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Financial Instruments
12 Months Ended
Dec. 31, 2016
Fair Value Disclosures [Abstract]  
Financial Instruments
Financial Instruments
We classify our cash equivalents and marketable securities within Level 1 or Level 2 in the fair value hierarchy 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 in the fair value hierarchy 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 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

 
As of December 31, 2016
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
$
7,078

 
$
0

 
$
0

 
$
7,078

 
$
7,078

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
4,783

 
0

 
0

 
4,783

 
4,783

 
0

U.S. government notes
38,454

 
46

 
(215
)
 
38,285

 
613

 
37,672

Marketable equity securities
160

 
133

 
0

 
293

 
0

 
293

 
43,397

 
179

 
(215
)
 
43,361

 
5,396

 
37,965

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
142

 
0

 
0

 
142

 
140

 
2

Mutual funds(4)
204

 
7

 
0

 
211

 
0

 
211

U.S. government agencies
1,826

 
0

 
(11
)
 
1,815

 
300

 
1,515

Foreign government bonds
2,345

 
18

 
(7
)
 
2,356

 
0

 
2,356

Municipal securities
4,757

 
15

 
(65
)
 
4,707

 
2

 
4,705

Corporate debt securities
12,993

 
114

 
(116
)
 
12,991

 
2

 
12,989

Agency mortgage-backed securities
12,006

 
26

 
(216
)
 
11,816

 
0

 
11,816

Asset-backed securities
1,855

 
2

 
(1
)
 
1,856

 
0

 
1,856

 
36,128

 
182

 
(416
)
 
35,894

 
444

 
35,450

Total
$
86,603

 
$
361

 
$
(631
)
 
$
86,333

 
$
12,918

 
$
73,415

(1) 
The majority of our time deposits are foreign deposits.
(2) 
The balance 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.
We determine realized gains or losses on the marketable securities on a specific identification method. We recognized gross realized gains of $238 million, $357 million, and $272 million for the years ended December 31, 2014, 2015, and 2016. We recognized gross realized losses of $85 million, $565 million, and $482 million for the years ended December 31, 2014, 2015, and 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):
 
As of December 31, 2016
Due in 1 year
$
13,066

Due in 1 year through 5 years
38,762

Due in 5 years through 10 years
8,382

Due after 10 years
12,701

Total
$
72,911


The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2015 and 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 December 31, 2016
 
 
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
 
$
26,411

 
$
(215
)
 
$
0

 
$
0

 
$
26,411

 
$
(215
)
U.S. government agencies
 
1,014

 
(11
)
 
0

 
0

 
1,014

 
(11
)
Foreign government bonds
 
956

 
(7
)
 
0

 
0

 
956

 
(7
)
Municipal securities
 
3,461

 
(63
)
 
46

 
(2
)
 
3,507

 
(65
)
Corporate debt securities
 
6,184

 
(111
)
 
166

 
(5
)
 
6,350

 
(116
)
Agency mortgage-backed securities
 
10,184

 
(206
)
 
259

 
(10
)
 
10,443

 
(216
)
Asset-backed securities
 
391

 
(1
)
 
0

 
0

 
391

 
(1
)
Total
 
$
48,601

 
$
(614
)
 
$
471

 
$
(17
)
 
$
49,072

 
$
(631
)

During the years ended December 31, 2014 and 2016, we did not recognize any other-than-temporary impairment loss. During the year ended December 31, 2015, we recognized $281 million of other-than-temporary impairment losses related to our marketable equity securities and fixed-income bond funds. Those losses are included in gain (loss) on marketable securities, net as a component of other income (expense), net, in the accompanying Consolidated Statements of Income. See Note 5 for further details on other income (expense), net.
Securities Lending Program
We entered into securities lending agreements with financial institutions to enhance investment income. We loaned certain securities which were collateralized in the form of cash or securities. Cash collateral was usually invested in reverse repurchase agreements which were collateralized in the form of securities.
We classified loaned securities as cash equivalents or marketable securities and recorded the cash collateral as an asset with a corresponding liability in the accompanying Consolidated Balance Sheets. We classified 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 did 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 December 31, 2016, we ended our securities lending program resulting in no cash collateral outstanding.
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 2016, we received cash collateral related to the derivative instruments under our collateral security arrangements of $192 million and $362 million.
Cash Flow Hedges
We use foreign currency option and forward contracts designated as cash flow hedges 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 $10.7 billion as of December 31, 2015 and 2016. These contracts have maturities of 36 months or less.
We reflect gain or loss 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 is immediately reclassified to other income (expense), net. Further, we exclude the change in the time value and forward points of foreign currency options and forward contracts from our assessment of hedge effectiveness. We recognize changes of the excluded components in other income (expense), net.
As of December 31, 2016, the effective portion of our cash flow hedges before tax effect was a net accumulated gain of $603 million, of which $567 million is expected to be reclassified from AOCI into earnings within the next 12 months.
Fair Value Hedges
We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. We exclude changes in forward points for the forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $1.8 billion and $2.4 billion as of December 31, 2015 and 2016.
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 2016.
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.
Other Derivatives
Other derivatives not designated as hedging instruments consist of foreign currency 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 these foreign exchange contracts outstanding was $7.5 billion and $7.9 billion as of December 31, 2015 and 2016.
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 2016.
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 liabilities, current and non-current
 
