10-Q 1 goog10-qq32016.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 September 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 October 27, 2016, there were 296,087,212 shares of Alphabet’s Class A common stock outstanding, 48,060,629 shares of Alphabet's Class B common stock outstanding, and 345,090,748 Alphabet's Class C capital stock outstanding.




Alphabet Inc.

Alphabet Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2016
TABLE OF CONTENTS
 
 
Page No.
 
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
 
 
 
Item 1
Item 1A
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 expectation 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;
the expected timing and amount of Alphabet Inc.'s stock repurchases;
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," "the company," "we," "us," "our," and similar terms include Alphabet Inc. and its subsidiaries, unless the context indicates otherwise.

1

Alphabet Inc.

"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.

2

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
September 30, 2016
 
 
 
(unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
16,549

 
$
9,406

Marketable securities
56,517

 
73,650

Total cash, cash equivalents, and marketable securities (including securities loaned of $4,531 and $730)
73,066

 
83,056

Accounts receivable, net of allowance of $296 and $398
11,556

 
11,979

Receivable under reverse repurchase agreements
450

 
0

Income taxes receivable, net
1,903

 
416

Inventory
491

 
559

Prepaid revenue share, expenses and other assets
2,648

 
2,536

Total current assets
90,114

 
98,546

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

 
3,276

Non-marketable investments
5,183

 
5,705

Deferred income taxes
251

 
273

Property and equipment, net
29,016

 
32,753

Intangible assets, net
3,847

 
3,367

Goodwill
15,869

 
16,028

Total assets
$
147,461

 
$
159,948

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

 
$
2,175

Short-term debt
3,225

 
0

Accrued compensation and benefits
3,539

 
3,672

Accrued expenses and other current liabilities
4,768

 
4,840

Accrued revenue share
2,329

 
2,542

Securities lending payable
2,428

 
0

Deferred revenue
788

 
923

Income taxes payable, net
302

 
171

Total current liabilities
19,310

 
14,323

Long-term debt
1,995

 
3,938

Deferred revenue, non-current
151

 
169

Income taxes payable, non-current
3,663

 
4,461

Deferred income taxes
189

 
393

Other long-term liabilities
1,822

 
2,561

Total liabilities
27,130

 
25,845

Commitments and contingencies (Note 10)

 

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 689,136 (Class A 295,995, Class B 48,105, Class C 345,036) shares issued and outstanding
32,982

 
35,337

Accumulated other comprehensive loss
(1,874
)
 
(1,032
)
Retained earnings
89,223

 
99,798

Total stockholders’ equity
120,331

 
134,103

Total liabilities and stockholders’ equity
$
147,461

 
$
159,948

See accompanying notes.

3

Alphabet Inc.

Alphabet Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2016
 
2015
 
2016
 
(unaudited)
Revenues
$
18,675

 
$
22,451

 
$
53,660

 
$
64,208

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
7,037

 
8,699

 
19,976

 
24,477

Research and development
3,230

 
3,596

 
8,772

 
10,326

Sales and marketing
2,223

 
2,565

 
6,368

 
7,367

General and administrative
1,477

 
1,824

 
4,564

 
4,961

Total costs and expenses
13,967

 
16,684

 
39,680

 
47,131

Income from operations
4,708

 
5,767

 
13,980

 
17,077

Other income (expense), net
183

 
278

 
471

 
216

Income before income taxes
4,891

 
6,045

 
14,451

 
17,293

Provision for income taxes
912

 
984

 
3,026

 
3,148

Net income
$
3,979

 
$
5,061

 
$
11,425

 
$
14,145

Less: Adjustment Payment to Class C capital stockholders
0

 
0

 
522

 
0

Net income available to all stockholders
$
3,979

 
$
5,061

 
$
10,903

 
$
14,145

 
 
 
 
 
 
 
 
Basic net income per share of Class A and B common stock
$
5.80

 
$
7.36

 
$
15.95

 
$
20.59

Basic net income per share of Class C capital stock
$
5.80

 
$
7.36

 
$
17.47

 
$
20.59

 
 
 
 
 
 
 
 
Diluted net income per share of Class A and B common stock
$
5.73

 
$
7.25

 
$
15.77

 
$
20.26

Diluted net income per share of Class C capital stock
$
5.73

 
$
7.25

 
$
17.27

 
$
20.26

See accompanying notes.

