
11.	Derivative Instruments


(a)	Summary of Derivative Instruments

The Company uses derivative instruments primarily to manage exposures to foreign currency exchange rate, interest rate, and equity price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates, interest rates, and equity prices. The Company’s derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.

The fair values of the Company’s derivative instruments and the line items on the Consolidated Balance Sheets to which they were recorded are summarized as follows (in millions):



	DERIVATIVE ASSETS					DERIVATIVE LIABILITIES
	Balance Sheet Line Item	July 26, 2014		July 27, 2013		Balance Sheet Line Item	July 26, 2014		July 27, 2013
Derivatives designated as hedging instruments:
Foreign currency derivatives	Other current assets	$	7	$	33	Other current liabilities	$	6	$	7
Interest rate derivatives	Other assets	148		147		Other long-term liabilities	3		2
Equity derivatives	Other current assets	—		—		Other current liabilities	56		155
Total		155		180			65		164
Derivatives not designated as hedging instruments:
Foreign currency derivatives	Other current assets	3		2		Other current liabilities	2		7
Equity derivatives	Other assets	2		—		Other long-term liabilities	—		—
Total		5		2			2		7
Total		$	160	$	182		$	67	$	171

The effects of the Company’s cash flow and net investment hedging instruments on other comprehensive income (OCI) and the Consolidated Statements of Operations are summarized as follows (in millions):



GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES FOR THE YEARS ENDED (EFFECTIVE PORTION)										GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME FOR THE YEARS ENDED (EFFECTIVE PORTION)
	July 26, 2014			July 27, 2013			July 28, 2012			Line Item in Statements of Operations	July 26, 2014		July 27, 2013		July 28, 2012
Derivatives designated as cash flow hedging instruments:
Foreign currency derivatives	$	48		$	73		$	(131	)	Operating expenses	$	55	$	10	$	(59	)
										Cost of sales—service	13		2		(14		)
Interest rate derivatives	—			—			—			Interest expense	—		—		1
Total	$	48		$	73		$	(131	)		$	68	$	12	$	(72	)

Derivatives designated as net investment hedging instruments:
Foreign currency derivatives	$	(15	)	$	(1	)	$	23		Other income (loss), net	$	—	$	—	$	—

As of July 26, 2014, the Company estimates that approximately $0.2 million of net derivative losses related to its cash flow hedges included in accumulated other comprehensive income (AOCI) will be reclassified into earnings within the next 12 months.

The effect on the Consolidated Statements of Operations of derivative instruments designated as fair value hedges and the underlying hedged items is summarized as follows (in millions):



		GAINS (LOSSES) ON DERIVATIVE INSTRUMENTS FOR THE YEARS ENDED									GAINS (LOSSES) RELATED TO HEDGED ITEMS FOR THE YEARS ENDED
Derivatives Designated as Fair Value Hedging Instruments	Line Item in Statements of Operations	July 26, 2014			July 27, 2013			July 28, 2012			July 26, 2014		July 27, 2013		July 28, 2012
Equity derivatives	Other income (loss), net	$	(72	)	$	(155	)	$	(4	)	$	72	$	155	$	4
Interest rate derivatives	Interest expense	(2		)	(78		)	78			—		78		(80		)
Total		$	(74	)	$	(233	)	$	74		$	72	$	233	$	(76	)

The effect on the Consolidated Statements of Operations of derivative instruments not designated as hedges is summarized as follows (in millions):



		GAINS (LOSSES) FOR THE YEARS ENDED
Derivatives Not Designated as Hedging Instruments	Line Item in Statements of Operations	July 26, 2014		July 27, 2013			July 28, 2012
Foreign currency derivatives	Other income (loss), net	$	23	$	(74	)	$	(206	)
Total return swaps—deferred compensation	Cost of sales—product	—		—			4
Total return swaps—deferred compensation	Operating expenses	47		61			3
Equity derivatives	Other income (loss), net	34		—			6
Total		$	104	$	(13	)	$	(193	)

The notional amounts of the Company’s outstanding derivatives are summarized as follows (in millions):



	July 26, 2014		July 27, 2013
Derivatives designated as hedging instruments:
Foreign currency derivatives—cash flow hedges	$	1,618	$	1,885
Interest rate derivatives	10,400		5,250
Net investment hedging instruments	345		662
Equity derivatives	238		1,098
Derivatives not designated as hedging instruments:
Foreign currency derivatives	2,528		3,739
Total return swaps—deferred compensation	428		358
Total	$	15,557	$	12,992


(b)	Offsetting of Derivative Instruments

The Company presents its derivative instruments at gross fair values in the Consolidated Balance Sheets. However, the Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty. To further limit credit risk, the Company also enters into collateral security arrangements related to certain derivative instruments whereby cash is posted as collateral between the counterparties based on the fair market value of the derivative instrument. Information related to these offsetting arrangements is summarized as follows (in millions):



	OFFSETTING OF DERIVATIVE ASSETS
	Gross Amounts Offset in Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets, but with Legal Rights to Offset
July 26, 2014	Gross Amount of Recognized Assets		Gross Amounts Offset in Consolidated Balance Sheets		Net Amount Presented on Consolidated Balance Sheets		Gross Derivative Amounts with Legal Rights to Offset			Cash Collateral Received			Net Amount
Derivatives	$	160	$	—	$	160	$	(39	)	$	(60	)	$	61



