Valuation of debt and equity investments and certain liabilities

9 Months Ended

Sep. 30, 2011

Valuation of debt and equity investments and certain liabilities [Abstract]

Valuation of debt and equity investments and certain liabilities

Valuation of debt and equity investments and certain liabilities.

Debt and equity investments

We classify our investments as available-for-sale, trading, equity method or cost method.  Most of our investments are classified as available-for-sale.

Available-for-sale and trading securities are stated at fair value, which is generally based on market prices, broker quotes or, when necessary, financial models (see fair value discussion below).

Unrealized gains and losses on available-for-sale securities are recorded as an increase or decrease, net of taxes, in AOCI. We record other-than-temporary losses (impairments) on available-for-sale securities in OI&E.

Changes in the fair value of debt securities classified as trading securities are recorded in OI&E.

We classify certain mutual funds as trading securities. These mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities.  We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in selling, general and administrative expense.

Our other investments are not measured at fair value but are accounted for using either the equity method or cost method.  These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity method investments are reflected in OI&E based on our ownership share of the investee’s financial results.  Gains and losses on cost method investments are recorded in OI&E when realized or when an impairment of the investment’s value is warranted based on our assessment of the recoverability of each investment.

Details of our investments and related unrealized gains and losses included in AOCI are as follows:

	Sept. 30, 2011						Dec. 31, 2010
	Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Measured at fair value:
Available-for-sale
Money market funds	$	506	$	—	$	—	$	167	$	—	$	—
Corporate obligations	300		166		—		44		649		—
U.S. government agency and Treasury securities	344		799		—		855		1,081		—
Auction-rate securities	—		—		42		—		23		257
Trading
Auction-rate securities	—		72		94		—		—		—
Mutual funds	—		—		158		—		—		139
Total	$	1,150	$	1,037	$	294	$	1,066	$	1,753	$	396
Other measurement basis:
Equity method investments	$	—	$	—	$	34	$	—	$	—	$	36
Cost method investments	—		—		22		—		—		21
Cash on hand	431		—		—		253		—		—
Total	$	1,581	$	1,037	$	350	$	1,319	$	1,753	$	453
Amounts included in AOCI from available-for-sale securities:
Unrealized gains (pre-tax)	$	—	$	—	$	—	$	—	$	1	$	—
Unrealized losses (pre-tax)	$	—	$	—	$	4	$	—	$	1	$	22

As of September 30, 2011, and December 31, 2010, the majority of unrealized losses included in AOCI were associated with auction-rate securities classified as securities that are available-for-sale.  We have determined that our available-for-sale investments with unrealized losses are not other-than-temporarily impaired as we expect to recover the entire cost basis of these securities and we do not intend to sell these investments, nor do we expect to be required to sell these investments before a recovery of the cost basis.  In the second quarter of 2011, we recategorized certain auction-rate securities from an available-for-sale classification to a trading classification as we intend to sell them.

For the nine months ended September 30, 2011 and 2010, the proceeds from sales, redemptions and maturities of short-term available-for-sale securities, excluding cash equivalents, were $3.25 billion and $2.18 billion, respectively.  Gross realized gains and losses from these sales were not significant.

The following table presents the aggregate maturities of investments in money market funds and other debt securities classified as available-for-sale at September 30, 2011:

Due	Fair Value
One year or less	$	1,947
One to three years	168
Greater than three years	42

Fair value

We measure and report our financial assets and certain liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The three-level hierarchy discussed below indicates the extent and level of judgment used to estimate fair value measurements.

Level 1 — Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.

Level 2 — Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active.  Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. Our Level 2 assets consist of corporate obligations, some U.S. government agency securities and auction-rate securities that have been called for redemption. We utilize a third-party data service to provide Level 2 valuations, verifying these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets.

Level 3 — Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment.  These values are generally determined using pricing models that utilize management estimates of market participant assumptions.

Our auction-rate securities are primarily classified as Level 3 assets.  Auction-rate securities are debt instruments with variable interest rates that historically would periodically reset through an auction process.  These auctions have not functioned since 2008. There is no active secondary market for these securities, although limited observable transactions do occasionally occur. As a result, we use a discounted cash flow (DCF) model to determine the estimated fair value of these investments as of each quarter end.  The assumptions used in preparing the DCF model include estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to own these securities in the current environment.  In making these assumptions we consider relevant factors including: the formula for each security that defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans and additional credit enhancements provided through other means; and, publicly available pricing data for student loan asset-backed securities that are not subject to auctions.  Our estimate of the rate of return required by investors to own these securities also considers the reduced liquidity for auction-rate securities. To date, we have collected all interest on all of our auction-rate securities when due and expect to continue to do so in the future.  

The following are our assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010.  These tables do not include cash on hand, assets held by our postretirement plans or assets and liabilities that are measured at historical cost or any basis other than fair value.

	Fair Value Sept. 30, 2011		Level 1		Level 2		Level 3
Assets:
Money market funds	$	506	$	506	$	—	$	—
Corporate obligations	466		—		466		—
U.S. government agency and Treasury securities	1,143		380		763		—
Auction-rate securities	208		—		—		208
Mutual funds	158		158		—		—
Total assets	$	2,481	$	1,044	$	1,229	$	208
Liabilities (a):
Deferred compensation	180		180		—		—
Total liabilities	$	180	$	180	$	—	$	—

	Fair Value Dec. 31, 2010		Level 1		Level 2		Level 3
Assets:
Money market funds	$	167	$	167	$	—	$	—
Corporate obligations	693		—		693		—
U.S. government agency and Treasury securities	1,936		1,120		816		—
Auction-rate securities	280		—		23		257
Mutual funds	139		139		—		—
Total assets	$	3,215	$	1,426	$	1,532	$	257
Liabilities (a):
Contingent consideration	8		—		—		8
Deferred compensation	159		159		—		—
Total liabilities	$	167	$	159	$	—	$	8

(a)The liabilities above are a component of Accrued expenses and other liabilities or Deferred credits and other liabilities on our balance sheets, depending on the expected timing of payment.

The following table provides a reconciliation of changes in the fair values for Level 3 assets and liabilities.  

	Level 3
Changes in fair value during the period (pre-tax):	Auction-rate securities			Contingent consideration
Beginning Balance, December 31, 2009	$	458		$	18
Change in fair value of contingent consideration - included in operating profit	—			(2		)
Reduction in unrealized loss - included in AOCI	5			—
Redemptions	(103		)	—
Transfers into Level 2	(29		)	—
Ending Balance, September 30, 2010	331			16
Change in fair value of contingent consideration - included in operating profit	—			(8		)
Reduction in unrealized loss - included in AOCI	5			—
Redemptions	(85		)	—
Transfers into Level 2	6			—
Ending Balance, December 31, 2010	257			8
Change in fair value of contingent consideration - included in operating profit	—			(8		)
Increase in unrealized loss - included in AOCI	(1		)	—
Redemptions and sales	(48		)	—
Ending Balance, September 30, 2011	$	208		$	—