4

Alphabet Inc.

Alphabet Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2016
 
2015
 
2016
 
(unaudited)
Net income
$
3,979

 
$
5,061

 
$
11,425

 
$
14,145

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(145
)
 
129

 
(850
)
 
166

Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
(389
)
 
71

 
(504
)
 
627

Less: reclassification adjustment for net (gains) losses included in net income
4

 
(46
)
 
(73
)
 
137

Net change (net of tax effect of $2, $7, $29, and $191)
(385
)
 
25

 
(577
)
 
764

Cash flow hedges:
 
 
 
 
 
 
 
Change in net unrealized gains
79

 
32

 
580

 
148

Less: reclassification adjustment for net gains included in net income
(212
)
 
(67
)
 
(772
)
 
(236
)
Net change (net of tax effect of $58, $20, $68, and $29)
(133
)
 
(35
)
 
(192
)
 
(88
)
Other comprehensive (loss) income
(663
)
 
119

 
(1,619
)
 
842

Comprehensive income
$
3,316

 
$
5,180

 
$
9,806

 
$
14,987

See accompanying notes.

5

Alphabet Inc.

Alphabet Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine Months Ended
 
September 30,
 
2015
 
2016
 
(unaudited)
Operating activities
 
 
 
Net income
$
11,425

 
$
14,145

Adjustments:
 
 
 
Depreciation and impairment of property and equipment
2,979

 
3,803

Amortization and impairment of intangible assets
680

 
654

Stock-based compensation expense
3,767

 
4,857

Deferred income taxes
(566
)
 
119

Loss on marketable and non-marketable investments, net
32

 
204

Other
157

 
117

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(336
)
 
(299
)
Income taxes, net
1,093

 
2,153

Prepaid revenue share, expenses and other assets
204

 
114

Accounts payable
(168
)
 
238

Accrued expenses and other liabilities
820

 
338

Accrued revenue share
(69
)
 
138

Deferred revenue
(55
)
 
42

Net cash provided by operating activities
19,963

 
26,623

Investing activities
 
 
 
Purchases of property and equipment
(7,848
)
 
(7,134
)
Proceeds from disposals of property and equipment
33

 
226

Purchases of marketable securities
(56,217
)
 
(70,959
)
Maturities and sales of marketable securities
46,860

 
54,379

Purchases of non-marketable investments
(1,771
)
 
(673
)
Cash collateral related to securities lending
488

 
(2,428
)
Investments in reverse repurchase agreements
475

 
450

Acquisitions, net of cash acquired, and purchases of intangible assets
(244
)
 
(324
)
Net cash used in investing activities
(18,224
)
 
(26,463
)
Financing activities
 
 
 
Net payments related to stock-based award activities
(1,610
)
 
(2,425
)
Adjustment Payment to Class C capital stockholders
(47
)
 
0

Repurchases of capital stock
0

 
(3,693
)
Proceeds from issuance of debt, net of costs
10,332

 
8,729

Repayments of debt
(10,341
)
 
(10,051
)
Net cash used in financing activities
(1,666
)
 
(7,440
)
Effect of exchange rate changes on cash and cash equivalents
(352
)
 
137

Net decrease in cash and cash equivalents
(279
)
 
(7,143
)
Cash and cash equivalents at beginning of period
18,347

 
16,549

Cash and cash equivalents at end of period
$
18,068

 
$
9,406

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for income taxes
$
2,543

 
$
934

Cash paid for interest
$
66

 
$
66

See accompanying notes.


6

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 September 30, 2016, the Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2016, the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2016, and the Consolidated Statements of Cash Flows for the nine months ended September 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 September 30, 2016, our results of operations for the three and nine months ended September 30, 2015 and 2016, and our cash flows for the nine months ended September 30, 2015 and 2016. The results of operations for the three and nine months ended September 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:

7

Alphabet Inc.

