10-Q 1 goog10-qq22016.htm FORM 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 001-37580
________________________________________________________________________________________
Alphabet Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________
Delaware
61-1767919
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
1600 Amphitheatre Parkway
Mountain View, CA 94043
(Address of principal executive offices, including zip code)
(650) 253-0000
(Registrant’s telephone number, including area code) 
________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
  
Accelerated filer
¨
Non-accelerated filer (Do not check if a smaller reporting company)
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 28, 2016, there were 294,844,176 shares of Alphabet’s Class A common stock outstanding, 48,825,477 shares of Alphabet's Class B common stock outstanding, and 343,604,144 Alphabet's Class C capital stock outstanding.

Alphabet Inc.

Alphabet Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2016
TABLE OF CONTENTS
 
 
Page No.
 
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
 
 
 
Item 1
Item 1A
Item 2
Item 6
 
 

i
Alphabet Inc.

NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
•
the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business;
•
our plans to continue to invest in new businesses, products and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions;
•
seasonal fluctuations in internet usage and advertiser expenditures, traditional retail seasonality and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results;
•
the potential for declines in our revenue growth rate;
•
our expectation that growth in advertising revenues from our websites will continue to exceed that from our Google Network Members' websites, which will have a positive impact on our operating margins;
•
our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce the number of accidental clicks;
•
fluctuations in the rate of change in revenue and revenue growth, as well as the rate of change in paid clicks and average cost-per-click and various factors contributing to such fluctuations;
•
our belief that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates;
•
the expected variability of costs related to hedging activities under our foreign exchange risk management program;
•
our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues;
•
our potential exposure in connection with pending investigations, proceedings, and other contingencies;
•
our expectation that our traffic acquisition costs will increase in the future;
•
our expectation that our other income (loss), net, will fluctuate in the future as it is largely driven by market dynamics;
•
estimates of our future compensation expenses;
•
fluctuations in our effective tax rate;
•
the sufficiency of our sources of funding;
•
our payment terms to certain advertisers, which may increase our working capital requirements;
•
fluctuations in our capital expenditures;
•
our expectations related to the new operating structure implemented in October 2015 pursuant to the holding company reorganization;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report and other documents we file with the Securities and Exchange Commission (SEC), including without limitation, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015, as updated by the Form 8-K filed with the SEC on May 3, 2016, and as updated in our subsequent Quarterly Reports on Form 10-Q. Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "may," "could," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015, as updated by the Form 8-K filed with the SEC on May 3, 2016, and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, "Alphabet," "our company," "we," "us," "our," and similar terms include Alphabet Inc. and its subsidiaries, unless the context indicates otherwise.
"Alphabet," "Google," and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

1
Alphabet Inc.

PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Alphabet Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts which are reflected in thousands and par value)
 
As of
December 31, 2015
 
As of
June 30, 2016
 
 
 
(unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
16,549

 
$
13,627

Marketable securities
56,517

 
64,833

Total cash, cash equivalents, and marketable securities (including securities loaned of $4,531 and $4,426)
73,066

 
78,460

Accounts receivable, net of allowance of $296 and $294
11,556

 
11,686

Receivable under reverse repurchase agreements
450

 
500

Income taxes receivable, net
1,903

 
576

Prepaid revenue share, expenses and other assets
3,139

 
3,016

Total current assets
90,114

 
94,238

Prepaid revenue share, expenses and other assets, non-current
3,181

 
3,275

Non-marketable investments
5,183

 
5,820

Deferred income taxes
251

 
253

Property and equipment, net
29,016

 
31,413

Intangible assets, net
3,847

 
3,452

Goodwill
15,869

 
15,841

Total assets
$
147,461

 
$
154,292

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,931

 
$
1,716

Short-term debt
3,225

 
2,219

Accrued compensation and benefits
3,539

 
3,409

Accrued expenses and other current liabilities
4,768

 
4,502

Accrued revenue share
2,329

 
2,345

Securities lending payable
2,428

 
2,065

Deferred revenue
788

 
900

Income taxes payable, net
302

 
185

Total current liabilities
19,310

 
17,341

Long-term debt
1,995

 
1,984

Deferred revenue, non-current
151

 
151

Income taxes payable, non-current
3,663

 
4,135

Deferred income taxes
189

 
651

Other long-term liabilities
1,822

 
2,151

Total liabilities
27,130

 
26,413

Commitments and contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding
0

 
0

Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 687,348 (Class A 292,297, Class B 50,295, Class C 344,756) and 686,778 (Class A 294,686, Class B 48,921, Class C 343,171) shares issued and outstanding
32,982

 
34,293

Accumulated other comprehensive loss
(1,874
)
 
(1,151
)
Retained earnings
89,223

 
94,737

Total stockholders’ equity
120,331

 
127,879

Total liabilities and stockholders’ equity
$
147,461

 
$
154,292

See accompanying notes.

