UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________________

FORM 10-Q

________________________________________________________________________________________

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

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 website, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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	¨
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No ý

As of July 18, 2018, there were 298,914,199 shares of Alphabet’s Class A common stock outstanding, 46,880,076 shares of Alphabet's Class B common stock outstanding, and 349,883,498 shares of Alphabet's Class C capital stock outstanding.

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Alphabet Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2018

TABLE OF CONTENTS

		Page No.
Note About Forward-Looking Statements		1
PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)	3
	Consolidated Balance Sheets - December 31, 2017 and June 30, 2018	3
	Consolidated Statements of Income - Three and Six Months Ended June 30, 2017 and 2018	4
	Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2017 and 2018	5
	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2017 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4	Controls and Procedures	47
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	48
Item 1A	Risk Factors	48
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6	Exhibits	49
	Signature	50

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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, services 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, underlying business trends such as 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 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 our revenue growth, as well as the change in paid clicks and cost-per-click on Google properties and the change in impressions and cost-per-impression on Google Network Members’ properties, 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;

• the anticipated effect of, and our response to, new accounting pronouncements;

• 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 monetization trends will fluctuate, which could affect our revenues and margins in the future;

• our expectation that our traffic acquisition costs (TAC) and the associated TAC rates will increase in the future;

• our expectation that our results will be affected by our performance in international markets as users in developing economies increasingly come online;

• our expectation that the portion of our revenues that we derive from non-advertising revenues will continue to increase and may affect margins;

• our expectation that our other income (expense), 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 effect of the U.S. Tax Cuts and Jobs Act (Tax Act);

• 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 operating structure implemented pursuant to the Alphabet holding company reorganization;

• the expected timing and amount of Alphabet Inc.'s share 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, the following sections: 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 fiscal year ended December 31, 2017, as may be 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 fiscal year ended December 31, 2017, 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

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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.

"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.

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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 per share amounts)

	As of December 31, 2017			As of June 30, 2018
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	10,715		$	14,148
Marketable securities	91,156			88,106
Total cash, cash equivalents, and marketable securities	101,871			102,254
Accounts receivable, net of allowance of $674 and $630	18,336			17,043
Income taxes receivable, net	369			201
Inventory	749			698
Other current assets	2,983			3,961
Total current assets	124,308			124,157
Non-marketable investments	7,813			11,487
Deferred income taxes	680			685
Property and equipment, net	42,383			51,672
Intangible assets, net	2,692			2,662
Goodwill	16,747			17,895
Other non-current assets	2,672			3,052
Total assets	$	197,295		$	211,610
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,137		$	3,369
Accrued compensation and benefits	4,581			4,642
Accrued expenses and other current liabilities	10,177			15,261
Accrued revenue share	3,975			3,728
Deferred revenue	1,432			1,714
Income taxes payable, net	881			1,189
Total current liabilities	24,183			29,903
Long-term debt	3,969			3,981
Deferred revenue, non-current	340			358
Income taxes payable, non-current	12,812			11,652
Deferred income taxes	430			479
Other long-term liabilities	3,059			3,237
Total liabilities	44,793			49,610
Commitments and Contingencies (Note 9)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding	0			0
Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 694,783 (Class A 298,470, Class B 46,972, Class C 349,341) and 695,946 (Class A 298,895, Class B 46,891, Class C 350,160) shares issued and outstanding	40,247			42,243
Accumulated other comprehensive loss	(992		)	(1,525		)
Retained earnings	113,247			121,282
Total stockholders’ equity	152,502			162,000
Total liabilities and stockholders’ equity	$	197,295		$	211,610

See accompanying notes.

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share amounts; unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2018		2017		2018
Revenues	$	26,010	$	32,657	$	50,760	$	63,803
Costs and expenses:
Cost of revenues	10,373		13,883		20,168		27,350
Research and development	4,172		5,114		8,114		10,153
Sales and marketing	2,897		3,780		5,541		7,384
General and administrative	1,700		2,002		3,501		4,037
European Commission fines	2,736		5,071		2,736		5,071
Total costs and expenses	21,878		29,850		40,060		53,995
Income from operations	4,132		2,807		10,700		9,808
Other income (expense), net	245		1,408		496		4,950
Income before income taxes	4,377		4,215		11,196		14,758
Provision for income taxes	853		1,020		2,246		2,162
Net income	$	3,524	$	3,195	$	8,950	$	12,596
Basic net income per share of Class A and B common stock and Class C capital stock	$	5.09	$	4.60	$	12.94	$	18.13
Diluted net income per share of Class A and B common stock and Class C capital stock	$	5.01	$	4.54	$	12.74	$	17.89

See accompanying notes.

