Financial Instruments

9 Months Ended

Sep. 30, 2015

Fair Value Measurements

We measure our cash equivalents, marketable securities, foreign currency and interest rate derivative contracts, and non-marketable debt securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.

Level 3 - Unobservable inputs that are supported by little or no market activities.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. We classify our non-marketable investments within Level 3 as the valuation inputs are not observable in an active market.

Cash, Cash Equivalents and Marketable Securities

The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of December 31, 2014 and September 30, 2015 (in millions):



	As of December 31, 2014
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities
Cash	$	9,863	$	0	$	0		$	9,863	$	9,863	$	0
Level 1:
Money market and other funds	2,532		0		0			2,532		2,532		0
U.S. government notes	15,320		37		(4		)	15,353		1,128		14,225
Marketable equity securities	988		428		(64		)	1,352		0		1,352
	18,840		465		(68		)	19,237		3,660		15,577
Level 2:
Time deposits⁽¹⁾	2,409		0		0			2,409		2,309		100
Money market and other funds⁽²⁾	1,762		0		0			1,762		1,762		0
Fixed-income bond funds⁽³⁾	385		0		(38		)	347		0		347
U.S. government agencies	2,327		8		(1		)	2,334		750		1,584
Foreign government bonds	1,828		22		(10		)	1,840		0		1,840
Municipal securities	3,370		33		(6		)	3,397		3		3,394
Corporate debt securities	11,499		114		(122		)	11,491		0		11,491
Agency mortgage-backed securities	8,196		109		(42		)	8,263		0		8,263
Asset-backed securities	3,456		1		(5		)	3,452		0		3,452
	35,232		287		(224		)	35,295		4,824		30,471
Total	$	63,935	$	752	$	(292	)	$	64,395	$	18,347	$	46,048



	As of September 30, 2015
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities
	(unaudited)
Cash	$	10,986	$	0	$	0		$	10,986	$	10,986	$	0
Level 1:
Money market and other funds	3,668		0		0			3,668		3,668		0
U.S. government notes	18,146		114		0			18,260		0		18,260
Marketable equity securities	1,014		196		(315		)	895		0		895
	22,828		310		(315		)	22,823		3,668		19,155
Level 2:
Time deposits⁽¹⁾	3,434		0		0			3,434		1,458		1,976
Money market and other funds⁽²⁾	1,855		0		0			1,855		1,855		0
Fixed-income bond funds⁽³⁾	370		0		(84		)	286		0		286
U.S. government agencies	1,331		6		0			1,337		100		1,237
Foreign government bonds	2,422		17		(23		)	2,416		0		2,416
Municipal securities	3,629		37		(4		)	3,662		0		3,662
Corporate debt securities	13,536		79		(239		)	13,376		1		13,375
Agency mortgage-backed securities	9,434		101		(24		)	9,511		0		9,511
Asset-backed securities	3,084		2		(5		)	3,081		0		3,081
	39,095		242		(379		)	38,958		3,414		35,544
Total	$	72,909	$	552	$	(694	)	$	72,767	$	18,068	$	54,699


⁽¹⁾	The majority of our time deposits are foreign deposits.


⁽²⁾	The balances as of December 31, 2014 and September 30, 2015 were related to cash collateral received in connection with our securities lending program, which was invested in reverse repurchase agreements maturing within three months. See section titled "Securities Lending Program" below for further discussion of this program.


⁽³⁾	Fixed-income bond funds consist of mutual funds that primarily invest in corporate and government bonds.

We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $33 million and $189 million for the three and nine months ended September 30, 2014 and $54 million and $235 million for the three and nine months ended September 30, 2015. We recognized gross realized losses of $15 million and $49 million for the three and nine months ended September 30, 2014 and $60 million and $156 million for the three and nine months ended September 30, 2015. We reflect these gains and losses as a component of interest and other income, net, in the accompanying Consolidated Statements of Income.

The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions):



	As of September 30, 2015
	(unaudited)
Due in 1 year	$	8,525
Due in 1 year through 5 years	27,725
Due in 5 years through 10 years	7,244
Due after 10 years	10,024
Total	$	53,518

Non-marketable Investments

We included $90 million and $991 million of available-for-sale debt securities in our non-marketable investments as of December 31, 2014 and September 30, 2015. These debt securities are primarily preferred stock with certain features and convertible notes issued by private companies that do not have readily determinable market values and are categorized accordingly as Level 3 in the fair value hierarchy. To estimate the fair value of these securities, we use a combination of valuation methodologies, including market and income approaches based on prior transaction prices; estimated timing, probability, and amount of cash flows; and illiquidity considerations. Financial information of the private companies may not be available and consequently we will estimate the value based on the best available information at the measurement date. As of December 31, 2014 and September 30, 2015, the estimated fair value of these debt securities approximated their carrying value. In addition, since these securities do not have contractual maturity dates and we do not intend to liquidate them in the next 12 months, we have classified them as non-current assets on the accompanying Consolidated Balance Sheet as of December 31, 2014 and September 30, 2015.

