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Financial Instruments

3 Months Ended

Mar. 31, 2020

Debt Securities

We classify and account for our marketable debt securities as available-for-sale and carry these securities at fair value.

We report the unrealized gains and losses, net of taxes, as a component of stockholders' equity, except for certain unrealized gains and losses recorded in other income (expense), net, described below.

For debt securities in an unrealized loss position, we determine whether a credit loss exists. The estimate of credit loss is determined by considering available information relevant to the collectibility of the security and information about past events, current conditions, and reasonable and supportable forecasts. The allowance for credit loss is recorded as a charge to other income (expense), net, not to exceed the amount of the unrealized loss. Any excess unrealized loss greater than the credit loss at a security level is recognized in accumulated other comprehensive income ("AOCI"). We assess expected credit losses at the end of each reporting period and adjust the allowance through other income (expense), net.

For certain debt securities we have elected the fair value option for which changes in fair value are recorded in other income (expense), net. The fair value option was elected for these securities to align with the unrealized gains and losses from related derivative contracts. Unrealized net loss related to debt securities still held where we have elected the fair value option was $9 million for the period ended March 31, 2020. As of March 31, 2020 the fair value was $1.9 billion. Balances prior to the period ended March 31, 2020 were not material.

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.

The following tables summarize our debt securities, for which we did not elect the fair value option, by significant investment categories as of December 31, 2019 and March 31, 2020 (in millions):


	As of December 31, 2019
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities
Level 2:
Time deposits⁽¹⁾	$	2,294	$	0	$	0	$	2,294	$	2,294	$	0
Government bonds	55,033		434		(30)		55,437		4,518		50,919
Corporate debt securities	27,164		337		(3)		27,498		44		27,454
Mortgage-backed and asset-backed securities	19,453		96		(41)		19,508		0		19,508
Total	$	103,944	$	867	$	(74)	$	104,737	$	6,856	$	97,881


	As of March 31, 2020
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities
	(unaudited)
Level 2:
Time deposits⁽¹⁾	$	2,195	$	0	$	0	$	2,195	$	2,195	$	0
Government bonds	50,350		1,162		(50)		51,462		3,668		47,794
Corporate debt securities	26,545		154		(360)		26,339		13		26,326
Mortgage-backed and asset-backed securities	18,576		287		(91)		18,772		0		18,772
Total	$	97,666	$	1,603	$	(501)	$	98,768	$	5,876	$	92,892

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

We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method. We recognized gross realized gains of $46 million and $257 million for the three months ended March 31, 2019 and 2020, respectively. We recognized gross realized losses of $48 million and $39 million for the three months ended March 31, 2019 and 2020, respectively. We reflect these gains and losses as a component of other income (expense), net.

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 March 31, 2020
Due in 1 year	$	24,209
Due in 1 year through 5 years	54,662
Due in 5 years through 10 years	3,080
Due after 10 years	12,820
Total	$	94,771

The following tables present fair values and gross unrealized losses recorded to AOCI as of December 31, 2019 and March 31, 2020, 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, 2019
	Less than 12 Months						12 Months or Greater						Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Government bonds	$	6,752	$	(20)	$	4,590	$	(10)	$	11,342	$	(30)
Corporate debt securities	1,665		(2)		978		(1)		2,643		(3)
Mortgage-backed and asset-backed securities	4,536		(13)		2,835		(28)		7,371		(41)
Total	$	12,953	$	(35)	$	8,403	$	(39)	$	21,356	$	(74)


	As of March 31, 2020
	Less than 12 Months						12 Months or Greater						Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(unaudited)
Government bonds	$	4,168	$	(50)	$	79	$	0	$	4,247	$	(50)
Corporate debt securities	15,561		(232)		113		(1)		15,674		(233)
Mortgage-backed and asset-backed securities	4,796		(85)		326		(6)		5,122		(91)
Total	$	24,525	$	(367)	$	518	$	(7)	$	25,043	$	(374)

During the three months ended March 31, 2020, for marketable debt securities, we recognized credit losses of $127 million, and the ending allowance for credit losses was $127 million. See Note 7 for further details on other income (expense), net.

Equity Investments

The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method.

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. All gains and losses on marketable equity securities, realized and unrealized, are recognized in other income (expense), net.

Our non-marketable equity securities are investments in privately held companies without readily determinable market values. 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). We qualitatively assess whether indicators of impairment exist. Factors considered in our assessment include the companies’ financial and liquidity position, access to capital resources, exposure to industries and markets impacted by COVID-19, and the time since the last adjustment to fair value, among others. If the assessment indicates that the investment is impaired, we estimate the fair value by using the best information available, which may include cash flow projections or other available market data. The effect of COVID-19 on our impairment assessment requires significant judgment due to the uncertainty around the impact.