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions; unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2018			2017			2018
Net income	$	3,524		$	3,195		$	8,950		$	12,596
Other comprehensive income (loss):
Change in foreign currency translation adjustment	565			(1,142		)	1,016			(485		)
Available-for-sale investments:
Change in net unrealized gains (losses)	86			(148		)	225			(356		)
Less: reclassification adjustment for net (gains) losses included in net income	26			(6		)	51			33
Net change (net of tax effect of $0, $60, $0, and $60)	112			(154		)	276			(323		)
Cash flow hedges:
Change in net unrealized gains (losses)	(230		)	363			(459		)	101
Less: reclassification adjustment for net (gains) losses included in net income	(6		)	78			(159		)	272
Net change (net of tax effect of $143, $109, $292, and $97)	(236		)	441			(618		)	373
Other comprehensive income (loss)	441			(855		)	674			(435		)
Comprehensive income	$	3,965		$	2,340		$	9,624		$	12,161

See accompanying notes.

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions; unaudited)

	Six Months Ended
	June 30,
	2017			2018
Operating activities
Net income	$	8,950		$	12,596
Adjustments:
Depreciation and impairment of property and equipment	2,711			3,653
Amortization and impairment of intangible assets	417			447
Stock-based compensation expense	4,012			4,870
Deferred income taxes	538			(157		)
(Gain) loss on debt and equity securities, net	22			(4,060		)
Other	96			(120		)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	431			1,388
Income taxes, net	(1,779		)	(656		)
Other assets	(454		)	(756		)
Accounts payable	119			(23		)
Accrued expenses and other liabilities	1,687			4,600
Accrued revenue share	6			(303		)
Deferred revenue	195			295
Net cash provided by operating activities	16,951			21,774
Investing activities
Purchases of property and equipment	(5,339		)	(12,776		)
Proceeds from disposals of property and equipment	54			49
Purchases of marketable securities	(39,676		)	(23,041		)
Maturities and sales of marketable securities	34,238			25,523
Purchases of non-marketable investments	(694		)	(732		)
Maturities and sales of non-marketable investments	118			1,191
Acquisitions, net of cash acquired, and purchases of intangible assets	(143		)	(1,434		)
Proceeds from collection of notes receivable	1,419			0
Net cash used in investing activities	(10,023		)	(11,220		)
Financing activities
Net payments related to stock-based award activities	(2,093		)	(2,699		)
Repurchases of capital stock	(2,745		)	(4,225		)
Proceeds from issuance of debt, net of costs	0			6,236
Repayments of debt	(56		)	(6,267		)
Proceeds from sale of subsidiary shares	480			0
Net cash used in financing activities	(4,414		)	(6,955		)
Effect of exchange rate changes on cash and cash equivalents	279			(166		)
Net increase in cash and cash equivalents	2,793			3,433
Cash and cash equivalents at beginning of period	12,918			10,715
Cash and cash equivalents at end of period	$	15,711		$	14,148

See accompanying notes.

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Alphabet Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Google was incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. In 2015, we implemented a holding company reorganization, and as a result, Alphabet Inc. (Alphabet) became the successor issuer to Google.

We generate revenues primarily by delivering relevant, cost-effective online advertising.

Basis of Consolidation

The consolidated financial statements of Alphabet include the accounts of Alphabet and entities consolidated under the variable interest and voting models. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The Consolidated Balance Sheets as of June 30, 2018, the Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2018, the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2018, and the Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2018 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of June 30, 2018, our results of operations for the three and six months ended June 30, 2017 and 2018, and our cash flows for the six months ended June 30, 2017 and 2018. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018.

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 5, 2018.

Use of Estimates

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, 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 assumptions, both historical and forward looking, 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 liabilities that are measured at fair value on a recurring basis include cash equivalents, marketable securities, derivative contracts, and non-marketable debt securities. Our financial assets that are measured at fair value on a nonrecurring basis include non-marketable equity securities measured at fair value when observable price changes are identified or are impaired. Other financial assets and liabilities are carried at cost with fair value disclosed, if required.

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:

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

Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable,

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these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.

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

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

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02 (Topic 842) "Leases." Topic 842 supersedes the lease requirements in Accounting Standards Codification (ASC) 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. As currently issued, 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. There are additional optional practical expedients that an entity may elect to apply. Based on our current portfolio of leases, approximately $8 billion of lease assets and liabilities would be recognized on our balance sheet, primarily relating to real estate. We are in the process of implementing changes to our systems and processes in conjunction with our review of lease agreements. We will adopt Topic 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients.

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 model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier 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 effect of the adoption of ASU 2016-13 on our consolidated financial statements.

