Valuation of debt and equity investments and certain liabilities

9 Months Ended

Sep. 30, 2020

Valuation of debt and equity investments and certain liabilities

Investments measured at fair value

Available-for-sale debt investments and trading securities are stated at fair value, which is generally based on market prices or broker quotes. See Fair-value considerations below. Unrealized gains and losses from available-for-sale debt securities are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets and any credit losses on available-for-sale debt securities are recorded as an allowance for credit losses with an offset recognized 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.

Other investments

Our other investments include equity-method investments and non-marketable equity investments, which are not measured at fair value. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are recognized in OI&E based on our ownership share of the investee’s financial results.

Non-marketable equity securities are measured at cost with adjustments for observable changes in price or impairments. Gains and losses on non-marketable equity investments are recognized in OI&E.

Details of our investments are as follows:


	September 30, 2020										December 31, 2019
	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 debt securities:
Money market funds	$	911	$	—	$	—	$	1,213	$	—	$	—
Corporate obligations	341		256		—		174		1,216		—
U.S. government agency and Treasury securities	1,047		2,440		—		604		1,734		—
Trading securities:
Mutual funds	—		—		16		—		—		272
Total	2,299		2,696		16		1,991		2,950		272

Other measurement basis:
Equity-method investments	—		—		27		—		—		24
Non-marketable equity investments	—		—		4		—		—		4
Cash on hand	523		—		—		446		—		—
Total	$	2,822	$	2,696	$	47	$	2,437	$	2,950	$	300

As of September 30, 2020 and December 31, 2019, unrealized gains and losses associated with our available-for-sale investments were not material. We did not recognize any credit losses related to available-for-sale investments for the first nine months of 2020 and 2019. All of our debt securities classified as available for sale as of September 30, 2020, have maturities within one year.

Proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $510 million and $220 million for the third quarters of 2020 and 2019, respectively, and $3.71 billion and $2.00 billion for the first nine months of 2020 and 2019, respectively. Gross realized gains and losses from these sales were not material.

During the first nine months of 2020, we entered into total return swaps to economically hedge the variability of certain deferred compensation obligations to employees. As a result, we received proceeds of $253 million from the sale of investments in mutual funds that were previously being utilized to offset this exposure.

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 described 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. We utilize a third-party data service to provide Level 2 valuations. We verify 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. As of September 30, 2020, and December 31, 2019, we had no Level 3 assets or liabilities.

The following are our assets and liabilities that were accounted for at fair value on a recurring basis. 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.


	September 30, 2020										December 31, 2019
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Money market funds	$	911	$	—	$	911	$	1,213	$	—	$	1,213
Corporate obligations	—		597		597		—		1,390		1,390
U.S. government agency and Treasury securities	3,487		—		3,487		2,338		—		2,338
Mutual funds	16		—		16		272		—		272
Total assets	$	4,414	$	597	$	5,011	$	3,823	$	1,390	$	5,213

Liabilities:
Deferred compensation	$	314	$	—	$	314	$	298	$	—	$	298
Total liabilities	$	314	$	—	$	314	$	298	$	—	$	298