2
Alphabet Inc.

Alphabet Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2016
 
2015
 
2016
 
(unaudited)
Revenues
$
17,727

 
$
21,500

 
$
34,985

 
$
41,757

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
6,583

 
8,130

 
12,939

 
15,778

Research and development
2,789

 
3,363

 
5,542

 
6,730

Sales and marketing
2,080

 
2,415

 
4,145

 
4,802

General and administrative
1,450

 
1,624

 
3,087

 
3,137

Total costs and expenses
12,902

 
15,532

 
25,713

 
30,447

Income from operations
4,825

 
5,968

 
9,272

 
11,310

Other income (expense), net
131

 
151

 
288

 
(62
)
Income before income taxes
4,956

 
6,119

 
9,560

 
11,248

Provision for income taxes
1,025

 
1,242

 
2,114

 
2,164

Net income
$
3,931

 
$
4,877

 
$
7,446

 
$
9,084

Less: Adjustment Payment to Class C capital stockholders
522

 
0

 
522

 
0

Net income available to all stockholders
$
3,409

 
$
4,877

 
$
6,924

 
$
9,084

 
 
 
 
 
 
 
 
Basic net income per share of Class A and B common stock
$
4.99

 
$
7.11

 
$
10.15

 
$
13.23

Basic net income per share of Class C capital stock
$
6.51

 
$
7.11

 
$
11.68

 
$
13.23

 
 
 
 
 
 
 
 
Diluted net income per share of Class A and B common stock
$
4.93

 
$
7.00

 
$
10.03

 
$
13.01

Diluted net income per share of Class C capital stock
$
6.43

 
$
7.00

 
$
11.53

 
$
13.01

See accompanying notes.

3
Alphabet Inc.

Alphabet Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2016
 
2015
 
2016
 
(unaudited)
Net income
$
3,931

 
$
4,877

 
$
7,446

 
$
9,084

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
218

 
(119
)
 
(705
)
 
37

Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains
(336
)
 
200

 
(115
)
 
556

Less: reclassification adjustment for net (gains) losses included in net income
(50
)
 
14

 
(77
)
 
183

Net change (net of tax effect of $92, $79, $31, and $198)
(386
)
 
214

 
(192
)
 
739

Cash flow hedges:
 
 
 
 
 
 
 
Change in net unrealized gains
(61
)
 
100

 
501

 
116

Less: reclassification adjustment for net gains included in net income
(329
)
 
(52
)
 
(560
)
 
(169
)
Net change (net of tax effect of $202, $28, $10, and $9)
(390
)
 
48

 
(59
)
 
(53
)
Other comprehensive (loss) income
(558
)
 
143

 
(956
)
 
723

Comprehensive income
$
3,373

 
$
5,020

 
$
6,490

 
$
9,807

See accompanying notes.

4
Alphabet Inc.

Alphabet Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Six Months Ended
 
June 30,
 
2015
 
2016
 
(unaudited)
Operating activities
 
 
 
Net income
$
7,446

 
$
9,084

Adjustments:
 
 
 
Depreciation and impairment of property and equipment
1,949

 
2,426

Amortization and impairment of intangible assets
462

 
435

Stock-based compensation expense
2,335

 
2,997

Deferred income taxes
(150
)
 
364

Loss on marketable and non-marketable investments, net
33

 
294

Other
116

 
91

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(69
)
 
(17
)
Income taxes, net
1,950

 
1,680

Prepaid revenue share, expenses and other assets
62

 
161

Accounts payable
(398
)
 
(221
)
Accrued expenses and other liabilities
237

 
(471
)
Accrued revenue share
(121
)
 
(48
)
Deferred revenue
(34
)
 
3

Net cash provided by operating activities
13,818

 
16,778

Investing activities
 
 
 
Purchases of property and equipment
(5,442
)
 
(4,551
)
Purchases of marketable securities
(33,126
)
 
(45,588
)
Maturities and sales of marketable securities
27,586

 
37,789

Purchases of non-marketable investments
(1,449
)
 
(583
)
Cash collateral related to securities lending
(84
)
 
(363
)
Investments in reverse repurchase agreements
250

 
(50
)
Acquisitions, net of cash acquired, and purchases of intangible assets
(142
)
 