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
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.
Inventory
Inventory consists primarily of finished goods and is stated at the lower of cost and net realizable value. Cost is computed using the first-in, first-out method.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Accounting Standards Update Topic 605, “Revenue Recognition”, 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. Topic 606 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 in the process of finalizing our accounting policies under Topic 606 and changes to our systems and internal control over financial reporting. We expect to make a determination as to the timing and method of adoption in the fourth quarter of 2016.
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. ASU 2016-01 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2017. The most significant impact relates to the recognition and measurement of equity investments at fair value in the consolidated statement of income. While we continue to evaluate the effect of the standard, we anticipate that the adoption of ASU 2016-01 will increase the volatility of our other income (expense), net resulting from the remeasurement of our equity investments.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842) "Leases". Topic 842 supersedes the lease recognition requirements in Accounting Standards Update Topic 840, "Leases". Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. Topic 842 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.
Revision of Previously Disclosed Information
During the third quarter of 2016, we identified an omission in our supplemental disclosure of cash paid for income taxes in the Consolidated Statements of Cash Flows. We have evaluated the materiality of the impact quantitatively and qualitatively and concluded it was not material to any of the prior periods impacted. We elected to revise the supplemental disclosure for the comparable period presented. The revision only impacted our supplemental disclosures included in the Consolidated Statements of Cash Flows.

8

Alphabet Inc.

Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
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 September 30, 2016 (in millions):
 
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


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Alphabet Inc.

 
As of September 30, 2016
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
 
(unaudited)
Cash
$
5,882

 
$
0

 
$
0

 
$
5,882

 
$
5,882

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
3,043

 
0

 
0

 
3,043

 
3,043

 
0

U.S. government notes
32,525

 
180

 
(15
)
 
32,690

 
300

 
32,390

Marketable equity securities
160

 
115

 
0

 
275

 
0

 
275

 
35,728

 
295

 
(15
)
 
36,008

 
3,343

 
32,665

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
155

 
0

 
0

 
155

 
153

 
2

Mutual funds(4)
214

 
8

 
0

 
222

 
0

 
222

U.S. government agencies
2,774

 
4

 
0

 
2,778

 
0

 
2,778

Foreign government bonds
3,448

 
60

 
(7
)
 
3,501

 
0

 
3,501

Municipal securities
4,625

 
73

 
(8
)
 
4,690

 
23

 
4,667

Corporate debt securities
14,854

 
268

 
(38
)
 
15,084

 
5

 
15,079

Agency mortgage-backed securities
12,464

 
148

 
(7
)
 
12,605

 
0

 
12,605

Asset-backed securities
2,127

 
4

 
0

 
2,131

 
0

 
2,131

 
40,661

 
565

 
(60
)
 
41,166

 
181

 
40,985

Total
$
82,271

 
$
860

 
$
(75
)
 
$
83,056

 
$
9,406

 
$
73,650

(1) 
The majority of our time deposits are foreign deposits.
(2) 
The balance relates 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.
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $54 million and $235 million for the three and nine months ended September 30, 2015 and $62 million and $221 million for the three and nine months ended September 30, 2016. We recognized gross realized losses of $60 million and $156 million for the three and nine months ended September 30, 2015 and $12 million and $347 million for the three and nine months ended September 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
September 30, 2016
Due in 1 year
$
11,205

Due in 1 year through 5 years
37,763

Due in 5 years through 10 years
10,383

Due after 10 years
13,802

Total
$
73,153


10

Alphabet Inc.

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 September 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 September 30, 2016
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(unaudited)
U.S. government notes
$
9,089

 
$
(15
)
 
$
0

 
$
0

 
$
9,089

 
$
(15
)
Foreign government bonds
$
766

 
$
(5
)
 
$
28

 
$
(2
)
 
$
794

 
$
(7
)
Municipal securities
1,743

 
(7
)
 
53

 
(1
)
 
1,796

 
(8
)
Corporate debt securities
2,675

 
(18
)
 
530

 
(20
)
 
3,205

 
(38
)
Agency mortgage-backed securities
2,384

 
(5
)
 
279

 
(2
)
 
2,663

 
(7
)
Total
$
16,657

 
$
(50
)
 
$
890

 
$
(25
)
 
$
17,547

 
$
(75
)
During the three and nine months ended September 30, 2015, we did not recognize any other-than-temporary impairment loss. During the three months ended September 30, 2016, we did not recognize any other-than-temporary impairment loss. During the nine months ended September 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, as a component of other income (expense), net, in the accompanying Consolidated Statements of Income. See Note 9 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.