$
1

 
$
13

 
$
14

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

 
0

 
2

Total
 
 
 
$
3

 
$
13

 
$
16

 
 
 
 
As of December 31, 2016
  
 
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
 
$
539

 
$
57

 
$
596

Total
 
 
 
$
539

 
$
57

 
$
596

Derivative Liabilities:
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Accrued expenses and other liabilities, current and non-current
 
$
4

 
$
9

 
$
13

Interest rate contracts
 
Accrued expenses and other liabilities, current and non-current
 
0

 
0

 
0

Total
 
 
 
$
4

 
$
9

 
$
13


The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions):
 
 
Gains (Losses) Recognized in OCI
on Derivatives Before Tax Effect (Effective Portion)
 
 
Year Ended December 31,
Derivatives in Cash Flow Hedging Relationship
 
2014
 
2015
 
2016
Foreign exchange contracts
 
$
929

 
$
964

 
$
773

Interest rate contracts
 
(31
)
 
0

 
0

Total
 
$
898

 
$
964

 
$
773

 
 
 
Gains (Losses) Reclassified from AOCI into Income (Effective Portion)
 
 
 
 
Year Ended December 31,
Derivatives in Cash Flow Hedging Relationship
 
Location
 
2014
 
2015
 
2016
Foreign exchange contracts
 
Revenues
 
$
171

 
$
1,399

 
$
539

Interest rate contracts
 
Other income (expense), net
 
4

 
5

 
5

Total
 
 
 
$
175

 
$
1,404

 
$
544

 
 
Gains (Losses) Recognized in Income on Derivatives (Amount
Excluded from  Effectiveness Testing and Ineffective Portion) (1)
 
 
 
 
Year Ended December 31,
Derivatives in Cash Flow Hedging Relationship
 
Location
 
2014
 
2015
 
2016
Foreign exchange contracts
 
Other income (expense), net
 
$
(279
)
 
$
(297
)
 
$
(381
)
Interest rate contracts
 
Other income (expense), net
 
4

 
0

 
0

Total
 
 
 
$
(275
)
 
$
(297
)
 
$
(381
)
(1) 
Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented.
The effect of derivative instruments in fair value hedging relationships on income is summarized below (in millions):
 
 
Gains (Losses) Recognized in Income on Derivatives(2)
 
 
 
 
Year Ended December 31,
Derivatives in Fair Value Hedging Relationship
 
Location
 
2014
 
2015
 
2016
Foreign Exchange Hedges:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Other income (expense), net
 
$
115

 
$
170

 
$
145

Hedged item
 
Other income (expense), net
 
(123
)
 
(176
)
 
(139
)
Total
 
 
 
$
(8
)
 
$
(6
)
 
$
6

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

 
$
(2
)
 
$
(3
)
Hedged item
 
Other income (expense), net
 
0

 
2

 
3

Total
 
 
 
$
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):
 
 
Gains (Losses) Recognized in Income on Derivatives
 
 
 
 
Year Ended December 31,
Derivatives Not Designated As Hedging Instruments
 
Location
 
2014
 
2015
 
2016
Foreign exchange contracts
 
Other income (expense), net, and net income from discontinued operations
 
$
237

 
$
198

 
$
130

Interest rate contracts
 
Other income (expense), net
 
2

 
1

 
(11
)
Total
 
 
 
$
239

 
$
199

 
$
119

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 2016, information related to these offsetting arrangements was 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 December 31, 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
Derivatives
$
596

 
$
0

 
$
596

 
$
(11
)
(1) 
$
(337
)
 
$
(73
)
 
$
175

(1) 
The balances as of December 31, 2015 and 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 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 December 31, 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
Derivatives
$
13

 
$
0

 
$
13

 
$
(11
)
(3) 
$
0

 
$
0

 
$
2

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