(72
)
Net cash used in investing activities
(12,407
)
 
(13,418
)
Financing activities
 
 
 
Net payments related to stock-based award activities
(1,004
)
 
(1,610
)
Repurchases of capital stock
0

 
(3,693
)
Adjustment Payment to Class C capital stockholders
(47
)
 
0

Proceeds from issuance of debt, net of costs
6,698

 
5,753

Repayments of debt
(6,704
)
 
(6,801
)
Net cash used in financing activities
(1,057
)
 
(6,351
)
Effect of exchange rate changes on cash and cash equivalents
(248
)
 
69

Net increase (decrease) in cash and cash equivalents
106

 
(2,922
)
Cash and cash equivalents at beginning of period
18,347

 
16,549

Cash and cash equivalents at end of period
$
18,453

 
$
13,627

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid (received) for income taxes
$
234

 
$
(24
)
Cash paid for interest
$
48

 
$
48

See accompanying notes.


5
Alphabet Inc.

Alphabet Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
We were incorporated in the State of Delaware in August 2015. We generate revenues primarily by delivering relevant, cost-effective online advertising.
On October 2, 2015, we implemented a holding company reorganization in which Alphabet became the successor issuer to Google Inc. (Google) that was accounted for as a merger under common control. Alphabet has recognized the assets and liabilities of Google at carryover basis. The consolidated financial statements of Alphabet present comparative information for the prior periods on a combined basis, as if both Alphabet and Google were under common control for all periods presented.
Basis of Consolidation
The consolidated financial statements include the accounts of Alphabet Inc., our subsidiaries, as well as all variable interest entities in which we are the primary beneficiary. All intercompany balances and transactions have been eliminated.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of June 30, 2016, the Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2016, the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2016, and the Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2016 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of June 30, 2016, our results of operations for the three and six months ended June 30, 2015 and 2016, and our cash flows for the six months ended June 30, 2015 and 2016. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on February 11, 2016 as updated by the Form 8-K filed with the SEC on May 3, 2016.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. We base our estimates on historical experience, future projections, market transactions, and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Fair Value of Financial Instruments
Our financial assets and financial liabilities that include cash equivalents, marketable securities, foreign currency and interest rate derivative contracts, and non-marketable debt securities are measured and recorded at fair value on a recurring basis. We measure certain financial assets at fair value for disclosure purposes, as well as, on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and our other current financial liabilities have fair values that approximate their carrying value.
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.

6
Alphabet Inc.

Level 2 - Include other 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements, implementing accounting system changes related to the adoption, and considering additional disclosure requirements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01) "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the recognition and measurement for equity investments. Additionally, ASU 2016-01 will impact the disclosure and presentation of financial assets and liabilities. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02) which amends the FASB Accounting Standards Codification and created Topic 842, "Leases." Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provides for enhanced disclosures. Leases will continue to be classified as either finance or operating. ASU 2016-02 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited and early adoption by public entities is permitted. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
Note 2. Financial Instruments
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.
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, 2015 and June 30, 2016 (in millions):

7
Alphabet Inc.

 
As of December 31, 2015
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
$
7,380

 
$
0

 
$
0

 
$
7,380

 
$
7,380

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
5,623

 
0

 
0

 
5,623

 
5,623

 
0

U.S. government notes
20,922

 
27

 
(48
)
 
20,901

 
258

 
20,643

Marketable equity securities
692

 
155

 
0

 
847

 
0

 
847

 
27,237

 
182

 
(48
)
 
27,371

 
5,881

 
21,490

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
3,223

 
0

 
0

 
3,223

 
2,012

 
1,211

Money market and other funds(2)
1,140

 
0

 
0

 
1,140

 
1,140

 
0

Fixed-income bond funds(3)
219

 
0

 
0

 
219

 
0

 
219

U.S. government agencies
1,367

 
2

 
(3
)
 
1,366

 
0

 
1,366

Foreign government bonds
2,242

 
14

 
(23
)
 
2,233

 
0

 
2,233

Municipal securities
3,812

 
47

 
(4
)
 
3,855

 
0

 
3,855

Corporate debt securities
13,809

 
53

 
(278
)
 
13,584

 
136

 
13,448

Agency mortgage-backed securities
9,680

 
48

 
(57
)
 
9,671

 
0

 
9,671

Asset-backed securities
3,032

 
0

 
(8
)
 
3,024

 
0

 
3,024

 
38,524

 
164

 
(373
)
 
38,315

 
3,288

 
35,027

Total
$
73,141

 
$
346

 
$
(421
)
 
$
73,066

 
$
16,549

 
$
56,517

 
As of June 30, 2016
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
 
(unaudited)
Cash
$
5,561

 
$
0

 
$
0

 
$
5,561

 
$
5,561

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
3,909

 
0

 
0

 
3,909

 
3,909

 
0

U.S. government notes
28,606

 
259

 
0

 
28,865

 
2,091

 
26,774

Marketable equity securities
163

 
47

 
0

 
210

 
0

 
210

 
32,678

 
306

 
0

 
32,984

 
6,000

 
26,984

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
230

 
0

 
0

 
230

 
228

 
2

Money market and other funds(2)
1,521

 
0

 
0

 
1,521

 
1,521

 
0

Mutual funds(4)
214

 
6

 
0

 
220

 
0

 
220

U.S. government agencies
3,360

 
6

 
0

 
3,366

 
250

 
3,116

Foreign government bonds
2,359

 
45

 
(5
)
 
2,399

 
0

 
2,399

Municipal securities
4,491

 
99

 
(3
)
 
4,587

 
61

 
4,526

Corporate debt securities
13,700

 
233

 
(68
)
 
13,865

 
6

 
13,859

Agency mortgage-backed securities
11,016

 
160

 
(5
)
 
11,171

 
0

 
11,171

Asset-backed securities
2,555

 
3

 
(2
)
 
2,556

 
0

 
2,556

 
39,446

 
552

 
(83
)
 
39,915

 
2,066

 
37,849

Total
$
77,685

 
$
858

 
$
(83
)
 
$
78,460

 
$
13,627

 
$
64,833

(1) 
The majority of our time deposits are foreign deposits.
(2) 
The balances as of December 31, 2015 and June 30, 2016 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.
(4) 
The fair value option was elected for mutual funds with gains (losses) recognized in other income (expense), net.

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Alphabet Inc.

We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $104 million and $181 million for the three and six months ended June 30, 2015 and $91 million and $159 million for the three and six months ended June 30, 2016. We recognized gross realized losses of $51 million and $96 million for the three and six months ended June 30, 2015 and $100 million and $335 million for the three and six months ended June 30, 2016. We reflect these gains and losses as a component of other income (expense), 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, unaudited):
 
As of
June 30, 2016
Due in 1 year
$
7,302

Due in 1 year through 5 years
36,934

Due in 5 years through 10 years
8,374

Due after 10 years
11,793

Total
$
64,403

Impairment Considerations for Marketable 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, 2015 and June 30, 2016, 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, 2015
 
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
$
13,757

 
$
(48
)
 
$
0

 
$
0

 
$
13,757

 
$
(48
)
U.S. government agencies
864

 
(3
)
 
0

 
0

 
864

 
(3
)
Foreign government bonds
885

 
(18
)
 
36

 
(5
)
 
921

 
(23
)
Municipal securities
1,116

 
(3
)
 
41

 
(1
)
 
1,157

 
(4
)
Corporate debt securities
9,192

 
(202
)
 
784

 
(76
)
 
9,976

 
(278
)
Agency mortgage-backed securities
5,783

 
(34
)
 
721

 
(23
)
 
6,504

 
(57
)
Asset-backed securities
2,508

 
(7
)
 
386

 
(1
)
 
2,894

 
(8
)
Total
$
34,105

 
$
(315
)
 
$
1,968

 
$
(106
)
 
$
36,073

 
$
(421
)
 
As of June 30, 2016
 
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
$
302

 
$
(1
)
 
$
66

 
$
(4
)
 
$
368

 
$
(5
)
Municipal securities
301

 
(2
)
 
61

 
(1
)
 
362

 
(3
)
Corporate debt securities
1,841

 
(28
)
 
897

 
(40
)
 
2,738

 
(68
)
Agency mortgage-backed securities
660

 
(2
)
 
389

 
(3
)
 
1,049

 
(5
)
Asset-backed securities
0

 
0

 
298

 
(2
)
 
298

 
(2
)
Total
$
3,104

 
$
(33
)
 
$
1,711

 
$
(50
)
 
$
4,815

 
$
(83
)
During the three and six months ended June 30, 2015, we did not recognize any other-than-temporary impairment loss. During the three months ended June 30, 2016, we did not recognize any other-than-temporary impairment loss. During the six months ended June 30, 2016, we recognized $87 million of other-than-temporary impairment losses related to our marketable equity securities. Those losses are included in gains (losses) on marketable securities, net,