11

Alphabet Inc.

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 September 30, 2016, there was no cash collateral received for our securities lending transactions.
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 of December 31, 2015 and September 30, 2016, we received cash collateral related to the derivative instruments under our collateral security arrangements of $192 million and $91 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 $6.4 billion as of December 31, 2015 and September 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 September 30, 2016, the effective portion of our cash flow hedges before tax effect was $259 million, of which $214 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 $2.3 billion as of December 31, 2015 and September 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 September 30, 2016, respectively.

12

Alphabet Inc.

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 September 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 $350 million as of December 31, 2015 and September 30, 2016, respectively.
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


13

Alphabet Inc.

 
 
 
As of September 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
 
$
214

 
$
11

 
$
225

Total
 
 
$
214

 
$
11

 
$
225

Derivative Liabilities:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued expenses and other current liabilities
 
$
10

 
$
20

 
$
30

Total
 
 
$
10

 
$
20

 
$
30

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
 
Nine Months Ended
 
September 30,
 
September 30,
Derivatives in Cash Flow Hedging Relationship
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
$
97

 
$
52

 
$
813

 
$
240

 
 
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
 
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
Revenues
 
$
286

 
$
105

 
$
1,068

 
$
352

Interest rate contracts
Other income (expense), net
 
1

 
1

 
3

 
4

Total
 
 
$
287

 
$
106

 
$
1,071

 
$
356

 
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
 
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
Other income (expense), net
 
$
(63
)
 
$
(102
)
 
$
(230
)
 
$
(361
)
 
(1) 
Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented.

14

Alphabet Inc.

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
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
Derivatives in Fair Value Hedging Relationship
Income Statement Location
 
2015
 
2016
 
2015
 
2016
Foreign Exchange Hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other income (expense), net
 
$
72

 
$
1

 
$
139

 
$
26

Hedged item
Other income (expense), net
 
(73
)
 
1

 
(144
)
 
(24
)
Total
 
 
$
(1
)
 
$
2

 
$
(5
)
 
$
2

Interest Rate Hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
Other income (expense), net
 
$
(5
)
 
$
0

 
$
(6
)
 
$
(3
)
Hedged item
Other income (expense), net
 
5

 
0

 
6

 
3

Total
 
 
$
0

 
$
0

 
$
0

 
$
0

(2) 
Amounts excluded from effectiveness testing and the ineffective portion of the fair value hedging relationships were not material in all periods presented.
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
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
Derivatives Not Designated As Hedging Instruments
Income Statement Location
 
2015
 
2016
 
2015
 
2016
Foreign exchange contracts
Other income (expense), net
 
$
150

 
$
(67
)
 
$
241

 
$
(147
)
Interest rate contracts
Other income (expense), net
 
3

 
1

 
0

 
(12
)
Total
 
 
$
153

 
$
(66
)
 
$
241

 
$
(159
)

15

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 September 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 September 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
$
225

 
$
0

 
$
225

 
$
(9
)
(1) 
$
(33
)
 
$
(64
)
 
$
119

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

 
$
0

 
$
30

 
$
(9
)
(3) 
$
0

 
$
0

 
$
21

(3) 
The balances as of December 31, 2015 and September 30, 2016 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.

16

Alphabet Inc.

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 September 30, 2016, investments accounted for under the equity method had a carrying value of approximately $1.6 billion and $1.6 billion, respectively. Our share of gains and losses in equity method investments was a net loss of approximately $35 million and $124 million for the three and nine months ended September 30, 2015 and a net loss of $61 million and $209 million for the three and nine months ended September 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 September 30, 2016, investments accounted for under the cost method had a carrying value of $2.6 billion and $2.9 billion, respectively, and a fair value of approximately $7.5 billion and $8.0 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 nine months ended September 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 September 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 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 September 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 nine months ended September 30, 2015 and 2016.

