Medtronic 2011 Annual Report Download - page 74

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70 Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
Valuation Techniques Financial assets that are classified as Level 1
securities include highly liquid government bonds within the U.S.
government and agency securities, marketable equity securities,
and exchange-traded funds for which quoted market prices are
available. In addition, the Company has determined that foreign
currency forward contracts are included in Level 1 as these are
valued using quoted market prices in active markets which have
identical assets or liabilities.
The valuation for most fixed maturity securities are classified as
Level 2. Financial assets that are classified as Level 2 include
corporate debt securities, U.S. government and agency securities,
foreign government and agency securities, certificates of deposit,
other 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 such as pricing for similar
securities, recently executed transactions, cash flow models with
yield curves, and benchmark securities. In addition, the Company
determined that interest rate swaps are included in Level 2 as the
Company uses inputs other than quoted prices that are observable
for the asset. The Level 2 derivative positions are primarily valued
using standard calculations and models that use readily observable
market data as their basis.
Financial assets are considered Level 3 when their fair values
are determined using pricing models, discounted cash flow
methodologies, or similar techniques, and at least one significant
model assumption or input is unobservable. Level 3 financial
assets also include certain investment securities for which there is
limited market activity such that the determination of fair value
requires significant judgment or estimation. Level 3 investment
securities primarily include certain corporate debt securities,
auction rate securities, certain mortgage-backed securities, and
certain other asset-backed securities for which there was a
decrease in the observability of market pricing for these
investments. At April 29, 2011, these securities were valued
primarily using broker pricing models that incorporate transaction
details such as contractual terms, maturity, timing, and amount of
expected future cash flows, as well as assumptions about liquidity
and credit valuation adjustments of marketplace participants.
The Company reviews the fair value hierarchy classification on
a quarterly basis. Changes in the ability to observe valuation
inputs may result in a reclassification of levels for certain securities
within the fair value hierarchy. The Company’s policy is to
recognize transfers into and out of levels within the fair value
hierarchy at the end of the fiscal quarter in which the actual event
or change in circumstances that caused the transfer occurs. There
were no significant transfers between Level 1, Level 2, or Level 3
during the fiscal years ended April 29, 2011 or April 30, 2010.
When a determination is made to classify an asset or liability
within Level 3, the determination is based upon the significance
of the unobservable inputs to the overall fair value measurement.
The following table provides a reconciliation of the beginning and
ending balances of items measured at fair value on a recurring
basis in the tables above that used significant unobservable
inputs (Level 3):
Fiscal Year
(in millions) 2011 2010
Beginning Balance $213 $205
Total realized losses and other-than-temporary
impairment losses included in earnings (6) (9)
Total unrealized gains included in other
comprehensive income 27 58
Net purchases, issuances, and settlements (43) (41)
Ending Balance $191 $213
Assets and Liabilities That Are Measured at Fair Value on a
Nonrecurring Basis Non-financial assets such as goodwill, intangible
assets, and property, plant, and equipment are measured at fair
value when there is an indicator of impairment and recorded at
fair value only when an impairment is recognized.
The Company holds investments in equity and other securities
that are accounted for using the cost or equity method, which are
classified as long-term investments in the consolidated balance
sheets. The aggregate carrying amount of these investments
approximated $656 million at April 29, 2011 and $542 million
at April 30, 2010. These cost or equity method investments are
measured at fair value on a nonrecurring basis. The fair value
of the Company’s cost or equity method investments is not
estimated if there are no identified events or changes in
circumstance that may have a significant adverse effect on the
fair value of these investments. During fiscal years 2011, 2010, and