The following table presents reconciliations for our assets measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions):



	Level 3
	(unaudited)
Balance as of December 31, 2014	$	90
Purchases, issuances, and settlements⁽¹⁾	901
Balance as of September 30, 2015	$	991


⁽¹⁾	Purchases of securities included our $900 million investment in SpaceX, a space exploration and space transport company, made during January 2015.

Impairment Considerations for Available-for-sale Investments

The following tables present gross unrealized losses and fair values for those marketable investments that were in an unrealized loss position as of December 31, 2014 and September 30, 2015, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):



	As of December 31, 2014
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. government notes	$	4,490	$	(4	)	$	0	$	0		$	4,490	$	(4	)
U.S. government agencies	830		(1		)	0		0			830		(1		)
Foreign government bonds	255		(7		)	43		(3		)	298		(10		)
Municipal securities	877		(3		)	174		(3		)	1,051		(6		)
Corporate debt securities	5,851		(112		)	225		(10		)	6,076		(122		)
Agency mortgage-backed securities	609		(1		)	2,168		(41		)	2,777		(42		)
Asset-backed securities	2,388		(4		)	174		(1		)	2,562		(5		)
Fixed-income bond funds	347		(38		)	0		0			347		(38		)
Marketable equity securities	690		(64		)	0		0			690		(64		)
Total	$	16,337	$	(234	)	$	2,784	$	(58	)	$	19,121	$	(292	)



	As of September 30, 2015
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(unaudited)
Foreign government bonds	$	873	$	(19	)	$	27	$	(4	)	$	900	$	(23	)
Municipal securities	356		(3		)	23		(1		)	379		(4		)
Corporate debt securities	7,152		(187		)	651		(52		)	7,803		(239		)
Agency mortgage-backed securities	1,355		(8		)	739		(16		)	2,094		(24		)
Asset-backed securities	1,650		(4		)	230		(1		)	1,880		(5		)
Fixed-income bond funds	0		0			286		(84		)	286		(84		)
Marketable equity securities	790		(315		)	0		0			790		(315		)
Total	$	12,176	$	(536	)	$	1,956	$	(158	)	$	14,132	$	(694	)

We periodically review our available-for-sale debt and equity securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three and nine months ended September 30, 2014 and 2015, we did not recognize any other-than-temporary impairment loss.

Securities Lending Program

From time to time, we enter into securities lending agreements with financial institutions to enhance investment income. We loan certain securities which are collateralized in the form of cash or securities. Cash collateral is usually invested in reverse repurchase agreements which are collateralized in the form of securities.

We classify loaned securities as cash equivalents or marketable securities and record the cash collateral as an asset with a corresponding liability in the accompanying Consolidated Balance Sheets. We classify reverse repurchase agreements maturing within three months as cash equivalents and those longer than three months as receivable under reverse repurchase agreements in the accompanying Consolidated Balance Sheets. For security collateral received, we do not record an asset or liability except in the event of counterparty default.

Our securities lending transactions were accounted for as secured borrowings with significant investment categories as follows (in millions):



	As of September 30, 2015
	Remaining Contractual Maturity of the Agreements
Securities Lending Transactions	Overnight and Continuous		Up to 30 days		30 - 90 Days		Greater Than 90 Days		Total
	(unaudited)
U.S. government notes	$	1,779	$	1,001	$	0	$	101	$	2,881
U.S. government agencies	192		0		0		0		192
Corporate debt securities	193		0		0		0		193
Total	$	2,164	$	1,001	$	0	$	101	$	3,266
Gross amount of recognized liabilities for securities lending in offsetting disclosure									$	3,266
Amounts related to agreements not included in securities lending in offsetting disclosure									$	0

Derivative Financial Instruments

We recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e. gains or losses) of the derivatives in the accompanying Consolidated Statements of income as interest and other income, net, as part of revenues, or as a component of accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets, as discussed below.

We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We use certain interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and our anticipated debt issuance. Our program is not used for trading or speculative purposes.