17

Alphabet Inc.

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):
 
Nine Months Ended
 
September 30,
 
2015
 
2016
Beginning balance
$
90

 
$
1,024

Total net gains or losses
 
 
 
Included in other comprehensive income
0

 
100

Purchases
918

 
78

Sales
(5
)
 
(7
)
Settlements
(12
)
 
(16
)
Ending balance
$
991

 
$
1,179

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 this program with a new short-term debt financing program of up to $5.0 billion of commercial paper and a $4.0 billion revolving credit facility, which expires in February 2021. Net proceeds from these programs are used for general corporate purposes.
We had $2.0 billion of outstanding commercial paper recorded as short-term debt with a weighted-average interest rate of 0.2% as of December 31, 2015 and no commercial paper outstanding as of September 30, 2016. The estimated fair value of the short-term debt approximated its carrying value as of December 31, 2015.
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 September 30, 2016.
In August 2013, we entered into a capital lease obligation on certain property expiring in 2028. In September 2016, we exercised our option to purchase the property for approximately $220 million.
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. 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 2011 Notes due 2021 and 2014 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 Alphabet notes with identical interest rate and maturity. 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.
In August 2016, Alphabet issued $2.0 billion of unsecured senior notes (the "2016 Notes") due 2026. The net proceeds from the issuance of the 2016 Notes were used to repay the outstanding commercial paper and for general corporate purposes. The Alphabet notes due in 2021, 2024, and 2026 rank equally with each other and are structurally subordinated to the outstanding Google Notes.

18

Alphabet Inc.

The total outstanding long-term debt is summarized below (in millions):
 
As of
December 31, 2015
 
As of
September 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

 
0

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

 
$
0

 
 
 
 
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

1.998% Notes due on August 15, 2026
0

 
2,000

Unamortized discount for the Notes above
(5
)
 
(62
)
Total Long-Term Debt(1)
$
1,995

 
$
3,938

(1) 
Includes the outstanding (and unexchanged) Google Notes issued in 2011 and 2014 and the Alphabet notes exchanged in 2016.
The effective interest yields based on proceeds received from the outstanding notes due in 2021, 2024 and 2026 were 3.734%, 3.377% and 2.231% respectively with interest payable semi-annually. 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 $4.2 billion as of September 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
September 30, 2016
 
 
 
(unaudited)
Land and buildings
$
16,518

 
$
19,209

Information technology assets
13,645

 
15,710

Construction in progress
7,324

 
7,790

Leasehold improvements
2,576

 
3,300

Furniture and fixtures
83

 
85

Property and equipment, gross
40,146

 
46,094

Less: accumulated depreciation and amortization
(11,130
)
 
(13,341
)
Property and equipment, net
$
29,016

 
$
32,753

As of September 30, 2016, assets under capital lease with a cost basis of $275 million were included in property and equipment. During the quarter ended September 30, 2016, we exchanged property that was previously classified as held for sale for property and gross cash proceeds of $186 million. These proceeds are included within proceeds from disposals of property and equipment in our Consolidated Statements of Cash Flows.

19

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
(850
)
 
(504
)
 
580

 
(774
)
Amounts reclassified from AOCI
0

 
(73
)
 
(772
)
 
(845
)
Other comprehensive income (loss)
(850
)
 
(577
)
 
(192
)
 
(1,619
)
Balance as of September 30, 2015
$
(1,830
)
 
$
(156
)
 
$
394

 
$
(1,592
)
 
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
166

 
627

 
148

 
941

Amounts reclassified from AOCI
0

 
137

 
(236
)
 
(99
)
Other comprehensive income (loss)
166

 
764

 
(88
)
 
842

Balance as of September 30, 2016
$
(1,881
)
 
$
678

 
$
171

 
$
(1,032
)
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
 
Nine Months Ended
 
 
 
 
September 30,
 
September 30,
 AOCI Components
 
Location
 
2015
 
2016
 
2015
 
2016
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investments
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense), net
 