Recently adopted accounting pronouncements

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," which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. We adopted ASU 2016-01 as of January 1, 2018 using the modified retrospective method for our marketable equity securities and the prospective method for our non-marketable equity securities. This resulted in a $98 million reclassification of net unrealized gains from accumulated other comprehensive income (AOCI) to opening retained earnings. We have elected to use the measurement alternative for our non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. The adoption of ASU 2016-01 increases the volatility of our other income (expense), net, as a result of the remeasurement of our equity securities. For further information on unrealized gains from equity securities, see Note 3.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16 (ASU 2016-16) "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory." ASU 2016-16 generally accelerates the recognition of income tax consequences for asset transfers between entities under common control. We adopted ASU 2016-16 as of January 1, 2018 using a modified retrospective transition method, resulting in a $701 million reclassification of unrecognized income tax effects related to asset transfers that occurred prior to adoption from other current and non-current assets to opening retained earnings.

Prior Period Reclassifications

Certain amounts in prior periods have been reclassified to conform with current period presentation.

Note 2. Revenues

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

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The following table presents our revenues disaggregated by revenue source (in millions, unaudited). Sales and usage-based taxes are excluded from revenues.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2018		2017		2018
Google properties	$	18,425	$	23,262	$	35,828	$	45,260
Google Network Members' properties	4,247		4,825		8,255		9,469
Google advertising revenues	22,672		28,087		44,083		54,729
Google other revenues	3,241		4,425		6,448		8,779
Other Bets revenues	97		145		229		295
Total revenues(1)	$	26,010	$	32,657	$	50,760	$	63,803

⁽¹⁾  Revenues include hedging gains (losses) of $3 million and $(103) million for the three months ended June 30, 2017 and 2018, respectively, and $220 million and $(342) million for the six months endedJune 30, 2017 and 2018, respectively, which do not represent revenues recognized from contracts with customers.

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers (in millions, unaudited):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2018		2017		2018
United States	$	12,322	$	14,933	$	24,091	$	29,077
EMEA(1)	8,545		10,785		16,636		21,259
APAC(1)	3,730		5,090		7,349		9,894
Other Americas(1)	1,413		1,849		2,684		3,573
Total revenues(2)	$	26,010	$	32,657	$	50,760	$	63,803

⁽¹⁾  Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America (Other Americas).

⁽²⁾  Revenues include hedging gains (losses) for the three and six months ended June 30, 2017 and 2018.

Advertising Revenues

We generate revenues primarily by delivering advertising on Google properties and Google Network Members’ properties.

Google properties revenues consist primarily of advertising revenues generated on Google.com, the Google Search app, and other Google owned and operated properties like Gmail, Google Maps, Google Play, and YouTube.

Google Network Members’ properties revenues consist primarily of advertising revenues generated on Google Network Members’ properties.

Our customers generally purchase advertising inventory through AdWords, DoubleClick AdExchange, and DoubleClick Bid Manager, among others.

We offer advertising on a cost-per-click basis, which means that an advertiser pays us only when a user clicks on an ad on Google properties or Google Network Members' properties or when a user views certain YouTube engagement ads. For these customers, we recognize revenue each time a user clicks on the ad or when a user views the ad for a specified period of time.

We also offer advertising on other bases such as cost-per-impression, which means an advertiser pays us based on the number of times their ads are displayed on Google properties or Google Network Members’ properties. For these customers, we recognize revenue each time an ad is displayed.

Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.

For ads placed on Google Network Members’ properties, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, we report advertising revenues for ads placed on Google Network Members’ properties on a gross basis, that is, the amounts billed to our customers

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are recorded as revenues, and amounts paid to Google Network Members are recorded as cost of revenues. Where we are the principal, we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory before it is transferred to our customers, and is further supported by us being primarily responsible to our customers and having a level of discretion in establishing pricing.

Other Revenues

Google other revenues and Other Bets revenues consist primarily of revenues from:

• Apps, in-app purchases, and digital content in the Google Play store;

• Google Cloud offerings;

• Hardware; and

• Other miscellaneous products and services.

As it relates to Google other revenues, the most significant judgment is determining whether we are the principal or agent for app sales and in-app purchases through the Google Play store. We report revenues from these transactions on a net basis because our performance obligation is to facilitate a transaction between app developers and end users, for which we earn a commission. Consequently, the portion of the gross amount billed to end users that is remitted to app developers is not reflected as revenues.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin.

Deferred Revenues

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The increase in the deferred revenue balance for the six months endedJune 30, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $1.0 billion of revenues recognized that were included in the deferred revenue balance as of December 31, 2017.

Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Note 3. Financial Instruments

Debt Securities

We classify our marketable debt securities within Level 2 in the fair value hierarchy because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine fair value. We reclassified our U.S. government notes included in marketable debt securities from Level 1 to Level 2 within the fair value hierarchy as these securities are priced based on a combination of quoted prices for identical or similar instruments in active markets and models with significant observable market inputs. Prior period amounts have been reclassified to conform with current period presentation. The vast majority of our government bond holdings are highly liquid U.S. government notes.