All gains and losses, realized and unrealized, and impairments on non-marketable equity securities are recognized in other income (expense), net. Non-marketable equity securities that have been remeasured during the period are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. The fair value of non-marketable equity securities that have been remeasured during the period due to impairment are classified within Level 3.

Gains and losses on marketable and non-marketable equity securities

Gains and losses reflected in other income (expense), net, for our marketable and non-marketable equity securities are summarized below (in millions, unaudited):


	Three Months Ended
	March 31,
	2019		2020
Net gain (loss) on equity securities sold during the period	$	42	$	171
Net unrealized gain (loss) on equity securities held as of the end of the period⁽¹⁾	1,041		(985)
Total gain (loss) recognized in other income (expense), net	$	1,083	$	(814)

⁽¹⁾Includes net gain of $390 million and net loss of $948 million related to non-marketable equity securities for the three months ended March 31, 2019 and 2020, respectively.

In the table above, net gain (loss) on equity securities sold during the period reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period or the purchase date, if later.

Cumulative net gains on equity securities sold during the period, which is summarized in the following table (in millions, unaudited), represents the total net gains (losses) recognized after the initial purchase date of the equity security. While these net gains may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic realized net gains on the securities sold during the period. Cumulative net gains are calculated as the difference between the sale price and the initial purchase price for the equity security sold during the period.


	Equity Securities Sold During the Three Months Ended March 31,
	2019		2020
Total sale price	$	240	$	909
Total initial cost	120		261
Cumulative net gains	$	120	$	648

Carrying value of marketable and non-marketable equity securities

The carrying value is measured as the total initial cost plus the cumulative net gain (loss). The carrying values for our marketable and non-marketable equity securities are summarized below (in millions):


	As of December 31, 2019
	Marketable Securities		Non-Marketable Securities		Total
Total initial cost	$	1,935	$	8,297	$	10,232
Cumulative net gain⁽¹⁾	1,361		3,056		4,417
Carrying value	$	3,296	$	11,353	$	14,649

⁽¹⁾Non-marketable securities cumulative net gain is comprised of $3.5 billion unrealized gains and $445 million unrealized losses (including impairment).


	As of March 31, 2020
	Marketable Securities		Non-Marketable Securities		Total
	(unaudited)
Total initial cost	$	1,865	$	8,777	$	10,642
Cumulative net gain⁽¹⁾	949		2,006		2,955
Carrying value	$	2,814	$	10,783	$	13,597

⁽¹⁾Non-marketable securities cumulative net gain is comprised of $3.8 billion unrealized gains and $1.7 billion unrealized losses (including impairment).

Marketable equity securities

The following table summarizes marketable equity securities measured at fair value by significant investment categories as of December 31, 2019 and March 31, 2020 (in millions):


	As of December 31, 2019						As of March 31, 2020
	Cash and Cash Equivalents		Marketable Securities		Cash and Cash Equivalents		Marketable Securities
					(unaudited)
Level 1:
Money market funds	$	4,604	$	0	$	6,806	$	0
Marketable equity securities⁽¹⁾	0		3,046		5		2,592
	4,604		3,046		6,811		2,592
Level 2:
Mutual funds	0		250		89		222
Total	$	4,604	$	3,296	$	6,900	$	2,814

⁽¹⁾ The balances as of December 31, 2019 and March 31, 2020 include investments that were reclassified from non-marketable equity securities following the initial public offering of the issuers.

Non-marketable equity securities

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 (in millions, unaudited):


	Three Months Ended
	March 31,
	2019		2020
Unrealized gains	$	456	$	356
Unrealized losses (including impairment)	(66)		(1,304)
Total unrealized gain (loss) for non-marketable equity securities	$	390	$	(948)

During the three months ended March 31, 2020, included in the $10.8 billion of non-marketable equity securities, $4.4 billion were measured at fair value resulting in a net unrealized loss of $948 million.

Equity securities accounted for under the Equity Method

Equity securities accounted for under the equity method had a carrying value of approximately $1.3 billion and $1.2 billion as of December 31, 2019 and March 31, 2020, respectively. Our share of gains and losses including impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 7 for further details on other income (expense), net.

Derivative Financial Instruments

We enter into derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed with derivative instruments is foreign exchange risk. We use foreign currency contracts to reduce the risk that our cash flows, earnings, and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. We also enter into derivative instruments to partially offset our business exposure to other risks and enhance investment returns.

We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value and classify the derivatives primarily within Level 2 in the fair value hierarchy. We present our collar contracts (an option strategy comprised of a combination of purchased and written options) at net fair values where both the purchased and written options are with the same counterparty. For other derivative contracts, we present at gross fair values. We primarily record changes in the fair value 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.