$
(6
)
 
$
46

 
$
79

 
$
(137
)
 
 
Provision for income taxes
 
2

 
0

 
(6
)
 
0

 
 
Net of tax
 
$
(4
)
 
$
46

 
$
73

 
$
(137
)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains on cash flow hedges
 
 
 
 
 
 
 
 
 
 
   Foreign exchange contracts
 
Revenue
 
$
286

 
$
105

 
$
1,068

 
$
352

   Interest rate contracts
 
Other income (expense), net
 
1

 
1

 
3

 
4

 
 
Provision for income taxes
 
(75
)
 
(39
)
 
(299
)
 
(120
)
 
 
Net of tax
 
$
212

 
$
67

 
$
772

 
$
236

 
 
 
 
 
 
 
 
 
 
 
Total amount reclassified, net of tax
 
 
 
$
208

 
$
113

 
$
845

 
$
99

Note 6. Acquisitions
During the nine months ended September 30, 2016, we completed various acquisitions and purchases of intangible assets for total consideration of approximately $331 million. In aggregate, $9 million was cash acquired, $105 million was attributed to intangible assets, $211 million was attributed to goodwill, and $6 million was attributed to net assets acquired. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in

20

Alphabet Inc.

engineering and other functional areas. The amount of goodwill expected to be deductible for tax purposes is approximately $46 million.
Pro forma results of operations for these acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in aggregate.
For all intangible assets acquired during the nine months ended September 30, 2016, patents and developed technology have a weighted-average useful life of 4.1 years, customer relationships have a weighted-average useful life of 5.3 years, and trade names and other have a weighted-average useful life of 6.4 years.
Apigee
In September 2016, we entered into an agreement to acquire Apigee Corp., a provider of application programming interface (API) management, for approximately $625 million, including amounts to be paid for future employee compensation. We expect the acquisition to accelerate our Google Cloud customers’ move to supporting their businesses with high quality digital interactions. The transaction is subject to customary closing conditions. We expect the transaction to close before the end of 2016.
Note 7. Calico
On September 18, 2013, we announced the formation of Calico, a life science company with a mission to harness advanced technologies to increase our understanding of the biology that controls lifespan. As of September 30, 2016, we have contributed $240 million to Calico in exchange for Calico convertible preferred units and are committed to fund an additional $490 million on an as-needed basis.
Calico is a VIE and its results of operations and statement of financial position are included in our consolidated financial statements as we have the power to direct the activities that most significantly impact its economic performance.
In September 2014, AbbVie Inc. (AbbVie) and Calico announced a research and development collaboration intended to help both companies discover, develop, and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. As of September 30, 2016, AbbVie has contributed $750 million to fund the collaboration pursuant to the agreement, which reflects its total commitment. As of September 30, 2016, Calico has contributed $250 million and committed up to an additional $500 million.
Calico has used its scientific expertise to establish a world-class research and development facility, with a focus on drug discovery and early drug development; and AbbVie provides scientific and clinical development support and its commercial expertise to bring new discoveries to market. Both companies share costs and profits equally. AbbVie's contribution has been recorded as a liability on Calico's financial statements, which is reduced and reflected as a reduction to research and development expense as eligible research and development costs are incurred by Calico over the next few years.
Note 8. Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2016 were as follows (in millions, unaudited):
 
Google
 
Other Bets
 
Total Consolidated
Balance as of December 31, 2015
$
15,456

 
$
413

 
$
15,869

Acquisitions
173

 
38

 
211

Foreign currency translation and other adjustments
(45
)
 
(7
)
 
(52
)
Balance as of September 30, 2016
$
15,584

 
$
444

 
$
16,028


21

Alphabet Inc.

Other Intangible Assets
Information regarding our purchased intangible assets was as follows (in millions):
 
As of December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
Patents and developed technology
$
6,592

 
$
3,213

 
$
3,379

Customer relationships
1,343

 
1,201

 
142

Trade names and other
795

 
469

 
326

Total
$
8,730

 
$
4,883

 
$
3,847

 
 
 
 
 
 
 
As of September 30, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization