Intel 2008 Annual Report Download - page 55

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
When values are determined using inputs that are both unobservable and significant to the values of the instruments being
measured, we classify those instruments as Level 3 under the SFAS No. 157 hierarchy. As of December 27, 2008, our
financial instruments measured at fair value on a recurring basis included $15.0 billion of assets, of which $1.7 billion (11%)
were classified as Level 3. In addition, our financial instruments measured at fair value on a recurring basis included $421
million of liabilities, of which $147 million (35%) were classified as Level 3. During 2008, we transferred approximately $680
million of assets from Level 3 to Level 2. These assets primarily consisted of floating-rate notes that were transferred from
Level 3 to Level 2 due to a greater availability of observable market data and/or non-binding market consensus prices to value
or corroborate the value of our instruments. During 2008, we recognized an insignificant amount of losses on the assets that
were transferred from Level 3 to Level 2.
During 2008, the Level 3 assets and liabilities that are measured at fair value on a recurring basis experienced net unrealized
fair value declines totaling $160 million. Of these declines, $111 million was recognized in our consolidated statements of
income. We believe that the remaining $49 million, included in other comprehensive income, represents a temporary decline
in the fair value of available-for-sale investments. During 2008, we did not experience any significant realized gains (losses)
related to the Level 3 assets or liabilities in our portfolio.
Marketable Debt Instruments
As of December 27, 2008, our assets measured at fair value on a recurring basis included $14.2 billion of marketable debt
instruments. Of these instruments, approximately $525 million was classified as Level 1, approximately $12.0 billion as Level
2, and approximately $1.6 billion as Level 3.
When available, we use observable market prices for identical securities to value our marketable debt instruments. If
observable market prices are not available, we use non-binding market consensus prices that we seek to corroborate with
observable market data, if available, or non-observable market data. When prices from multiple sources are available for a
given instrument, we use observable market quotes to price our instruments, in lieu of prices from other sources.
Our balance of marketable debt instruments that are measured at fair value on a recurring basis and classified as Level 1 was
classified as such due to the usage of observable market prices for identical securities that are traded in active markets.
Marketable debt instruments in this category generally include certain of our floating-rate notes, corporate bonds, and money
market fund deposits. Management judgment was required to determine our policy that defines the levels at which sufficient
volume and frequency of transactions are met for a market to be considered active. Our assessment of an active market for our
marketable debt instruments generally takes into consideration activity during each week of the one-month period prior to the
valuation date of each individual instrument, including the number of days each individual instrument trades and the average
weekly trading volume in relation to the total outstanding amount of the issued instrument.
Approximately 10% of our balance of marketable debt instruments that are measured at fair value on a recurring basis and
classified as Level 2 was classified as such due to the usage of observable market prices for identical securities that are traded
in less active markets. When observable market prices for identical securities are not available, we price our marketable debt
instruments using: non-binding market consensus prices that are corroborated with observable market data; quoted market
prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived
from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary
valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-
binding and binding broker quotes; observable market prices for identical and/or similar securities; and the internal
assumptions of pricing providers or brokers that use observable market inputs and to a lesser degree non-observable market
inputs. We corroborate the non-binding market consensus prices with observable market data using statistical models when
observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield
curves, currency spot and forward rates, and credit ratings. Approximately 45% of our balance of marketable debt instruments
that are measured at fair value on a recurring basis and classified as Level 2 was classified as such due to the usage of a
discounted cash flow model, approximately 40% due to the usage of non-binding market consensus prices that are
corroborated with observable market data, and approximately 5% due to the usage of quoted market prices for similar
instruments. Marketable debt instruments classified as Level 2 generally include commercial paper, bank time deposits,
municipal bonds, certain of our money market fund deposits, and a majority of floating-rate notes and corporate bonds.
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