We classify our non-marketable debt securities within Level 3 in the fair value hierarchy because they are primarily preferred stock and convertible notes issued by private companies without quoted market prices. To estimate the fair value of our non-marketable debt 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 fair value based on the best available information at the measurement date.

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The following tables summarize our debt securities by significant investment categories as of December 31, 2017 and June 30, 2018 (in millions):

	As of December 31, 2017
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities		Non-Marketable Securities
Level 2:
Time deposits(1)	$	359	$	0	$	0		$	359	$	357	$	2	$	0
Government bonds(2)	51,548		10		(406		)	51,152		1,241		49,911		0
Corporate debt securities	24,269		21		(135		)	24,155		126		24,029		0
Mortgage-backed and asset-backed securities	16,789		13		(180		)	16,622		0		16,622		0
	92,965		44		(721		)	92,288		1,724		90,564		0
Level 3:
Non-marketable debt securities	1,083		811		0			1,894		0		0		1,894
Total	$	94,048	$	855	$	(721	)	$	94,182	$	1,724	$	90,564	$	1,894

	As of June 30, 2018
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities		Non-Marketable Securities
	(unaudited)
Level 2:
Time deposits(1)	$	252	$	0	$	0		$	252	$	251	$	1	$	0
Government bonds(2)	48,567		11		(575		)	48,003		783		47,220		0
Corporate debt securities	24,490		10		(383		)	24,117		21		24,096		0
Mortgage-backed and asset-backed securities	15,746		3		(398		)	15,351		12		15,339		0
	89,055		24		(1,356		)	87,723		1,067		86,656		0
Level 3:
Non-marketable debt securities	1,026		1,184		0			2,210		0		0		2,210
Total	$	90,081	$	1,208	$	(1,356	)	$	89,933	$	1,067	$	86,656	$	2,210

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

⁽²⁾  Government bonds are comprised primarily of U.S. government notes, and also includes U.S. government agencies, foreign government bonds, and municipal securities. 

We determine realized gains or losses on the sale of debt securities on a specific identification method. We recognized gross realized gains of $17 million and $37 million for the three months ended June 30, 2017 and 2018, respectively, and $162 million and $39 million for the six months ended June 30, 2017 and 2018, respectively. We recognized gross realized losses of $43 million and $31 million for the three months ended June 30, 2017 and 2018, respectively, and $213 million and $72 million for the six months ended June 30, 2017 and 2018, respectively. We reflect these gains and losses as a component of other income (expense), net, in the Consolidated Statements of Income.

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

	As of June 30, 2018
Due in 1 year	$	15,357
Due in 1 year through 5 years	57,525
Due in 5 years through 10 years	2,429
Due after 10 years	11,345
Total	$	86,656

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2017 and June 30, 2018, 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, 2017
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Government bonds(1)	$	28,836	$	(211	)	$	17,660	$	(195	)	$	46,496	$	(406	)
Corporate debt securities	18,300		(114		)	1,710		(21		)	20,010		(135		)
Mortgage-backed and asset-backed securities	11,061		(105		)	3,449		(75		)	14,510		(180		)
Total	$	58,197	$	(430	)	$	22,819	$	(291	)	$	81,016	$	(721	)

	As of June 30, 2018
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(unaudited)
Government bonds(1)	$	32,284	$	(414	)	$	8,144	$	(161	)	$	40,428	$	(575	)
Corporate debt securities	19,955		(357		)	1,153		(26		)	21,108		(383		)
Mortgage-backed and asset-backed securities	11,139		(282		)	2,742		(116		)	13,881		(398		)
Total	$	63,378	$	(1,053	)	$	12,039	$	(303	)	$	75,417	$	(1,356	)

⁽¹⁾  Government bonds are comprised primarily of U.S. government notes, and also includes U.S. government agencies, foreign government bonds and municipal securities. 

During the three and six months ended June 30, 2017 and 2018, we did not recognize any significant other-than-temporary impairment losses. Losses on impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 6 for further details on other income (expense), net.

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The following table presents a reconciliation for our non-marketable debt securities measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions, unaudited):

	Six Months Ended
	June 30,
	2017			2018
Beginning balance	$	1,165		$	1,894
Total net gains (losses)
Included in earnings	(5		)	10
Included in other comprehensive income	126			395
Purchases	70			12
Sales	(1		)	(41		)
Settlements	(3		)	(60		)
Ending balance	$	1,352		$	2,210

Equity Investments

The following discusses our marketable equity securities, non-marketable equity securities, realized and unrealized gains and losses on marketable and non-marketable equity securities, as well as our equity method investments.