We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. To further reduce credit risk, we enter into collateral security arrangements under which the counterparty is required to provide collateral when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of the collateral in the event of counterparty default. As of December 31, 2014 and September 30, 2015, we received cash collateral related to the derivative instruments under our collateral security arrangements of $268 million and $105 million.

Cash Flow Hedges

We use options designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. The notional principal of these contracts was approximately $13.6 billion and $9.7 billion as of December 31, 2014 and September 30, 2015. These foreign exchange contracts have maturities of 36 months or less.

In 2012, we entered into forward-starting interest rate swaps, with a total notional amount of $1.0 billion and terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate, that effectively locked in an interest rate on our anticipated debt issuance of $1.0 billion in 2014. We issued $1.0 billion of unsecured senior notes in February 2014 (see details in Note 3). As a result, we terminated the forward-starting interest rate swaps upon the debt issuance. The gain associated with the termination is reported within operating activities in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2014, consistent with the impact of the hedged item.

We reflect gains or losses on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to interest and other income, net. Further, we exclude the change in the time value of the options from our assessment of hedge effectiveness. We record the premium paid or time value of an option on the date of purchase as an asset. Thereafter, we recognize changes to this time value in interest and other income, net.

As of September 30, 2015, the effective portion of our cash flow hedges before tax effect was $556 million, of which $466 million is expected to be reclassified from AOCI into earnings within the next 12 months.

Fair Value Hedges

We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. We exclude changes in the time value for these forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $1.5 billion and $2.0 billion as of December 31, 2014 and September 30, 2015.

We use interest rate swaps designated as fair value hedges to hedge interest rate risk for certain fixed rate securities. The notional principal of these contracts was $175 million and $290 million as of December 31, 2014 and September 30, 2015.

Gains and losses on these forward contracts and interest rate swaps are recognized in interest and other income, net, along with the offsetting losses and gains of the related hedged items. Cash flows from these forward contracts and interest rate swaps are reported within investment activities in the Consolidated Statements of Cash Flows, consistent with the impact of the hedged items.

Other Derivatives

Other derivatives not designated as hedging instruments consist of forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in interest and other income, net along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of foreign exchange contracts outstanding was $6.2 billion and $5.7 billion as of December 31, 2014 and September 30, 2015.

We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related costs, in interest and other income, net. The gains and losses are generally economically offset by unrealized gains and losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into interest and other income, net. The total notional amounts of interest rate contracts outstanding were $150 million as of December 31, 2014 and $450 million as of September 30, 2015.

The fair values of our outstanding derivative instruments were as follows (in millions):



		As of December 31, 2014
	Balance Sheet Location	Fair Value of Derivatives Designated as Hedging Instruments		Fair Value of Derivatives Not Designated as Hedging Instruments		Total Fair Value
Derivative Assets:
Level 2:
Foreign exchange contracts	Prepaid revenue share, expenses and other assets, current and non-current	$	851	$	0	$	851
Interest rate contracts	Prepaid revenue share, expenses and other assets, current and non-current	1		0		1
Total		$	852	$	0	$	852
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other current liabilities	$	0	$	3	$	3
Interest rate contracts	Accrued expenses and other liabilities, current and non-current	1		0		1
Total		$	1	$	3	$	4



		As of September 30, 2015
	Balance Sheet Location	Fair Value of Derivatives Designated as Hedging Instruments		Fair Value of Derivatives Not Designated as Hedging Instruments		Total Fair Value
		(unaudited)
Derivative Assets:
Level 2:
Foreign exchange contracts	Prepaid revenue share, expenses and other assets, current and non-current	$	545	$	1	$	546
Total		$	545	$	1	$	546
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other current liabilities	$	0	$	3	$	3
Interest rate contracts	Accrued expenses and other liabilities, current and non-current	6		1		7
Total		$	6	$	4	$	10

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions):



	Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Derivatives in Cash Flow Hedging Relationship	2014		2015		2014			2015
	(unaudited)
Foreign exchange contracts	$	436	$	97	$	458		$	813
Interest rate contracts	0		0		(31		)	0
Total	$	436	$	97	$	427		$	813



	Gains Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Derivatives in Cash Flow Hedging Relationship	Income Statement Location	2014		2015		2014		2015
		(unaudited)
Foreign exchange contracts	Revenues	$	10	$	286	$	24	$	1,068
Interest rate contracts	Interest and other income, net	1		1		2		3
Total		$	11	$	287	$	26	$	1,071



	Gains (Losses) Recognized in Income on Derivatives ⁽¹⁾ (Amount Excluded from Effectiveness Testing and Ineffective Portion)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Derivatives in Cash Flow Hedging Relationship	Income Statement Location	2014			2015			2014			2015
		(unaudited)
Foreign exchange contracts	Interest and other income, net	$	(52	)	$	(63	)	$	(186	)	$	(230	)
Interest rate contracts	Interest and other income, net	0			0			4			0
Total		$	(52	)	$	(63	)	$	(182	)	$	(230	)


⁽¹⁾	Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented.