We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. Further, we enter into collateral security arrangements that provide for collateral to be received or pledged when the net fair value of certain financial instruments fluctuates from contractually established thresholds. Cash collateral received related to derivative instruments under our collateral security arrangements are included in other current assets with a corresponding liability. Cash and non-cash

collateral pledged related to derivative instruments under our collateral security arrangements are included in other current assets.

Cash Flow Hedges

We designate foreign currency forward and option contracts (including collars) as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. These contracts have maturities of 24 months or less.

Cash flow hedge amounts included in the assessment of hedge effectiveness are deferred in AOCI and subsequently reclassified to revenue when the hedged item is recognized in earnings. We exclude the change in 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. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are immediately reclassified to other income (expense), net.

As of March 31, 2020, the net accumulated gain on our foreign currency cash flow hedges before tax effect was $304 million, of which $304 million is expected to be reclassified from AOCI into earnings within the next 12 months.

Fair Value Hedges

We designate foreign currency forward contracts as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.

Net Investment Hedges

We designate foreign currency forward contracts as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Net investment hedge amounts included in the assessment of hedge effectiveness are recognized in AOCI along with the foreign currency translation adjustment. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily 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. Gains and losses on these contracts, as well as the related costs, are recognized in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities.

We also use derivatives not designated as hedging instruments to manage risks relating to interest rates, equity and commodity prices, credit exposures and to enhance investment returns.

The gross notional amounts of our outstanding derivative instruments were as follows (in billions):


	As of December 31, 2019		As of March 31, 2020
			(unaudited)
Derivatives Designated as Hedging Instruments:
Foreign exchange contracts
Cash flow hedges	$	13.2	$	12.6
Fair value hedges	$	0.5	$	0.5
Net investment hedges	$	9.3	$	9.3
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts	$	43.5	$	30.9
Other contracts	$	0.1	$	1.1

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


		As of December 31, 2019
	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	$	91	$	253	$	344
Other Contracts	Other current and non-current assets	0		1		1

Total		$	91	$	254	$	345
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	173	$	196	$	369
Other Contracts	Accrued expenses and other liabilities, current and non-current	0		13		13

Total		$	173	$	209	$	382


		As of March 31, 2020
	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	$	394	$	103	$	497
Other contracts	Other current and non-current assets	0		7		7
Total		$	394	$	110	$	504
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	43	$	94	$	137
Other contracts	Accrued expenses and other liabilities, current and non-current	0		49		49
Total		$	43	$	143	$	186

The gains (losses) on derivatives in cash flow hedging and net investment hedging relationships recognized in other comprehensive income ("OCI") are summarized below (in millions, unaudited):


	Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect
	Three Months Ended
	March 31,
	2019		2020
Derivatives in Cash Flow Hedging Relationship:
Foreign exchange contracts
Amount included in the assessment of effectiveness	$	(6)	$	412
Amount excluded from the assessment of effectiveness	(30)		52

Derivatives in Net Investment Hedging Relationship:
Foreign exchange contracts
Amount included in the assessment of effectiveness	64		80
Total	$	28	$	544

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


	Gains (Losses) Recognized in Income
	Three Months Ended
	March 31,
	2019						2020
	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	$	36,339	$	1,538	$	41,159	$	(220)

Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:
Foreign exchange contracts
Amount of gains (losses) reclassified from AOCI to income	$	128	$	0	$	26	$	0
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach	9		0		23		0
Gains (Losses) on Derivatives in Fair Value Hedging Relationship:
Foreign exchange contracts
Hedged items	0		22		0		(17)
Derivatives designated as hedging instruments	0		(22)		0		17
Amount excluded from the assessment of effectiveness	0		10		0		1
Gains (Losses) on Derivatives in Net Investment Hedging Relationship:
Foreign exchange contracts
Amount excluded from the assessment of effectiveness	0		54		0		78
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts	0		(249)		0		229
Other Contracts	0		0		0		(28)
Total gains (losses)	$	137	$	(185)	$	49	$	280

Offsetting of Derivatives

The gross amounts of our derivative instruments subject to master netting arrangements with various counterparties, and cash and non-cash collateral received and pledged under such agreements were as follows (in millions):

Offsetting of Assets


	As of December 31, 2019
							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	$	365	$	(21)	$	344	$	(88)	⁽¹⁾	$	(234)	$	0	$	22

	As of March 31, 2020
							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	$	588	$	(84)	$	504	$	(115)	⁽¹⁾	$	(326)	$	(27)	$	36

⁽¹⁾The balances as of December 31, 2019 and March 31, 2020 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, 2019
							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	$	390	$	(21)	$	369	$	(88)	⁽²⁾	$	0	$	0	$	281

	As of March 31, 2020
							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	$	270	$	(84)	$	186	$	(115)	⁽²⁾	$	0	$	(8)	$	63

⁽²⁾The balances as of December 31, 2019 and March 31, 2020 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.