Valuation of debt and equity investments and certain liabilities

3 Months Ended

Mar. 31, 2012

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 on our Consolidated balance sheets. We record other-than-temporary losses (impairments) on available-for-sale securities in OI&E in our Consolidated statements of income.

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

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:

	March 31, 2012						December 31, 2011
	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 securities
Money market funds	$	69	$	—	$	—	$	55	$	—	$	—
Corporate obligations	168		152		—		135		159		—
U.S. Government agency and Treasury securities	625		1,326		—		430		1,691		—
Auction-rate securities	—		—		24		—		—		41
Trading securities
Auction-rate securities	—		94		—		—		93		—
Mutual funds	—		—		159		—		—		169
Total	$	862	$	1,572	$	183	$	620	$	1,943	$	210
Other measurement basis:
Equity-method investments	$	—	$	—	$	33	$	—	$	—	$	32
Cost-method investments	—		—		23		—		—		23
Cash on hand	331		—		—		372		—		—
Total	$	1,193	$	1,572	$	239	$	992	$	1,943	$	265
Amounts included in AOCI from available-for-sale securities:
Unrealized gains (pre-tax)	$	—	$	1	$	—	$	—	$	—	$	—
Unrealized losses (pre-tax)	$	—	$	—	$	2	$	—	$	—	$	5

As of March 31, 2012, and December 31, 2011, 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. 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.  For the three months ended March 31, 2012 and 2011, we did not recognize in earnings any credit losses related to these investments.

For the three months ended March 31, 2012 and 2011, the Proceeds from short-term available-for-sale investments were $613 million and $1.11 billion, respectively.  Gross realized gains and losses from these sales were not significant.

The following table presents the aggregate maturities of investments in debt securities classified as available for sale at March 31, 2012:

Due	Fair Value
One year or less	$	1,849
One to three years	491
Greater than three years (auction-rate securities)	24

Fair-value considerations

We measure and report certain financial assets and liabilities at fair value on a recurring basis. 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 model to determine the estimated fair value of these investments as of each quarter end.  The inputs used in preparing the discounted cash flow 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.  Changes in unobservable inputs would have an impact on the value of these Level 3 assets.

The following are our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012, and December 31, 2011.  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
	March 31, 2012		Level 1		Level 2		Level 3
Assets:
Money market funds	$	69	$	69	$	—	$	—
Corporate obligations	320		—		320		—
U.S. Government agency and Treasury securities	1,951		730		1,221		—
Auction-rate securities	118		—		—		118
Mutual funds	159		159		—		—
Total assets	$	2,617	$	958	$	1,541	$	118
Liabilities:
Deferred compensation	173		173		—		—
Total liabilities	$	173	$	173	$	—	$	—

	Fair Value
	December 31, 2011		Level 1		Level 2		Level 3
Assets:
Money market funds	$	55	$	55	$	—	$	—
Corporate obligations	294		—		294		—
U.S. Government agency and Treasury securities	2,121		606		1,515		—
Auction-rate securities	134		—		—		134
Mutual funds	169		169		—		—
Total assets	$	2,773	$	830	$	1,809	$	134
Liabilities:
Deferred compensation	191		191		—		—
Total liabilities	$	191	$	191	$	—	$	—

The following table summarizes the changes in fair values for Level 3 assets and liabilities for the periods ended March 31, 2012 and 2011:  

	Level 3
Changes in fair value during the period (pre-tax):	Auction-rate Securities			Contingent Consideration
Balance, December 31, 2010	$	257		$	8
Change in fair value of contingent consideration - included in operating profit	—			(8		)
Change in unrealized loss - included in AOCI	1			—
Redemptions and sales	(1		)	—
Balance, March 31, 2011	257			—
Change in unrealized loss - included in AOCI	(2		)	—
Redemptions and sales	(121		)	—
Balance, December 31, 2011	134			—
Change in unrealized loss - included in AOCI	5			—
Redemptions	(1		)	—
Sales	(20		)	—
Balance, March 31, 2012	$	118		$	—