Medtronic 2009 Annual Report Download - page 75

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71
Medtronic, Inc.
Gains and losses recognized on debt instruments are recorded
in interest expense/(income), net in the consolidated statements
of earnings. Gains and losses recognized on equity instruments
are recorded in other expense, net in the consolidated statements
of earnings. Gains and losses from the sale of investments are
calculated based on the specific identification method.
The Company historically lent certain fixed income securities
to enhance its investment income. Those lending activities
were indemnified against counterparty risk and collateralized at
an average rate of 102 percent, with the collateral determined
based on the underlying securities and creditworthiness of the
borrowers. The value of the securities on loan at April 25, 2008
was $610 million. Due to the Company’s concerns about the
liquidity condition in the fixed income markets, the Company
suspended its securities lending program in the second quarter of
fiscal year 2009.
6. Fair Value Measurements
As discussed in Note 1, the Company adopted SFAS No. 157
effective April 26, 2008, with respect to fair value measurements
of (a) nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the Company’s financial statements on
a recurring basis (at least annually) and (b) all financial assets
and liabilities. SFAS No. 157 clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands the
disclosures on fair value measurements.
Under SFAS No. 157, fair value is defined as the exit price, or
the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants as of the measurement date. SFAS No. 157 also
establishes a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs
be used when available. Observable inputs are inputs market
participants would use in valuing the asset or liability developed
based on market data obtained from sources independent of
the Company. Unobservable inputs are inputs that reflect the
Company’s assumptions about the factors market participants
would use in valuing the asset or liability developed based upon
the best information available in the circumstances. The
categorization of financial assets and financial liabilities within
the valuation hierarchy is based upon the lowest level of input
that is significant to the fair value measurement. The hierarchy is
broken down into three levels defined as follows:
• Level 1—Inputs are quoted prices in active markets for
identical assets or liabilities. The Company’s Level 1 assets
include money market funds, treasury bonds, marketable
equity securities and foreign currency hedges that are valued
using quoted market prices.
• Level 2—Inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
inputs (other than quoted prices) that are observable for the
asset or liability, either directly or indirectly. The Company’s
Level 2 assets and liabilities primarily include government
agency bonds, corporate debt securities, asset backed
securities and certain mortgage backed securities whose
value is determined using inputs that are observable in the
market or can be derived principally from or corroborated by
observable market data.
• Level 3—Inputs are unobservable inputs for the asset or
liability. The Company’s Level 3 assets include certain
corporate debt securities, auction rate securities, certain
mortgage backed securities and certain asset backed
securities. See the section below titled Level 3 Valuation
Techniques for further discussion of how the Company
determines fair value for investments classified as Level 3.
Assets and Liabilities That Are Measured at Fair Value on a Recurring
Basis For the Company, effective April 26, 2008, fair value under
SFAS No. 157 is principally applied to financial assets and liabilities
such as marketable equity securities and debt securities that are
classified and accounted for as available-for-sale, and derivative
instruments. Derivatives include cash flow hedges, freestanding
derivative forward contracts and net investment hedges. These
items were previously and will continue to be marked-to-market
at each reporting period; however, the definition of fair value is
now applied using SFAS No. 157. The information in the following
paragraphs and tables primarily addresses matters relative to
these financial assets and liabilities. Separately, there were no
material fair value measurements with respect to nonfinancial
assets or liabilities that are recognized or disclosed at fair value
in the Company’s financial statements on a recurring basis
subsequent to the effective date of SFAS No. 157.