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Financial Instruments
 9 Months Ended
Sep. 30, 2017
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, 2016 and September 30, 2017 (in millions):
 
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(2)
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

 
As of September 30, 2017
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
 
(unaudited)
Cash
$
6,460

 
$
0

 
$
0

 
$
6,460

 
$
6,460

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
1,450

 
0

 
0

 
1,450

 
1,450

 
0

U.S. government notes
40,268

 
12

 
(163
)
 
40,117

 
919

 
39,198

Marketable equity securities
226

 
120

 
(2
)
 
344

 
0

 
344

 
41,944

 
132

 
(165
)
 
41,911

 
2,369

 
39,542

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
145

 
0

 
0

 
145

 
143

 
2

Mutual funds(2)
233

 
14

 
0

 
247

 
0

 
247

U.S. government agencies
2,841

 
0

 
(9
)
 
2,832

 
17

 
2,815

Foreign government bonds
2,464

 
8

 
(15
)
 
2,457

 
0

 
2,457

Municipal securities
6,774

 
17

 
(10
)
 
6,781

 
13

 
6,768

Corporate debt securities
23,107

 
49

 
(35
)
 
23,121

 
1,579

 
21,542

Agency mortgage-backed securities
10,984

 
17

 
(76
)
 
10,925

 
0

 
10,925

Asset-backed securities
5,261

 
7

 
(4
)
 
5,264

 
0

 
5,264

 
51,809

 
112

 
(149
)
 
51,772

 
1,752

 
50,020

Total
$
100,213

 
$
244

 
$
(314
)
 
$
100,143

 
$
10,581

 
$
89,562

(1) 
The majority of our time deposits are foreign deposits.
(2) 
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 $62 million and $21 million for the three months ended September 30, 2016 and 2017, respectively, and $221 million and $193 million for the nine months ended September 30, 2016 and 2017, respectively. We recognized gross realized losses of $12 million and $65 million for the three months ended September 30, 2016 and 2017, respectively, and $347 million and $274 million for the nine months ended September 30, 2016 and 2017, respectively. 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, 2017
Due in 1 year
$
22,234

Due in 1 year through 5 years
52,502

Due in 5 years through 10 years
2,172

Due after 10 years
12,063

Total
$
88,971


Impairment Considerations for Marketable Investments
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2016 and September 30, 2017, 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, 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
)
 
As of September 30, 2017
 
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
$
26,626

 
$
(115
)
 
$
5,409

 
$
(48
)
 
$
32,035

 
$
(163
)
U.S. government agencies
2,751

 
(9
)
 
0

 
0

 
2,751

 
(9
)
Foreign government bonds
1,362

 
(13
)
 
123

 
(2
)
 
1,485

 
(15
)
Municipal securities
2,118

 
(6
)
 
432

 
(4
)
 
2,550

 
(10
)
Corporate debt securities
11,153

 
(27
)
 
793

 
(8
)
 
11,946

 
(35
)
Agency mortgage-backed securities
8,450

 
(62
)
 
728

 
(14
)
 
9,178

 
(76
)
Asset-backed securities
2,572

 
(4
)
 
0

 
0

 
2,572

 
(4
)
Marketable equity securities
38

 
(2
)
 
0

 
0

 
38

 
(2
)
Total
$
55,070

 
$
(238
)
 
$
7,485

 
$
(76
)
 
$
62,555

 
$
(314
)

