Fair Value Measurements

12 Months Ended

Jul. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair Value Hierarchy

The authoritative guidance defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, we consider the principal or most advantageous market for an asset or liability and assumptions that market participants would use when pricing the asset or liability. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of an asset or liability.

The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:

• Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.

• Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices in active markets for similar assets or liabilities: quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above.

	At July 31, 2011								At July 31, 2010
(In millions)	Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value
Assets:
Cash equivalents, primarily money market funds	$	854	$	—	$	—	$	854	$	330	$	—	$	—	$	330
Available-for-sale debt securities:
Municipal bonds	—		434		—		434		—		1,050		—		1,050
Municipal auction rate securities	—		—		59		59		—		—		87		87
Corporate notes	—		288		—		288		—		334		—		334
U.S. agency securities	—		152		—		152		—		174		—		174
Total available-for-sale debt securities	—		874		59		933		—		1,558		87		1,645
Total assets measured at fair value on a recurring basis	$	854	$	874	$	59	$	1,787	$	330	$	1,558	$	87	$	1,975
Liabilities:
Senior notes (1)	$	—	$	1,084	$	—	$	1,084	$	—	$	1,086	$	—	$	1,086

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(1) Carrying value on our balance sheets at July 31, 2011 was $999 million and at July 31, 2010 was $998 million. See Note 10.

The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates shown:

	At July 31, 2011								At July 31, 2010
(In millions)	Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
In cash and cash equivalents	$	615	$	—	$	—	$	615	$	143	$	—	$	—	$	143
In funds held for customers	239		—		—		239		187		—		—		187
Total cash and cash equivalents	$	854	$	—	$	—	$	854	$	330	$	—	$	—	$	330
Available-for-sale debt securities:
In investments	$	—	$	699	$	—	$	699	$	—	$	1,408	$	—	$	1,408
In funds held for customers	—		175		—		175		—		150		—		150
In long-term investments	—		—		59		59		—		—		87		87
Total available-for-sale debt securities	$	—	$	874	$	59	$	933	$	—	$	1,558	$	87	$	1,645

We value our Level 1 assets, consisting primarily of money market funds, using quoted prices in active markets for identical instruments. Financial assets whose fair values we measure on a recurring basis using Level 2 inputs consist of municipal bonds, corporate notes and U.S. agency securities. We measure the fair values of these assets using quoted prices in active markets for similar instruments. Financial liabilities whose fair values we measure using Level 2 inputs consist of debt. See Note 10. We measure the fair value of our senior notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms. Financial assets whose fair values we measure using significant unobservable (Level 3) inputs consist of municipal auction rate securities that are no longer liquid. These securities are included in long-term investments on our balance sheets at July 31, 2011 and 2010 based on the maturities of the underlying securities at those dates. There were no significant transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the twelve months ended July 31, 2011, 2010 or 2009.

The following table presents a reconciliation of activity for our Level 3 assets for the periods shown.

	Municipal Auction Rate Securities
(In millions)	Investments			Long-Term Investments			Total
Balance at July 31, 2008	$	—		$	285		$	285
Transfers from long-term to current	175			(175		)	—
Settlements at par	(24		)	(16		)	(40		)
Balance at July 31, 2009	151			94			245
Settlements at par	(151		)	(7		)	(158		)
Balance at July 31, 2010	—			87			87
Settlements at par	—			(28		)	(28		)
Balance at July 31, 2011	$	—		$	59		$	59

In February 2008 auctions began failing for the municipal auction rate securities we held and in accordance with authoritative guidance we began estimating their fair value based on a discounted cash flow model that we prepared. All of the municipal auction rate securities we held were rated A or better by the major credit rating agencies and the majority of the securities were collateralized by student loans guaranteed by the U.S. Department of Education. In November 2008 we accepted an offer from UBS AG (UBS), one of the broker-dealers for our municipal auction rate securities, which gave us the option to sell UBS all of the municipal auction rate securities that we held through them at par value. In June 2010 UBS settled the remaining balance of $110 million in municipal auction rate securities subject to the offer at par. We accounted for the put option at its cost of zero on the date that we entered into the agreement because we considered the value of the securities subject to the put option to be substantially equal to their par values at that date. We classified the remaining balances of municipal auction rate securities that we held at July 31, 2011 and 2010 as long-term investments based on the maturities of the underlying securities at those dates.

We estimated the fair values of the municipal auction rate securities we held at July 31, 2011, 2010 and 2009 based on a discounted cash flow model that we prepared. Key inputs to our discounted cash flow model included the projected future interest rates; the likely timing of principal repayments; the probability of full repayment considering guarantees by the U.S. Department of Education of the underlying student loans or insurance by other third parties; publicly available pricing data for recently issued student loan backed securities that are not subject to auctions; and the impact of the reduced liquidity for auction rate securities.

The following table presents information about significant inputs to our discounted cash flow model at the dates shown:

	Inputs to Model at
	July 31, 2011		July 31, 2010		July 31, 2009
Range of average projected future yield rates	1.37% - 2.46%		1.48% - 2.65%		0.63% - 3.78%
Range of overall discount rates used in model (like-kind security yield rate plus illiquidity factor)	1.33% - 1.58%		1.52% - 1.77%		1.61% - 1.86%
Like-kind security yield rate	0.08	%	0.27	%	0.36	%
Range of illiquidity factors	125 - 150 bps		125 - 150 bps		125 - 150 bps
Expected holding period in years	7		7		7

Using our discounted cash flow model we determined that the fair values of the municipal auction rate securities we held at July 31, 2011, 2010 and 2009 were approximately equal to their par values. As a result, we recorded no decrease in the fair values of those securities for the twelve months then ended. We do not intend to sell our municipal auction rate securities and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity. Based on our expected operating cash flows and our other sources of cash, we do not believe that the reduction in liquidity of our municipal auction rate securities will have a material impact on our overall ability to meet our liquidity needs.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include reporting units measured at fair value in a goodwill impairment test. Estimates of fair value for reporting units fall under Level 3 of the fair value hierarchy.

During the fourth quarter of fiscal 2011 we performed our annual goodwill impairment test in conjunction with our annual planning and budgeting process. See Note 1 for a complete description of our methodology for this test. In step one of the test we compared the estimated fair values of each of our reporting units to their carrying values. We used a weighted combination of a discounted cash flow model (income approach) and comparisons to publicly traded companies engaged in similar businesses (market approach) to estimate the fair value of each of our reporting units. We determined that the estimated fair values of all of our reporting units except Intuit Health exceeded their carrying values and that they were not impaired. The estimated fair value of our Intuit Health reporting unit, which is part of our Other Businesses segment, fell below its carrying value of $75 million. As a result, we completed step two of the test by allocating the fair value of that reporting unit calculated in step one of the test to all of the assets and liabilities of the unit, as if we had just acquired it in a business combination. In comparing the residual goodwill resulting from this calculation to the carrying value of the goodwill, we determined that the goodwill and acquired intangible assets for our Intuit Health reporting unit were impaired. All of the goodwill and acquired intangible assets associated with our Intuit Health reporting unit were derived from our fiscal 2010 acquisition of Medfusion, Inc. Circumstances that negatively affected our estimate of the fair value of the Intuit Health reporting unit included unforeseen delays in developing high quality, timely offerings and marketing them effectively. We recorded a goodwill and intangible asset impairment charge of approximately $30 million for our Intuit Health reporting unit in the fourth quarter of fiscal 2011. This consisted of a goodwill impairment charge of approximately $24 million and an acquired intangible asset impairment charge of approximately $6 million.