24, 2015		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	6,378	$	—	$	6,377	$	1
Auction rate securities	105		—		—		105
Mortgage-backed securities	1,478		—		1,478		—
U.S. government and agency securities	3,139		1,541		1,598		—
Foreign government and agency securities	85		—		85		—
Certificates of deposit	44		—		44		—
Other asset-backed securities	507		—		507		—
Debt funds	2,930		—		2,930		—
Marketable equity securities	80		80		—		—
Exchange-traded funds	77		77		—		—
Derivative assets	733		644		89		—
Total assets	$	15,556	$	2,342	$	13,108	$	106

Liabilities:
Derivative liabilities	$	116	$	45	$	71	$	—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	264		—		—		264
Total liabilities	$	380	$	45	$	71	$	264



	Fair Value as of		Fair Value Measurements Using Inputs Considered as
(in millions)	April 25, 2014		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	5,542	$	—	$	5,533	$	9
Auction rate securities	97		—		—		97
Mortgage-backed securities	1,336		—		1,336		—
U.S. government and agency securities	3,116		1,251		1,865		—
Foreign government and agency securities	67		—		67		—
Certificates of deposit	54		—		54		—
Other asset-backed securities	542		—		542		—
Debt funds	2,123		—		2,123		—
Marketable equity securities	49		49		—		—
Exchange-traded funds	67		67		—		—
Derivative assets	175		89		86		—
Total assets	$	13,168	$	1,456	$	11,606	$	106

Liabilities:
Derivative liabilities	$	127	$	116	$	11	$	—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	68		—		—		68
Total liabilities	$	195	$	116	$	11	$	68

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 24, 2015:

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 24, 2015 or April 25, 2014. 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 tables provide reconciliations of the beginning and ending balances of items 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
Balance as of April 25, 2014	$	106		$	9		$	97	$	—
Total realized losses and other-than-temporary impairment losses included in earnings	(5		)	(5		)	—		—
Total unrealized gains included in other comprehensive income	10			2			8		—
Settlements	(5		)	(5		)	—		—
Balance as of April 24, 2015	$	106		$	1		$	105	$	—



(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities
Balance as of April 26, 2013	$	127		$	10		$	103		$	14
Total realized losses and other-than-temporary impairment losses included in earnings	(5		)	—			(5		)	—
Total unrealized gains included in other comprehensive income	4			—			3			1
Settlements	(20		)	(1		)	(4		)	(15		)
Balance as of April 25, 2014	$	106		$	9		$	97		$	—

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

Non-financial assets such as equity and other securities that are accounted for using the cost or equity method, goodwill and IPR&D, 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 impairment is recognized.

The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the consolidated balance sheets. The aggregate carrying amount of these investments was $520 million and $666 million as of April 24, 2015 and April 25, 2014, respectively. 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 may have a significant adverse effect on the fair value of these investments. During fiscal years 2015, 2014, and 2013, the Company determined that the fair values of certain cost method investments were below their carrying values and that the carrying values of these investments were not expected to be recoverable within a reasonable period of time. As a result, the Company recognized $7 million, $10 million, and $21 million in impairment charges in fiscal years 2015, 2014, and 2013, respectively. These investments fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are privately-held entities without quoted market prices. To determine the fair value of these investments, the Company used all pertinent financial information available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings.

The Company assesses goodwill for impairment annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of goodwill was $40.530 billion and $10.593 billion as of April 24, 2015 and April 25, 2014, respectively.

Impairment testing for goodwill is performed at the reporting unit level. During fiscal year 2015, the Company reassessed the level for which it has aggregated its reporting units in connection with the annual assessment performed in the third quarter. Based on the determination of the similar economic characteristics, the components of the Cardiac and Vascular Group were aggregated into one reporting unit for the annual impairment assessment. Similarly, the components of the Restorative Therapies Group were aggregated into one reporting unit for the annual impairment assessment. The test for impairment of goodwill requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculated the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. As a result of the analysis performed, the fair value of each reporting unit's goodwill was deemed to be greater than the carrying value. The Company did not record any goodwill impairments during fiscal years 2015, 2014, or 2013.

The Company assesses IPR&D for impairment annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of IPR&D was $470 million and $119 million as of April 24, 2015 and April 25, 2014, respectively. Similar to the goodwill impairment test, the IPR&D impairment test requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculated the excess of IPR&D asset fair values over their carrying values utilizing a discounted future cash flow analysis. As a result of the analysis performed during fiscal year 2015, the fair value of certain IPR&D assets were deemed to be less than their carrying value, resulting in an impairment loss of $5 million, which was recorded in acquisition-related items in the consolidated statements of income. As a result of the analysis performed during fiscal years 2014 and 2013, the fair value of IPR&D assets were deemed to be less than the carrying value, resulting in a pre-tax impairment loss of $207 million and $5 million, respectively. In 2014, the pre-tax impairment loss primarily related to the Ardian acquisition and was recorded in acquisition-related items in the consolidated statements of income. See discussion below for additional information on impairments recorded on the Ardian long-lived asset group. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of such clinical trials, delays or failures to obtain required market clearances or other failures to achieve a commercially viable product, and as a result, may record impairment losses in the future.

The Company assesses intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset (asset group) may not be recoverable. The aggregate carrying amount of intangible assets, excluding IPR&D and tradenames, was $27.381 billion and $2.167 billion as of April 24, 2015 and April 25, 2014, respectively. When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recorded based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company did not record any intangible asset impairments during fiscal year 2015. During fiscal year 2014 and 2013, the Company determined that a change in events and circumstances indicated that the carrying amount of certain intangible assets, representing less than five percent of the total aggregate carrying amount of intangible assets, may not be fully recoverable. During fiscal year 2014, the carrying amount of Ardian intangible assets was less than the undiscounted future cash flows, therefore, the Company assessed the fair value of the assets and recorded an impairment of $41 million that was included in acquisition-related items in the consolidated statements of income. During fiscal year 2013, the carrying amount of one intangible asset was less than the undiscounted future cash flows, therefore, the Company assessed the asset's fair value and there were no material impairments recorded.

The Company assesses property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. As part of the Company’s restructuring initiatives, the Company recorded property, plant, and equipment impairments of $8 million, $16 million, and $6 million during fiscal years 2015, 2014, and 2013, respectively, in restructuring charges, net in the consolidated statements of income. During fiscal year 2014, the Company determined that a change in events and circumstances indicated that the carrying amount of Ardian property, plant, and equipment may not be fully recoverable and recorded an impairment of $3 million that was recorded in acquisition-related items in the consolidated statements of income. For further discussion of the restructuring initiatives, refer to Note 3.

Financial Instruments Not Measured at Fair Value

The estimated fair value of the Company’s long-term debt, including the short-term portion, as of April 24, 2015 was $34.637 billion compared to a principal value of $32.125 billion. As of April 25, 2014 the estimated fair value was $11.856 billion compared to a principal value of $11.375 billion. Fair value was estimated using quoted market prices for the publicly registered senior notes, classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.

Valuation
Technique

Unobservable Input

Range
(Weighted Average)

Auction rate securities

Discounted cash flow

Years to principal recovery

2 yrs. - 12 yrs. (3 yrs.)

Illiquidity premium