Medtronic 2014 Annual Report Download - page 97

Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
Fair Value
as of
April 26, 2013
Fair Value Measurements
Using Inputs Considered as
(in millions) Level 1 Level 2 Level 3
Assets:
Corporate debt securities $ 4,661 $ — $ 4,651 $ 10
Auction rate securities 103 — — 103
Mortgage-backed securities 1,053 — 1,039 14
U.S. government and agency securities 3,898 1,833 2,065 —
Foreign government and agency securities 38 — 38 —
Certificates of deposit 6 — 6 —
Other asset-backed securities 541 — 541 —
Marketable equity securities 155 155 — —
Exchange-traded funds 50 50 — —
Derivative assets 394 213 181 —
Total assets $ 10,899 $ 2,251 $ 8,521 $ 127
Liabilities:
Derivative liabilities $ 58 $ 40 $ 18 $ —
Contingent consideration associated with
acquisitions subsequent to April 24, 2009 142 — — 142
Total liabilities $ 200 $ 40 $ 18 $ 142
Valuation Techniques
Financial assets that are classified as Level 1 securities include highly liquid government bonds within 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 will be 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, debt funds, 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, 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 instruments 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 include certain corporate debt securities, auction
rate securities, and certain mortgage-backed securities. With the exception of auction rate securities, these securities were
valued using third-party pricing sources 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 by market
participants. The fair value of auction rate securities is estimated by the Company using a discounted cash flow model, which
incorporates significant unobservable inputs. The significant unobservable inputs used in the fair value measurement of the
Company’s auction rate securities are years to principal recovery and the illiquidity premium that is incorporated into the
discount rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher)
fair value of the securities. Additionally, the Company uses Level 3 inputs in the measurement of contingent consideration and
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