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Alphabet Inc.

as a component of other income (expense), net, in the accompanying Consolidated Statements of Income. See Note 8 for further details on other income (expense), net.
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 December 31, 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
U.S. government notes
$
1,322

 
$
31

 
$
0

 
$
306

 
$
1,659

U.S. government agencies
504

 
77

 
0

 
0

 
581

Corporate debt securities
188

 
0

 
0

 
0

 
188

Total
$
2,014

 
$
108

 
$
0

 
$
306

 
$
2,428

Gross amount of recognized liabilities for securities lending in offsetting disclosure
 
$
2,428

Amounts related to agreements not included in securities lending in offsetting disclosure
 
$
0

 
As of June 30, 2016
 
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
$
969

 
$
82

 
$
0

 
$
102

 
$
1,153

U.S. government agencies
564

 
128

 
0

 
0

 
692

Corporate debt securities
220

 
0

 
0

 
0

 
220

Total
$
1,753

 
$
210

 
$
0

 
$
102

 
$
2,065

Gross amount of recognized liabilities for securities lending in offsetting disclosure
 
$
2,065

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 other income (expense), net, revenues, or 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 debt issuances. 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

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Alphabet Inc.

of December 31, 2015 and June 30, 2016, we received cash collateral related to the derivative instruments under our collateral security arrangements of $192 million and $150 million.
Cash Flow Hedges
We use options to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar and at times we use interest rate swaps to effectively lock interest rates on anticipated debt issuances. These transactions are designated as cash flow hedges. The notional principal of these contracts was approximately $16.4 billion and $10.4 billion as of December 31, 2015 and June 30, 2016, respectively. These contracts have maturities of 36 months or less.
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 other income (expense), net. Further, we exclude the change in the time value of the options from our assessment of hedge effectiveness. We record the time value of an option on the date of purchase as an asset. Thereafter, we recognize changes to this time value in other income (expense), net.
As of June 30, 2016, the effective portion of our cash flow hedges before tax effect was $313 million, of which $255 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 the difference between spot rates and forward rates for these forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $1.8 billion and $1.9 billion as of December 31, 2015 and June 30, 2016, respectively.
We have used 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 $295 million and $0 million as of December 31, 2015 and June 30, 2016, respectively.
Gains and losses on these forward contracts and interest rate swaps are recognized in other income (expense), 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 other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of foreign exchange contracts outstanding was $7.5 billion and $6.4 billion as of December 31, 2015 and June 30, 2016, respectively.
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 other income (expense), 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 other income (expense), net. The total notional amounts of interest rate contracts outstanding were $50 million and $0 million as of December 31, 2015 and June 30, 2016, respectively.

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Alphabet Inc.

The fair values of our outstanding derivative instruments were as follows (in millions):
 
 
 
As of December 31, 2015
  
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
 
$
626

 
$
2

 
$
628

Total
 
 
$
626

 
$
2

 
$
628

Derivative Liabilities:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued expenses and other current liabilities
 
$
1

 
$
13

 
$
14

Interest rate contracts
Accrued expenses and other liabilities, current and non-current
 
2

 
0

 
2

Total
 
 
$
3

 
$
13

 
$
16

 
 
 
As of June 30, 2016
  
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
 
$
412

 
$
6

 
$
418

Total
 
 
$
412

 
$
6

 
$
418

Derivative Liabilities:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued expenses and other current liabilities
 
$
0

 
$
2

 
$
2

Total
 
 
$
0

 
$
2

 
$
2

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions, unaudited):
 
Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Derivatives in Cash Flow Hedging Relationship
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
$
(120
)
 
$
155

 
$
716

 
$
188

 

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Alphabet Inc.

 
Gains Reclassified from AOCI into Income (Effective Portion)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives in Cash Flow Hedging Relationship
Income Statement Location
 
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
Revenues
 
$
471

 
$
78

 
$
782

 
$
247

Interest rate contracts
Other income (expense), net
 
1

 
2

 
2

 
3

Total
 
 
$
472

 
$
80

 
$
784

 
$
250

 
Gains (Losses) Recognized in Income on Derivatives (1)
(Amount Excluded from  Effectiveness Testing and Ineffective Portion)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives in Cash Flow Hedging Relationship
Income Statement Location
 
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
Other income (expense), net
 
$
(66
)
 
$
(120
)
 
$
(167
)
 
$
(259
)
 
(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, unaudited):
 
Gains (Losses) Recognized in Income on Derivatives(2)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives in Fair Value Hedging Relationship
Income Statement Location
 
