NOTE 4 — Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses the three-level hierarchy established by the FASB that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach).

The levels of the fair value hierarchy are described below:


•	Level 1: Quoted prices in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical assets or liabilities in markets that are not active.


•	Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.

Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and that of its counterparties.

The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include a comparison of fair values to another independent pricing vendor.

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis as of February 29, 2016 and May 31, 2015, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement.



	As of February 29, 2016
(In millions)	Assets at Fair Value		Cash and Equivalents		Short-term Investments		Other Long-term Assets
Cash	$	809	$	809	$	—	$	—
Level 1:
U.S. Treasury securities	1,027		—		1,027		—
Level 2:
Time deposits	695		695		—		—
U.S. Agency securities	593		50		543		—
Commercial paper and bonds	697		205		492		—
Money market funds	1,285		1,285		—		—
Total Level 2:	3,270		2,235		1,035		—
Level 3:
Non-marketable preferred stock	20		—		—		20
TOTAL	$	5,126	$	3,044	$	2,062	$	20



	As of May 31, 2015
(In millions)	Assets at Fair Value		Cash and Equivalents		Short-term Investments		Other Long-term Assets
Cash	$	615	$	615	$	—	$	—
Level 1:
U.S. Treasury securities	869		225		644		—
Level 2:
Time deposits	684		684		—		—
U.S. Agency securities	976		110		866		—
Commercial paper and bonds	914		352		562		—
Money market funds	1,866		1,866		—		—
Total Level 2:	4,440		3,012		1,428		—
Level 3:
Non-marketable preferred stock	8		—		—		8
TOTAL	$	5,932	$	3,852	$	2,072	$	8

The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Unaudited Condensed Consolidated Balance Sheets. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company’s derivative asset balance (refer to Note 10 — Risk Management and Derivatives). Cash collateral received or posted related to the Company's credit-related contingent features is presented in the Cash provided by operations component of the Unaudited Condensed Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Unaudited Condensed Consolidated Balance Sheets pursuant to the accounting standards for non-cash collateral received.

The following tables present information about the Company’s derivative assets and liabilities measured at fair value on a recurring basis as of February 29, 2016 and May 31, 2015, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement.



	As of February 29, 2016
	Derivative Assets						Derivative Liabilities
(In millions)	Assets at Fair Value		Other Current Assets		Other Long-term Assets		Liabilities at Fair Value		Accrued Liabilities		Other Long-term Liabilities
Level 2:
Foreign exchange forwards and options⁽¹⁾	$	963	$	720	$	243	$	117	$	103	$	14
Embedded derivatives	5		1		4		11		3		8
Interest rate swaps⁽²⁾	—		—		—		54		54		—
TOTAL	$	968	$	721	$	247	$	182	$	160	$	22

(1)

If the foreign exchange derivative instruments had been netted on the Unaudited Condensed Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $116 million as of February 29, 2016. As of that date, the Company had received $338 million of cash collateral from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company’s derivative liability balance as of February 29, 2016.


(2)	As of February 29, 2016, no amount of cash collateral had been posted on the derivative liability balance related to the Company's interest rate swaps.



	As of May 31, 2015
	Derivative Assets						Derivative Liabilities
(In millions)	Assets at Fair Value		Other Current Assets		Other Long-term Assets		Liabilities at Fair Value		Accrued Liabilities		Other Long-term Liabilities
Level 2:
Foreign exchange forwards and options⁽¹⁾	$	1,554	$	1,034	$	520	$	164	$	160	$	4
Embedded derivatives	7		2		5		11		2		9
Interest rate swaps⁽²⁾	78		78		—		—		—		—
TOTAL	$	1,639	$	1,114	$	525	$	175	$	162	$	13

(1)

If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $161 million as of May 31, 2015. As of that date, the Company had received $900 million of cash collateral and $74 million of securities from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company’s derivative liability balance as of May 31, 2015.


(2)	As of May 31, 2015, the Company had received $68 million of cash collateral related to its interest rate swaps.

Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). The gross realized gains and losses on sales of available-for-sale securities were immaterial for the three and nine months ended February 29, 2016 and February 28, 2015. Unrealized gains and losses on available-for-sale securities included in Accumulated other comprehensive income were immaterial as of February 29, 2016 and May 31, 2015.

The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the nine months ended February 29, 2016 the Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment losses.

As of February 29, 2016, the Company held $1,830 million of available-for-sale securities with maturity dates within one year and $232 million with maturity dates over one year and less than five years within Short-term investments on the Unaudited Condensed Consolidated Balance Sheets.

Included in Interest expense (income), net for the three months ended February 29, 2016 and February 28, 2015 was interest income related to the Company's available-for-sale securities of $4 million and $1 million, respectively, and $8 million and $4 million for the nine months ended February 29, 2016 and February 28, 2015, respectively.

The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the nine months ended February 29, 2016 and the fiscal year ended May 31, 2015.

Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swaps. Refer to Note 10 — Risk Management and Derivatives for additional detail.

No transfers among the levels within the fair value hierarchy occurred during the nine months ended February 29, 2016.

As of February 29, 2016 and May 31, 2015, assets or liabilities that were required to be measured at fair value on a non-recurring basis were immaterial.

Financial Assets and Liabilities Not Recorded at Fair Value

For fair value information regarding Long-term debt, refer to Note 6 — Long-Term Debt.

The carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value.

At May 31, 2015, the Company had $150 million of outstanding receivables related to its investments in reverse repurchase agreements recorded within Prepaid expenses and other current assets on the Unaudited Condensed Consolidated Balance Sheets. The carrying amount of these agreements approximates their fair value based upon observable inputs other than quoted prices (Level 2). The reverse repurchase agreements are fully collateralized. At February 29, 2016, there were no outstanding receivables related to investments in reverse repurchase agreements.