Fair value measurements

12 Months Ended

Dec. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value Disclosures

FAIR VALUE MEASUREMENTS

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

• Level 1 inputs include quoted prices in active markets for identical assets or liabilities;

• Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

• Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities, foreign currency exchange contracts and equity securities are reported at their respective fair values on our Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized costs on our Consolidated Balance Sheets. The remaining financial instruments are reported on our Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):

	December 31, 2017								December 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Corporate debt securities	$	—	$	14,747	$	—	$	14,747	$	—	$	12,603	$	—	$	12,603
Certificates of deposit	—		5,131		—		5,131		—		943		—		943
Money market funds	4,714		—		—		4,714		5,464		—		—		5,464
U.S. treasury securities	4,061		—		—		4,061		5,529		—		—		5,529
Residential mortgage and asset-backed securities	—		4,058		—		4,058		—		3,602		—		3,602
U.S. government agencies securities	—		926		—		926		—		975		—		975
Non-U.S. government securities	—		664		—		664		—		720		—		720
Municipal debt securities	—		—		—		—		—		27		—		27
Equity securities	635				—		635		428		—		—		428
Deferred compensation plan	116		—		—		116		84		—		—		84
Foreign currency derivative contracts	—		13		—		13		—		336		—		336
Total	$	9,526	$	25,539	$	—	$	35,065	$	11,505	$	19,206	$	—	$	30,711
Liabilities:
Deferred compensation plan	$	116	$	—	$	—	$	116	$	84	$	—	$	—	$	84
Foreign currency derivative contracts	—		93		—		93		—		37		—		37
Contingent consideration	—		—		15		15		—		—		25		25
Total	$	116	$	93	$	15	$	224	$	84	$	37	$	25	$	146

Level 2 Inputs

We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

Substantially all of our foreign currency derivative contracts have maturities within an 18 month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.

The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $35.5 billion and $27.0 billion at December 31, 2017 and 2016, respectively, and the carrying values were $33.5 billion and $26.3 billion at December 31, 2017 and 2016, respectively.

Level 3 Inputs

As of December 31, 2017 and 2016, the only assets or liabilities that were measured using Level 3 inputs on a recurring basis were our contingent consideration liabilities, which were immaterial. On a nonrecurring basis, we measure certain assets including intangible assets at fair value when the carrying value of the asset exceeds its fair value. During 2016, the estimated fair value of our IPR&D related to momelotinib and simtuzumab was written down to zero due to termination of clinical developments of such programs, and as a result, we recorded impairment charges of $432 million.

Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.