2015
 
2016
 
2015
 
2016
Foreign Exchange Hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other income (expense), net
 
$
(44
)
 
$
53

 
$
67

 
$
25

Hedged item
Other income (expense), net
 
42

 
(53
)
 
(71
)
 
(25
)
Total
 
 
$
(2
)
 
$
0

 
$
(4
)
 
$
0

Interest Rate Hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
Other income (expense), net
 
$
1

 
$
2

 
$
(1
)
 
$
(3
)
Hedged item
Other income (expense), net
 
(1
)
 
(2
)
 
1

 
3

Total
 
 
$
0

 
$
0

 
$
0

 
$
0

(2) 
Losses related to the amount excluded from effectiveness testing of the hedges were $2 million and $4 million for the three and six months ended June 30, 2015, respectively, and $0 million and $0 million for the three and six months ended June 30, 2016, respectively.
The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions, unaudited):
 
Gains (Losses) Recognized in Income on Derivatives
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives Not Designated As Hedging Instruments
Income Statement Location
 
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
Other income (expense), net
 
$
(66
)
 
$
(6
)
 
$
91

 
$
(80
)
Interest rate contracts
Other income (expense), net
 
4

 
(5
)
 
(3
)
 
(13
)
Total
 
 
$
(62
)
 
$
(11
)
 
$
88

 
$
(93
)

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Alphabet Inc.

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, 2015 and June 30, 2016, these offsetting arrangements were as follows (in millions):
Offsetting of Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 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
Derivatives
$
628

 
$
0

 
$
628

 
$
(13
)
(1) 
$
(189
)
 
$
(214
)
 
$
212

Reverse repurchase agreements
1,590

 
0

 
1,590

(2) 
0

 
0

 
(1,590
)
 
0

Total
$
2,218

 
$
0

 
$
2,218

 
$
(13
)
 
$
(189
)
 
$
(1,804
)
 
$
212

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2016
 
 
 
 
 
 
 
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
$
418

 
$
0

 
$
418

 
$
(1
)
(1) 
$
(118
)
 
$
(186
)
 
$
113

Reverse repurchase agreements
2,021

 
0

 
2,021

(2) 
0

 
0

 
(2,021
)
 
0

Total
$
2,439

 
$
0

 
$
2,439

 
$
(1
)
 
$
(118
)
 
$
(2,207
)
 
$
113

(1) 
The balances as of December 31, 2015 and June 30, 2016 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, 2015 and June 30, 2016 included $1,140 million and $1,521 million, respectively, recorded in cash and cash equivalents, and $450 million and $500 million, respectively, recorded in receivable under reverse repurchase agreements.

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Alphabet Inc.

Offsetting of Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 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
Derivatives
$
16

 
$
0

 
$
16

 
$
(13
)
(3) 
$
(3
)
 
$
0

 
$
0

Securities lending agreements
2,428

 
0

 
2,428

 
0

 
0

 
(2,401
)
 
27

Total
$
2,444

 
$
0

 
$
2,444

 
$
(13
)
 
$
(3
)
 
$
(2,401
)
 
$
27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2016
 
 
 
 
 
 
 
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
$
2

 
$
0

 
$
2

 
$
(1
)
(3) 
$
0

 
$
0

 
$
1

Securities lending agreements
2,065

 
0

 
2,065

 
0

 
0

 
(2,037
)
 
28

Total
$
2,067

 
$
0

 
$
2,067

 
$
(1
)
 
$
0

 
$
(2,037
)
 
