Fair Value Measurements

3 Months Ended

Sep. 30, 2012

Fair Value Measurements

NOTE 6    FAIR VALUE MEASUREMENTS

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

• Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Our Level 1 non-derivative investments primarily include U.S. treasuries, domestic and international equities, and actively traded mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

• Level 2—inputs 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 (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, 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 forward and spot prices for currencies and commodities. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, mortgage-backed securities, agency securities, certificates of deposit, and commercial paper. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

• Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets primarily comprise investments in certain corporate bonds and goodwill when it is recorded at fair value due to an impairment charge. We value the Level 3 corporate bonds using internally developed valuation models, inputs to which include interest rate curves, credit spreads, stock prices, and volatilities. Our Level 3 derivative assets and liabilities primarily comprise derivatives for foreign equities. In certain cases, market-based observable inputs are not available and we use management judgment to develop assumptions to determine fair value for these derivatives. Unobservable inputs used in all of these models are significant to the fair values of the assets and liabilities.

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.

Our other current financial assets and our current financial liabilities have fair values that approximate their carrying values.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:

(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	(a)		Net Fair Value
September 30, 2012
Assets
Mutual funds	$	705	$	0	$	0	$	705	$	0		$	705
Commercial paper		0		79		0		79		0			79
Certificates of deposit		0		567		0		567		0			567
U.S. government and agency securities		49,170		4,048		0		53,218		0			53,218
Foreign government bonds		32		973		0		1,005		0			1,005
Mortgage-backed securities		0		1,725		0		1,725		0			1,725
Corporate notes and bonds		0		6,757		17		6,774		0			6,774
Municipal securities		0		422		0		422		0			422
Common and preferred stock		8,056		628		5		8,689		0			8,689
Derivatives		6		323		0		329		(80	)		249
Total	$	57,969	$	15,522	$	22	$	73,513	$	(80	)	$	73,433
Liabilities
Derivatives and other	$	6	$	101	$	0	$	107	$	(79	)	$	28

(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	(a)		Net Fair Value
June 30, 2012
Assets
Mutual funds	$	820	$	0	$	0	$	820	$	0		$	820
Commercial paper		0		96		0		96		0			96
Certificates of deposit		0		744		0		744		0			744
U.S. government and agency securities		42,291		5,019		0		47,310		0			47,310
Foreign government bonds		31		1,703		0		1,734		0			1,734
Mortgage-backed securities		0		1,892		0		1,892		0			1,892
Corporate notes and bonds		0		7,839		9		7,848		0			7,848
Municipal securities		0		416		0		416		0			416
Common and preferred stock		7,539		877		5		8,421		0			8,421
Derivatives		16		467		0		483		(141	)		342
Total	$	50,697	$	19,053	$	14	$	69,764	$	(141	)	$	69,623
Liabilities
Derivatives and other	$	10	$	145	$	0	$	155	$	(139	)	$	16

(a) These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.

The following table reconciles the total Net Fair Value of assets above to the balance sheet presentation of these same assets in Note 4 – Investments.

(In millions)
September 30, 2012					June 30, 2012
Net fair value of assets measured at fair value on a recurring basis	$	73,433		$	69,623
Cash		1,993			2,019
Common and preferred stock measured at fair value on a nonrecurring basis		323			313
Other investments measured at fair value on a nonrecurring basis		1,027			1,043
Less derivative assets classified as other current assets		(98	)		(185	)
Other		4			3
Recorded basis of investment components	$	76,682		$	72,816

Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis

The following tables present the changes during the periods presented in our Level 3 financial instruments that are measured at fair value on a recurring basis. The majority of these instruments consist of investment securities classified as available-for-sale with changes in fair value included in OCI.

(In millions)	Corporate Notes and Bonds		Common and Preferred Stock		Derivative Assets		Total
Three Months Ended September 30, 2012
Balance, beginning of period	$	9	$	5	$	0	$	14
Total realized and unrealized gains:
Included in other income (expense)		0		0		0		0
Included in other comprehensive income (loss)		0		0		0		0
Purchases		8		0		0		8
Balance, end of period	$	17	$	5	$	0	$	22
Change in unrealized gains (losses) included in other income (expense) related to assets held as of September 30, 2012	$	0	$	0	$	0	$	0

(In millions)	Corporate Notes and Bonds			Common and Preferred Stock		Derivative Assets			Total
Three Months Ended September 30, 2011
Balance, beginning of period	$	58		$	5	$	20		$	83
Total realized and unrealized gains (losses):
Included in other income (expense)		0			0		(2	)		(2	)
Included in other comprehensive income (loss)		(21	)		0		0			(21	)
Balance, end of period	$	37		$	5	$	18		$	60
Change in unrealized gains (losses) included in other income (expense) related to assets held as of September 30, 2011	$	0		$	0	$	(2	)	$	(2	)

Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three months ended September 30, 2012 and 2011, we did not record any material other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.