The effect of derivative instruments in fair value hedging relationships on income is summarized below (in millions):



	Gains (Losses) Recognized in Income on Derivatives⁽²⁾
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Derivatives in Fair Value Hedging Relationship	Income Statement Location	2014			2015			2014			2015
		(unaudited)
Foreign Exchange Hedges:
Foreign exchange contracts	Interest and other income, net	$	73		$	72		$	52		$	139
Hedged item	Interest and other income, net	(75		)	(73		)	(58		)	(144		)
Total		$	(2	)	$	(1	)	$	(6	)	$	(5	)
Interest Rate Hedges:
Interest rate contracts	Interest and other income, net	$	0		$	(5	)	$	0		$	(6	)
Hedged item	Interest and other income, net	0			5			0			6
Total		$	0		$	0		$	0		$	0


⁽²⁾	Losses related to the amount excluded from effectiveness testing of the hedges were $2 million and $6 million for the three and nine months ended September 30, 2014 and $1 million and $5 million for the three and nine months ended September 30, 2015.

The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):



	Gains (Losses) Recognized in Income on Derivatives
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Derivatives Not Designated As Hedging Instruments	Income Statement Location	2014		2015		2014		2015
		(unaudited)
Foreign exchange contracts	Interest and other income, net and net loss from discontinued operations	$	172	$	150	$	59	$	241
Interest rate contracts	Interest and other income, net	2		3		2		0
Total		$	174	$	153	$	61	$	241

Offsetting of Derivatives, Securities Lending and Reverse Repurchase Agreements

We present our derivatives, securities lending and reverse repurchase agreements at gross fair values in the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2014 and September 30, 2015, information related to these offsetting arrangements was as follows (in millions):



Offsetting of Assets
	As of December 31, 2014
								Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Presented in the Consolidated Balance Sheets			Financial Instruments				Cash Collateral Received			Non-Cash Collateral Received			Net Assets Exposed
Derivatives	$	852	$	0	$	852		$	(1	)	⁽¹⁾	$	(251	)	$	(412	)	$	188
Reverse repurchase agreements	2,637		0		2,637		⁽²⁾	0				0			(2,637		)	0
Total	$	3,489	$	0	$	3,489		$	(1	)		$	(251	)	$	(3,049	)	$	188

	As of September 30, 2015
								Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Presented in the Consolidated Balance Sheets			Financial Instruments				Cash Collateral Received			Non-Cash Collateral Received			Net Assets Exposed
	(unaudited)
Derivatives	$	546	$	0	$	546		$	(2	)	⁽¹⁾	$	(93	)	$	(303	)	$	148
Reverse repurchase agreements	2,255		0		2,255		⁽²⁾	0				0			(2,255		)	0
Total	$	2,801	$	0	$	2,801		$	(2	)		$	(93	)	$	(2,558	)	$	148


⁽¹⁾	The balances as of December 31, 2014 and September 30, 2015 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.


⁽²⁾	The balances as of December 31, 2014 and September 30, 2015 included $1,762 million and $1,855 million recorded in cash and cash equivalents, respectively, and $875 million and $400 million recorded in receivable under reverse repurchase agreements, respectively.



Offsetting of Liabilities
	As of December 31, 2014
							Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Presented in the Consolidated Balance Sheets		Financial Instruments				Cash Collateral Pledged			Non-Cash Collateral Pledged			Net Liabilities
Derivatives	$	4	$	0	$	4	$	(1	)	⁽³⁾	$	0		$	0		$	3
Securities lending agreements	2,778		0		2,778		0				0			(2,740		)	38
Total	$	2,782	$	0	$	2,782	$	(1	)		$	0		$	(2,740	)	$	41

	As of September 30, 2015
							Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Presented in the Consolidated Balance Sheets		Financial Instruments				Cash Collateral Pledged			Non-Cash Collateral Pledged			Net Liabilities
	(unaudited)
Derivatives	$	10	$	0	$	10	$	(2	)	⁽³⁾	$	(4	)	$	0		$	4
Securities lending agreements	3,266		0		3,266		0				0			(3,245		)	21
Total	$	3,276	$	0	$	3,276	$	(2	)		$	(4	)	$	(3,245	)	$	25


⁽³⁾	The balances as of December 31, 2014 and September 30, 2015 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.