Marketable equity securities

Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.

Prior to January 1, 2018, we accounted for the majority of our marketable equity securities at fair value with unrealized gains and losses recognized in accumulated other comprehensive income on the balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized in other income (expense), net.

On January 1, 2018, we adopted ASU 2016-01. Our marketable equity securities are measured at fair value. Starting January 1, 2018, unrealized gains and losses are recognized in other income (expense), net. Upon adoption, we reclassified $98 millionnet unrealized gains related to marketable equity securities from accumulated other comprehensive income to opening retained earnings.

The following table summarizes marketable equity securities measured at fair value by significant investment categories as of December 31, 2017 and June 30, 2018 (in millions):

	As of December 31, 2017
	Cash and Cash Equivalents		Marketable Securities
Level 1:
Money market funds	$	1,833	$	0
Marketable equity securities	0		340
	1,833		340
Level 2:
Mutual funds(1)	0		252
Total	$	1,833	$	592

⁽¹⁾  The fair value option was elected for mutual funds with gains (losses) recognized in other income (expense), net.

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	As of June 30, 2018
	(unaudited)
	Cash and Cash Equivalents		Marketable Securities
Level 1:
Money market funds	$	3,698	$	0
Marketable equity securities	0		1,211
	3,698		1,211
Level 2:
Mutual funds	0		239
Total	$	3,698	$	1,450

Non-marketable equity securities

Our non-marketable equity securities are investments in privately held companies without readily determinable market values.

Prior to January 1, 2018, we accounted for our non-marketable equity securities at cost less impairment. Realized gains and losses on non-marketable securities sold or impaired were recognized in other income (expense), net. As of December 31, 2017, non-marketable equity securities accounted for under the cost method had a carrying value of $4.5 billion and a fair value of approximately $8.8 billion.

On January 1, 2018, we adopted ASU 2016-01 which changed the way we account for non-marketable securities. The carrying value of our non-marketable equity securities is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. Because we adopted ASU 2016-01 prospectively, we recognize unrealized gains that occurred in prior periods in the first period after January 1, 2018 when there is an observable transaction for our securities. Non-marketable equity securities remeasured during the six months ended June 30, 2018 are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods using the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold.

The following is a summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to the carrying value of non-marketable equity securities held as of June 30, 2018 (in millions, unaudited):

	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018
Upward adjustments	$	572		$	3,080
Downward adjustments (including impairment)	(81		)	(104		)
Total unrealized gain (loss) for non-marketable equity securities	$	491		$	2,976

The following table summarizes the total carrying value of our non-marketable equity securities held as of June 30, 2018 including cumulative unrealized upward and downward adjustments made to the initial cost basis of the securities (in millions, unaudited):

Initial cost basis	$	4,952
Upward adjustments	3,080
Downward adjustments (including impairment)	(104		)
Total carrying value at the end of the period	$	7,928

During the three months ended June 30, 2018, included in the $7.9 billion of non-marketable equity securities, $1.6 billion were measured at fair value based on observable market transactions, resulting in a net unrealized gain of $491 million.

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Gains and losses on marketable and non-marketable equity securities

Realized and unrealized gains and losses for our marketable and non-marketable equity securities for the three and six months ended June 30, 2018 are summarized below (in millions, unaudited):

	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Realized gain (loss) for equity securities sold during the period	$	515	$	900
Unrealized gain (loss) on equity securities held as of the end of the period(1)	547		3,193
Total gain (loss) recognized in other income (expense), net	$	1,062	$	4,093

⁽¹⁾  Includes $491 million and $2,976 million related to non-marketable equity securities for the three and six months ended June 30, 2018, respectively.

Investments accounted for under the Equity Method

As of December 31, 2017 and June 30, 2018, investments accounted for under the equity method had a carrying value of approximately $1.4 billion and $1.3 billion, respectively. Our share of gains and losses in equity method investments including impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 6 for further details on other income (expense), net.

Derivative Financial Instruments

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.

We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the Consolidated Statements of Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in AOCI, as discussed below. As a result of our adoption of Accounting Standard Update No. 2017-12 (ASU 2017-12) "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," the components excluded from the assessment of hedge effectiveness are recognized in the same income statement line as the hedged item beginning January 1, 2018.

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 also use 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, 2017 and June 30, 2018, we received cash collateral related to the derivative instruments under our collateral security arrangements of $15 million and $443 million, respectively, which was included in other current assets.

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. The notional principal of these contracts was approximately $11.7 billion and $11.8 billion as of December 31, 2017 and June 30, 2018, respectively. These contracts have maturities of 24 months or less.

