Medtronic 2015 Annual Report Download - page 86

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Medtronic plc
Notes to Consolidated Financial Statements (Continued)
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.
Warranty Obligation The Company offers a warranty on various products. The Company estimates the costs that may be
incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. The amount of
the reserve recorded is equal to the net costs to repair or otherwise satisfy the claim. The Company includes the warranty
obligation in other accrued expenses and other long-term liabilities on the consolidated balance sheets. The Company includes
the covered costs associated with field actions, if any, in cost of products sold in the consolidated statements of income.
Changes in the Company’s product warranty obligations during the years ended April 24, 2015 and April 25, 2014 consisted of
the following:
(in millions)
Balance as of April 26, 2013 $35
Warranty claims provision 25
Settlements made (28)
Balance as of April 25, 2014 $32
Fair value of warranty obligation acquired from Covidien 23
Technology upgrade commitment 74
Warranty claims provision 30
Settlements made (24)
Balance as of April 24, 2015 $ 135
Self-Insurance With the exception of insurance that Covidien currently holds for certain risks, it is the Company’s policy to
self-insure the vast majority of its insurable risks including medical and dental costs, disability coverage, physical loss to
property, business interruptions, workers’ compensation, comprehensive general, and product liability. Insurance coverage is
obtained for those risks required to be insured by law or contract. The Company uses claims data and historical experience, as
applicable, to estimate liabilities associated with the exposures that the Company has self-insured. Based on historical loss
trends, the Company believes that its self-insurance program accruals and its existing insurance coverage will be adequate to
cover future losses. Historical trends, however, may not be indicative of future losses. These losses could have a material
adverse impact on the Company’s consolidated financial statements.
Retirement Benefit Plan Assumptions The Company sponsors various retirement benefit plans, including defined benefit
pension plans (pension benefits), post-retirement medical plans (post-retirement benefits), defined contribution savings plans,
and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. Pension
benefit costs include assumptions for the discount rate, retirement age, compensation rate increases, and the expected return on
plan assets. Post-retirement medical benefit costs include assumptions for the discount rate, retirement age, expected return on
plan assets, and health care cost trend rate assumptions.
Revenue Recognition The Company sells its products through direct sales representatives and independent distributors. The
Company recognizes revenue when title to the goods and risk of loss transfers to customers, which may be upon shipment or
upon delivery to the customer site, based on the contract terms or legal requirements in non-U.S. jurisdictions, provided there
are no material remaining performance obligations required of the Company or any matters requiring customer acceptance. In
76