$
29

(3) 
The balances as of December 31, 2015 and June 30, 2016 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.
Note 3. Non-Marketable Investments
Our non-marketable investments include non-marketable equity investments and non-marketable debt securities.
Non-Marketable Equity Investments
Our non-marketable equity investments are investments we have made in privately-held companies accounted for under the equity or cost method and are not required to be consolidated under the variable interest or voting models. As of December 31, 2015 and June 30, 2016, investments accounted for under the equity method had a carrying value of approximately $1.6 billion and $1.7 billion, respectively. Our share of gains and losses in equity method investments was a net loss of approximately $59 million and $89 million for the three and six months ended June 30, 2015 and $43 million and $148 million for the three and six months ended June 30, 2016. We reflect these losses as a component of other income (expense), net, in the accompanying Consolidated Statements of Income. As of December 31, 2015 and June 30, 2016, investments accounted for under the cost method had a carrying value of $2.6 billion and $3.0 billion, respectively, and a fair value of approximately $7.5 billion and $8.1 billion, respectively. The fair value of the cost method investments are primarily determined from data leveraging private-market transactions and are classified within Level 3 in the fair value hierarchy. We periodically review our non-marketable equity investments for impairment. No material impairments were recognized for the three and six months ended June 30, 2015 and 2016.
Certain renewable energy investments included in our non-marketable equity investments are variable interest entities (VIEs). Our involvement with investments in renewable energy relate to our equity investments in entities whose activities involve power generation. We have determined that the governance structures of these entities do not allow us to direct the activities that would significantly impact the entity's economic performance such as setting operating budgets. Therefore, we do not consolidate these entities in our financial statements because we do not have the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. We account for these investments under the equity method. The carrying value of our renewable energy investments accounted for under the equity method that are VIEs is $1.3 billion with the maximum exposure of $1.3 billion as of December 31, 2015 and $1.3 billion with the maximum exposure of $1.3 billion as of June 30, 2016, respectively.  The maximum exposure is based on current investments to date plus future funding commitments.  We have determined the single source of our exposure to these VIEs is our capital investment in these entities. We periodically reassess whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We

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Alphabet Inc.

also reconsider whether entities previously determined not to be VIEs have become VIEs and vice versa, based on changes in facts and circumstances including changes in contractual arrangements and capital structure.
Non-Marketable Debt Securities
Our non-marketable debt securities are primarily preferred stock that are redeemable at our option and convertible notes issued by private companies. The cost of these securities was $1.0 billion and $1.1 billion as of December 31, 2015 and June 30, 2016, respectively. These debt securities 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 private companies may not be available and consequently we will estimate the value based on the best available information at the measurement date. No material impairments were recognized for the three and six months ended June 30, 2015 and 2016.
The following table presents a reconciliation for our non-marketable debt securities measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions, unaudited):
 
Six Months Ended
 
June 30,
 
2015
 
2016
Beginning balance
$
90

 
$
1,024

Total net gains or losses
 
 
 
Included in other comprehensive income
0

 
90

Purchases
908

 
76

Sales
0

 
(6
)
Settlements
0

 
(14
)
Ending balance
$
998

 
$
1,170

Note 4. Debt
Short-Term Debt
Google had a short-term debt financing program of up to $3.0 billion through the issuance of commercial paper and a $3.0 billion revolving credit facility as of December 31, 2015. In February 2016, we replaced Google's existing debt financing program with a new short-term debt financing program that allows us to issue up to $5.0 billion of commercial paper from time to time and to draw on a $4.0 billion revolving credit facility, which expires in February 2021. Net proceeds from these programs are used for general corporate purposes. As of December 31, 2015 and June 30, 2016, we had $2.0 billion of outstanding commercial paper recorded as short-term debt with weighted-average interest rates of 0.2% and 0.5%, respectively. The interest rate for the credit facility is determined based on a formula using certain market rates. No amounts were outstanding under the credit facility as of December 31, 2015 and June 30, 2016. The estimated fair value of the short-term debt approximated its carrying value as of December 31, 2015 and June 30, 2016.
In August 2013, we entered into a capital lease obligation on certain property which expires in 2028. We intend to exercise the option to purchase the property in the second half of 2016. The effective rate of the capital lease obligation approximates the market rate. The estimated fair value of the capital lease obligation approximated its carrying value as of December 31, 2015 and June 30, 2016.
Long-Term Debt
Google issued $3.0 billion of unsecured senior notes in three tranches (collectively, the "2011 Notes") in May 2011, due in 2014, 2016, and 2021, as well as $1.0 billion of unsecured senior notes (the "2014 Notes") in February 2014 due 2024. The net proceeds from the issuance of the 2011 Notes were used to repay a portion of the outstanding commercial paper and for general corporate purposes. The net proceeds from the issuance of the 2014 Notes were used for the repayment of the portion of the principal amount of our 2011 Notes which matured on May 19, 2014 and for general corporate purposes. We repaid $1.0 billion of the 2011 Notes in May 2016.
In April 2016, we completed an exchange offer with eligible holders of Google’s 3.625% Notes due 2021 and 3.375% Notes due 2024 (collectively, the "Google Notes"). An aggregate principal amount of approximately $1.7 billion of the Google Notes was exchanged for approximately $1.7 billion of the notes of Alphabet with identical interest rate

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Alphabet Inc.

and maturity (the "Alphabet Notes"). Because the exchange was between a parent and the subsidiary company and for substantially identical notes, the change was treated as a debt modification for accounting purposes with no gains or losses recognized. The total outstanding long-term debt is summarized below (in millions):
 