For forwards and option contracts, we exclude the change in the forward points and time value from our assessment of hedge effectiveness. The initial value of the excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI. We reflect the gains or losses of a cash flow hedge included in our hedge effective assessment as a component of AOCI and subsequently reclassify these gains and losses to revenues 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.

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As of June 30, 2018, the net gain or loss of our foreign currency cash flow hedges before tax effect was a net accumulated gain of $248 million, of which a net gain of $248 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. We recognize changes in the excluded component in other income (expense), net. The notional principal of these contracts was $2.9 billion and $1.5 billion as of December 31, 2017 and June 30, 2018, 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 $15.2 billion and $16.0 billion as of December 31, 2017 and June 30, 2018, respectively.

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

		As of December 31, 2017
	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	$	51	$	29	$	80
Total		$	51	$	29	$	80
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	230	$	122	$	352
Total		$	230	$	122	$	352

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		As of June 30, 2018
	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	$	310	$	111	$	421
Total		$	310	$	111	$	421
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	2	$	221	$	223
Total		$	2	$	221	$	223

The gains (losses) on derivatives in cash flow hedging relationships recognized in other comprehensive income (OCI) is summarized below (in millions, unaudited):

	Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect
	Three Months Ended					Six Months Ended
	June 30,					June 30,
Derivatives in Cash Flow Hedging Relationship	2017			2018		2017			2018
Foreign exchange contracts
Amount included in the assessment of effectiveness	$	(374	)	$	443	$	(687	)	$	124
Amount excluded from the assessment of effectiveness	0			8		0			1
Total	$	(374	)	$	451	$	(687	)	$	125

The effect of derivative instruments on income is summarized below (in millions, unaudited):

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	Gains (Losses) Recognized in Income
	Three Months Ended
	June 30,
	2017					2018
	Revenues		Other income (expense), net			Revenues			Other income (expense), net
Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded	$	26,010	$	245		$	32,657		$	1,408
Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:
Foreign exchange contracts
Amount of gains (losses) reclassified from AOCI to income	$	3	$	0		$	(101	)	$	0
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach	0		0			(2		)	0
Amount excluded from the assessment of effectiveness	0		20			0			0
Gains (Losses) on Derivatives in Fair Value Hedging Relationship:
Foreign exchange contracts
Hedged items	0		85			0			(158		)
Derivatives designated as hedging instruments	0		(85		)	0			158
Amount excluded from the assessment of effectiveness	0		5			0			10
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts
Derivatives not designated as hedging instruments	0		(22		)	0			200
Total gains (losses)	$	3	$	3		$	(103	)	$	210

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	Gains (Losses) Recognized in Income
	Six Months Ended
	June 30,
	2017					2018
	Revenues		Other income (expense), net			Revenues			Other income (expense), net
Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded	$	50,760	$	496		$	63,803		$	4,950
Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:
Foreign exchange contracts
Amount of gains (losses) reclassified from AOCI to income	$	220	$	0		$	(348	)	$	0
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach	0		0			6			0
Amount excluded from the assessment of effectiveness	0		46			0			0
Gains (Losses) on Derivatives in Fair Value Hedging Relationship:
Foreign exchange contracts
Hedged items	0		136			0			(45		)
Derivatives designated as hedging instruments	0		(136		)	0			45
Amount excluded from the assessment of effectiveness	0		9			0			21
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts
Derivatives not designated as hedging instruments	0		(224		)	0			100
Total gains (losses)	$	220	$	(169	)	$	(342	)	$	121

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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, 2017 and June 30, 2018, information related to these offsetting arrangements were as follows (in millions):

Offsetting of Assets

	As of December 31, 2017
								Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
	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	$	102	$	(22	)	$	80	$	(64	)	(1)	$	(4	)	$	(2	)	$	10
	As of June 30, 2018
								Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
	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	$	451	$	(30	)	$	421	$	(95	)	(1)	$	(300	)	$	0		$	26

⁽¹⁾  The balances as of December 31, 2017 and June 30, 2018 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, 2017
								Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
	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	$	374	$	(22	)	$	352	$	(64	)	(2)	$	0	$	0	$	288
	As of June 30, 2018
								Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
	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	$	253	$	(30	)	$	223	$	(95	)	(2)	$	0	$	0	$	128

⁽²⁾  The balances as of December 31, 2017 and June 30, 2018 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.

Note 4. Variable Interest Entities (VIEs)

Consolidated VIEs

We consolidate VIEs in which we hold a variable interest and are the primary beneficiary. We are the primary beneficiary because we have the power to direct activities that most significantly affect their economic performance and have the obligation to absorb the majority of their losses or benefits. The results of operations and financial position of these VIEs are included in our consolidated financial statements.