During the three months ended September 30, 2016 and the three and nine months ended September 30, 2017, we did not recognize any other-than-temporary impairment losses. 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 gain (loss) on marketable securities, net, as a component of other income (expense), net, in the accompanying Consolidated Statements of Income. See Note 6 for further details on other income (expense), net.
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 either other income (expense), net, or revenues, or in the accompanying Consolidated Balance Sheets in accumulated other comprehensive income (AOCI), 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, 2016 and September 30, 2017, we received cash collateral related to the derivative instruments under our collateral security arrangements of $362 million and $47 million, respectively.
Cash Flow Hedges
We use foreign currency forwards and option contracts, including collars (an option strategy comprised of a combination of purchased and written options), 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 $10.7 billion and $11.7 billion as of December 31, 2016 and September 30, 2017, respectively. These contracts have maturities of 24 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 are immediately reclassified to other income (expense), net. For foreign currency collars, we include the change in time value in our assessment of hedge effectiveness. For forwards and all other option contracts, we exclude the change in the forward points and time value from our assessment of hedge effectiveness. We recognize changes of the excluded components in other income (expense), net.
As of September 30, 2017, the effective portion of our cash flow hedges before tax effect was a net accumulated loss of $440 million, of which a net loss of $473 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 $2.4 billion and $2.5 billion as of December 31, 2016 and September 30, 2017, respectively.
Gains and losses on these forward contracts are recognized in other income (expense), net, along with the offsetting gains and losses 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 the outstanding foreign exchange contracts was $7.9 billion and $17.2 billion as of December 31, 2016 and September 30, 2017, respectively.
The fair values of our outstanding derivative instruments were as follows (in millions):
 
 
 
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
Other current and non-current assets
 
$
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

Total
 
 
$
4

 
$
9

 
$
13

 
 
 
As of September 30, 2017
  
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
Other current and non-current assets
 
$
53

 
$
113

 
$
166

Total
 
 
$
53

 
$
113

 
$
166

Derivative Liabilities:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued expenses and other liabilities, current and non-current
 
$
459

 
$
123

 
$
582

Total
 
 
$
459

 
$
123

 
$
582


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
2016
 
2017
 
2016
 
2017
Foreign exchange contracts
$
52

 
$
(324
)
 
$
240

 
$
(1,011
)
 
 
Gains (Losses) Reclassified from AOCI into Income (Effective Portion)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
Derivatives in Cash Flow Hedging Relationship
Location
 
2016
 
2017
 
2016
 
2017
Foreign exchange contracts
Revenues
 
$
105

 
$
(191
)
 
$
352

 
$
29

Interest rate contracts
Other income (expense), net
 
1

 
1

 
4

 
4

Total
 
 
$
106

 
$
(190
)
 
$
356

 
$
33

 
Gains (Losses) Recognized in Income on Derivatives
(Amount Excluded from  Effectiveness Testing and Ineffective Portion) (1)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
Derivatives in Cash Flow Hedging Relationship
Location
 
2016
 
2017
 
2016
 
2017
Foreign exchange contracts
Other income (expense), net
 
$
(102
)
 
$
26

 
$
(361
)
 
$
72

 
(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
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
Derivatives in Fair Value Hedging Relationship
Location
 
2016
 
2017
 
2016
 
2017
Foreign Exchange Hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other income (expense), net
 
$
1

 
$
(89
)
 
$
26

 
$
(216
)
Hedged item
Other income (expense), net
 
1

 
94

 
(24
)
 
230

Total
 
 
$
2

 
$
5

 
$
2

 
$
14

(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
Location
 
2016
 
2017
 
2016
 
2017
Foreign exchange contracts
Other income (expense), net
 
$
(67
)
 
$
(39
)
 
$
(147
)
 
$
(263
)
Offsetting of Derivatives
We present our forwards and purchased options at gross fair values in the Consolidated Balance Sheets. For foreign currency collars, we present at net fair values where both purchased and written options are with the same counterparty. Our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2016 and September 30, 2017, information related to these offsetting arrangements were as follows (in millions):
Offsetting of Assets
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2017
 
 
 
 
 
 
 
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
$
183

 
$
(17
)
 
$
166

 
$
(122
)
(1) 
$
(37
)
 
$
0

 
$
7

(1) 
The balances as of December 31, 2016 and September 30, 2017 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.
Offsetting of Liabilities
 
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
)
(2) 
$
0

 
$
0

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2017
 
 
 
 
 
 
 
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
$
599

 
$
(17
)
 
$
582

 
$
(122
)
(2) 
$
0

 
$
0

 
$
460

(2) 
The balances as of December 31, 2016 and September 30, 2017 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.