	OFFSETTING OF DERIVATIVE LIABILITIES
	Gross Amounts Offset in Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets, but with Legal Rights to Offset
July 26, 2014	Gross Amount of Recognized Liabilities		Gross Amounts Offset in Consolidated Balance Sheets		Net Amount Presented on Consolidated Balance Sheets		Gross Derivative Amounts with Legal Rights to Offset			Cash Collateral Pledged			Net Amount
Derivatives	$	67	$	—	$	67	$	(39	)	$	(1	)	$	27



	OFFSETTING OF DERIVATIVE ASSETS
	Gross Amounts Offset in Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets, but with Legal Rights to Offset
July 27, 2013	Gross Amount of Recognized Assets		Gross Amounts Offset in Consolidated Balance Sheets		Net Amount Presented on Consolidated Balance Sheets		Gross Derivative Amounts with Legal Rights to Offset			Cash Collateral Received		Net Amount
Derivatives	$	182	$	—	$	182	$	(120	)	$	—	$	62



	OFFSETTING OF DERIVATIVE LIABILITIES
	Gross Amounts Offset in Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets, but with Legal Rights to Offset
July 27, 2013	Gross Amount of Recognized Liabilities		Gross Amounts Offset in Consolidated Balance Sheets		Net Amount Presented on Consolidated Balance Sheets		Gross Derivative Amounts with Legal Rights to Offset			Cash Collateral Pledged		Net Amount
Derivatives	$	171	$	—	$	171	$	(120	)	$	—	$	51


(c)	Foreign Currency Exchange Risk

The Company conducts business globally in numerous currencies. Therefore, it is exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency contracts. The Company does not enter into such contracts for trading purposes.

The Company hedges forecasted foreign currency transactions related to certain operating expenses and service cost of sales with currency options and forward contracts. These currency options and forward contracts, designated as cash flow hedges, generally have maturities of less than 18 months. The Company assesses effectiveness based on changes in total fair value of the derivatives. The effective portion of the derivative instrument’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. During the fiscal years presented, the Company did not discontinue any cash flow hedges for which it was probable that a forecasted transaction would not occur.

The Company enters into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables, including long-term customer financings, investments, and payables. These derivatives are not designated as hedging instruments. Gains and losses on the contracts are included in other income (loss), net, and substantially offset foreign exchange gains and losses from the remeasurement of intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional currency of the reporting entity.

The Company hedges certain net investments in its foreign operations with forward contracts to reduce the effects of foreign currency fluctuations on the Company’s net investment in those foreign subsidiaries. These derivative instruments generally have maturities of up to six months.


(d)	Interest Rate Risk

Interest Rate Derivatives, Investments The Company’s primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of July 26, 2014 and July 27, 2013, the Company did not have any outstanding interest rate derivatives related to its fixed income securities.

Interest Rate Derivatives Designated as Fair Value Hedge, Long-Term Debt In fiscal 2014 and 2013, the Company entered into interest rate swaps designated as fair value hedges related to fixed-rate senior notes that are due on various dates from 2017 through 2024. In the previous periods, the Company entered into interest rate swaps designated as fair value hedges related to fixed-rate senior notes that are due in 2016 and 2017. Under these interest rate swaps, the Company receives fixed-rate interest payments and makes interest payments based on LIBOR plus a fixed number of basis points. The effect of such swaps is to convert the fixed interest rates of the senior fixed-rate notes to floating interest rates based on LIBOR. The gains and losses related to changes in the fair value of the interest rate swaps are included in interest expense and substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market interest rates. The fair value of the interest rate swaps was reflected in other assets and other long-term liabilities.


(e)	Equity Price Risk

The Company may hold equity securities for strategic purposes or to diversify its overall investment portfolio. The publicly traded equity securities in the Company’s portfolio are subject to price risk. To manage its exposure to changes in the fair value of certain equity securities, the Company has entered into equity derivatives that are designated as fair value hedges. The changes in the value of the hedging instruments are included in other income (loss), net, and offset the change in the fair value of the underlying hedged investment. In addition, the Company periodically enters into equity derivatives that are not designated as accounting hedges. The changes in the fair value of these derivatives are also included in other income (loss), net.

The Company is also exposed to variability in compensation charges related to certain deferred compensation obligations to employees. Although not designated as accounting hedges, the Company utilizes derivatives such as total return swaps to economically hedge this exposure.


(f)	Hedge Effectiveness

For the fiscal years presented, amounts excluded from the assessment of hedge effectiveness were not material for fair value, cash flow, and net investment hedges. In addition, hedge ineffectiveness for fair value, cash flow, and net investment hedges was not material for any of the fiscal years presented.


(g)	Collateral and Credit-Risk-Related Contingent Features

For certain derivative instruments, the Company and its counterparties have entered into arrangements requiring the party that is in a liability position from a mark-to-market standpoint to post cash collateral to the other party. See further discussion under "(b) Offsetting of Derivative Instruments" above.

In addition, certain derivative instruments are executed under agreements that have provisions requiring the Company and the counterparty to maintain a specified credit rating from certain credit-rating agencies. Under such agreements, if the Company’s or the counterparty’s credit rating falls below a specified credit rating, either party has the right to request collateral on the derivatives’ net liability position. The fair market value of these derivatives that are in a net liability position as of July 26, 2014 was $3 million. There was no such balance as of July 27, 2013.