As of
December 31, 2015
 
As of
June 30, 2016
 
 
 
(unaudited)
Short-Term Portion of Long-Term Debt
 
 
 
2.125% Notes due on May 19, 2016
$
1,000

 
$
0

Capital Lease Obligation
225

 
220

Total Short-Term Portion of Long-Term Debt
$
1,225

 
$
220

 
 
 
 
Long-Term Debt
 
 
 
3.625% Notes due on May 19, 2021
$
1,000

 
$
1,000

3.375% Notes due on February 25, 2024
1,000

 
1,000

Unamortized discount for the Notes above
(5
)
 
(16
)
Total Long-Term Debt(1)
$
1,995

 
$
1,984

(1) 
Includes portion of the Google Notes issued in 2011 and 2014 and the Alphabet Notes exchanged in 2016.
The effective interest yields of the outstanding Notes due in 2021 and 2024 were 3.734%, and 3.377%, respectively with interest payable semi-annually. The Alphabet Notes due in 2021 and 2024 rank equally with each other and are structurally subordinated to the Google Notes. We may redeem these Notes at any time in whole or in part at specified redemption prices. The total estimated fair value of all outstanding notes was approximately $3.1 billion as of December 31, 2015 and $2.2 billion as of June 30, 2016. The fair value was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.
Note 5. Balance Sheet Components
Property and Equipment
Property and equipment consisted of the following (in millions):
 
As of
December 31, 2015
 
As of
June 30, 2016
 
 
 
(unaudited)
Land and buildings
$
16,518

 
$
18,770

Information technology assets
13,645

 
14,511

Construction in progress
7,324

 
7,601

Leasehold improvements
2,576

 
2,938

Furniture and fixtures
83

 
84

Property and equipment, gross
40,146

 
43,904

Less: accumulated depreciation and amortization
(11,130
)
 
(12,491
)
Property and equipment, net
$
29,016

 
$
31,413

As of June 30, 2016, assets under capital lease with a cost basis of $484 million and assets held for sale of $515 million were included in property and equipment.

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Alphabet Inc.

Accumulated Other Comprehensive Income (Loss)
The components of AOCI, net of tax, were as follows (in millions, unaudited):
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Unrealized Gains on Cash Flow Hedges
 
Total
Balance as of December 31, 2014
$
(980
)
 
$
421

 
$
586

 
$
27

Other comprehensive income (loss) before reclassifications
(705
)
 
(115
)
 
501

 
(319
)
Amounts reclassified from AOCI
0

 
(77
)
 
(560
)
 
(637
)
Other comprehensive income (loss)
(705
)
 
(192
)
 
(59
)
 
(956
)
Balance as of June 30, 2015
$
(1,685
)
 
$
229

 
$
527

 
$
(929
)
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Unrealized Gains on Cash Flow Hedges
 
Total
Balance as of December 31, 2015
$
(2,047
)
 
$
(86
)
 
$
259

 
$
(1,874
)
Other comprehensive income (loss) before reclassifications
37

 
556

 
116

 
709

Amounts reclassified from AOCI
0

 
183

 
(169
)
 
14

Other comprehensive income (loss)
37

 
739

 
(53
)
 
723

Balance as of June 30, 2016
$
(2,010
)
 
$
653

 
$
206

 
$
(1,151
)
The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited):
 
 
 
 
Gains (Losses) Reclassified from AOCI to the Consolidated Statement of Income
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
June 30,
 
June 30,
 AOCI Components
 
Location
 
2015
 
2016
 
2015
 
2016
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investments
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense), net
 
$
53

 
$
(14
)
 
$
85

 
$
(183
)
 
 
Provision for income taxes
 
(3
)
 
0

 
(8
)
 
0

 
 
Net of tax
 
$
50

 
$
(14
)
 
$
77

 
$
(183
)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains on cash flow hedges
 
 
 
 
 
 
 
 
 
 
   Foreign exchange contracts
 
Revenue
 
$
471

 
$
78

 
$
782

 
$
247

   Interest rate contracts
 
Other income (expense), net
 
1

 
2

 
2

 
3

 
 
Provision for income taxes
 
(143
)
 
(28
)
 
(224
)
 
(81
)
 
 
Net of tax
 
$
329

 
$
52

 
$
560

 
$
169

 
 
 
 
 
 
 
 
 
 
 
Total amount reclassified, net of tax
 
 
 
$
379

 
$
38

 
$
637

 
$