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For certain consolidated VIEs, their assets are not available to us and their creditors do not have recourse to us.As of December 31, 2017 and June 30, 2018, assets that can only be used to settle obligations of these VIEs were$1.7 billion and $1.5 billion, respectively, and the liabilities for which creditors do not have recourse to us were $997 million and $949 million, respectively.

Calico

Calico is a life science company with a mission to harness advanced technologies to increase our understanding of the biology that controls lifespan.

In September 2014, AbbVie Inc. (AbbVie) and Calico entered into a research and development collaboration agreement intended to help both companies discover, develop, and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. In the second quarter of 2018, AbbVie and Calico amended the collaboration agreement resulting in an increase in total commitments. As of June 30, 2018, AbbVie has contributed $750 million to fund the collaboration pursuant to the agreement and is committed to an additional $500 million which will be paid by the fourth quarter of 2019. As of June 30, 2018, Calico has contributed $250 million and has committed up to an additional $1.0 billion.

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 for projects covered under this agreement 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.

As of June 30, 2018, we have contributed $240 million to Calico in exchange for Calico convertible preferred units and are committed to fund up to an additional $990 million on an as-needed basis and subject to certain conditions.

Verily

Verily is a life science company with a mission to make the world's health data useful so that people enjoy healthier lives.

In 2017, Temasek, a Singapore-based investment company, purchased a noncontrolling interest in Verily for an aggregate of $800 million in cash. The transaction was accounted for as an equity transaction and no gain or loss was recognized. Noncontrolling interest and net loss attributable to noncontrolling interest were not separately presented on our consolidated financial statements as of and for the three and six months ended June 30, 2018 as the amounts were not material.

Unconsolidated VIEs

Certain renewable energy investments included in our non-marketable equity investments accounted for under the equity method are VIEs. These entities' activities involve power generation using renewable sources. We have determined that the governance structures of these entities do not allow us to direct the activities that would significantly affect their economic performance such as setting operating budgets. Therefore, we do not consolidate these VIEs in our consolidated financial statements. The carrying value and maximum exposure of these VIEs were $896 million and $759 million as of December 31, 2017 and June 30, 2018, respectively. The maximum exposure is based on current investments to date. We have determined the single source of our exposure to these VIEs is our capital investment in them.

Other unconsolidated VIEs were not material as of December 31, 2017 and June 30, 2018.

Note 5. Debt

Short-Term Debt

We have a debt financing program of up to $5.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. We had no commercial paper outstanding as of December 31, 2017 and June 30, 2018, respectively.

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Long-Term Debt

Google issued $3.0 billion of senior unsecured notes in three tranches (collectively, 2011 Notes) in May 2011, due in 2014, 2016, and 2021, as well as $1.0 billion of senior unsecured notes (2014 Notes) in February 2014 due in 2024.

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 gain or loss recognized.

In August 2016, Alphabet issued $2.0 billion of senior unsecured notes (2016 Notes) due 2026. The net proceeds from the issuance of the 2016 Notes were used for general corporate purposes, including the repayment of outstanding commercial paper. The Alphabet notes due in 2021, 2024, and 2026 rank equally with each other and are structurally subordinate to the outstanding Google Notes.

The total outstanding long-term debt is summarized below (in millions):

	As of December 31, 2017			As of June 30, 2018
				(unaudited)
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	2,000			2,000
Unamortized discount for the Notes above	(57		)	(53		)
Subtotal(1)	$	3,943		$	3,947
Capital lease obligation	26			34
Total long-term debt	$	3,969		$	3,981

⁽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 $4.0 billion as of December 31, 2017 and $3.8 billion as of June 30, 2018. 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.

Credit Facility

As of June 30, 2018, we have a $4.0 billion revolving credit facility which expires in February 2021. 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, 2017 and June 30, 2018.

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Note 6. Supplemental Financial Statement Information

Property and Equipment, Net

Property and equipment, net, consisted of the following (in millions):

	As of December 31, 2017			As of June 30, 2018
				(unaudited)
Land and buildings	$	23,183		$	27,253
Information technology assets	21,429			26,148
Construction in progress	10,491			13,669
Leasehold improvements	4,496			4,758
Furniture and fixtures	48			48
Property and equipment, gross	59,647			71,876
Less: accumulated depreciation	(17,264		)	(20,204		)
Property and equipment, net	$	42,383		$	51,672

As of December 31, 2017 and June 30, 2018, assets under capital lease with a cost basis of $390 million and $520 million were included in property and equipment, respectively.

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following (in millions):

	As of December 31, 2017		As of June 30, 2018
			(unaudited)
European Commission fines(1)	$	2,874	$	7,914
Accrued customer liabilities	1,489		1,445
Other accrued expenses and current liabilities	5,814		5,902
Accrued expenses and other current liabilities	$	10,177	$	15,261

⁽¹⁾  Includes the effects of foreign exchange and interest. See Note 9 for further details.

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 (Losses) on Cash Flow Hedges			Total
Balance as of December 31, 2016	$	(2,646	)	$	(179	)	$	423		$	(2,402	)
Other comprehensive income (loss) before reclassifications	1,016			225			(459		)	782
Amounts reclassified from AOCI	0			51			(159		)	(108		)
Other comprehensive income (loss)	1,016			276			(618		)	674
Balance as of June 30, 2017	$	(1,630	)	$	97		$	(195	)	$	(1,728	)

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	Foreign Currency Translation Adjustments			Unrealized Gains (Losses) on Available-for-Sale Investments			Unrealized Gains (Losses) on Cash Flow Hedges			Total
Balance as of December 31, 2017	$	(1,103	)	$	233		$	(122	)	$	(992	)
Other comprehensive income (loss) before reclassifications(1)	(485		)	(454		)	100			(839		)
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI	0			0			1			1
Amounts reclassified from AOCI	0			33			272			305
Other comprehensive income (loss)	(485		)	(421		)	373			(533		)
Balance as of June 30, 2018	$	(1,588	)	$	(188	)	$	251		$	(1,525	)

⁽¹⁾  The change in unrealized gains (losses) on available-for-sale investments included a $98 million reclassification of net unrealized gains related to marketable equity securities from AOCI to opening retained earnings as a result of the adoption of ASU 2016-01 on January 1, 2018.

The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited):

		Gains (Losses) Reclassified from AOCI to the Consolidated Statements of Income
		Three Months Ended						Six Months Ended
		June 30,						June 30,
AOCI Components	Location	2017			2018			2017			2018
Unrealized gains (losses) on available-for-sale investments
	Other income (expense), net	$	(26	)	$	6		$	(51	)	$	(33	)
	Provision for income taxes	0			0			0			0
	Net of tax	$	(26	)	$	6		$	(51	)	$	(33	)
Unrealized gains (losses) on cash flow hedges
Foreign exchange contracts	Revenue	$	3		$	(101	)	$	220		$	(348	)
Interest rate contracts	Other income (expense), net	2			1			3			2
	Benefit (provision) for income taxes	1			22			(64		)	74
	Net of tax	$	6		$	(78	)	$	159		$	(272	)
Total amount reclassified, net of tax		$	(20	)	$	(72	)	$	108		$	(305	)

Other Income (Expense), Net

The components of other income (expense), net, were as follows (in millions, unaudited):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2018			2017			2018
Interest income	$	294		$	456		$	606		$	855
Interest expense(1)	(21		)	(27		)	(46		)	(57		)
Foreign currency exchange losses, net	(46		)	(33		)	(48		)	(57		)
Gain (loss) on debt securities, net	(26		)	6			(51		)	(33		)
Gain on equity securities, net	23			1,062			29			4,093
Loss and impairment from equity method investments, net	(13		)	(105		)	(62		)	(112		)
Other	34			49			68			261
Other income (expense), net	$	245		$	1,408		$	496		$	4,950

⁽¹⁾  Interest expense is net of $12 million and $23 million of interest capitalized for the three months ended June 30, 2017 and 2018, respectively, and $19 million and $39 million for the six months ended June 30, 2017 and 2018, respectively.

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Note 7. Acquisitions

Agreement with HTC Corporation (HTC)

In January 2018, we completed the acquisition of a team of engineers and a non-exclusive license of intellectual property from HTC for $1.1 billion in cash. In aggregate, $10 million was cash acquired, $165 million was attributed to intangible assets, $934 million was attributed to goodwill, and $9 million was attributed to net liabilities assumed. Goodwill, which was included in Google, is not deductible for tax purposes. We expect this transaction to accelerate Google’s ongoing hardware efforts. The transaction was accounted for as a business combination.

Other Acquisitions

During the six months ended June 30, 2018, we completed other acquisitions and purchases of intangible assets for total consideration of approximately $520 million. In aggregate, $10 million was cash acquired, $273 million was attributed to intangible assets, $268 million was attributed to goodwill, and $31 million was attributed to net liabilities assumed. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in engineering and other functional areas. The amount of goodwill expected to be deductible for tax purposes is approximately $78 million.

Pro forma results of operations for these acquisitions, including HTC, have not been presented because they are not material to the consolidated results of operations, either individually or in the aggregate.

For all intangible assets acquired and purchased during the six months ended June 30, 2018, patents and developed technology have a weighted-average useful life of 3.8 years, customer relationships have a weighted-average useful life of 2.2 years, and trade names and other have a weighted-average useful life of 3.7 years.

Note 8. Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying amount of goodwill for the six months ended June 30, 2018 were as follows (in millions, unaudited):

Google Other Bets Total Consolidated