MICROSOFT CORP - 10-Q filing on 2016-04-21

FAIR VALUE MEASUREMENTS

9 Months Ended

Mar. 31, 2016

NOTE 6 — FAIR VALUE MEASUREMENTS

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•

Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Our Level 1 non-derivative investments primarily include U.S. government securities, domestic and international equities, and actively traded mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

•

Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies and commodities. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, common and preferred stock, mortgage- and asset-backed securities, U.S. government and agency securities, and foreign government bonds. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

•

Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets primarily comprise investments in common and preferred stock, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.

Our other current financial assets and our current financial liabilities have fair values that approximate their carrying values.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:



(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	^(a)		Net Fair Value


March 31, 2016

Assets

Mutual funds	$	1,111	$	0	$	0	$	1,111	$	0		$	1,111
Commercial paper		0		824		0		824		0			824
Certificates of deposit		0		1,324		0		1,324		0			1,324
U.S. government and agency securities		78,052		3,684		0		81,736		0			81,736
Foreign government bonds		10		5,306		0		5,316		0			5,316
Mortgage- and asset-backed securities		0		4,708		0		4,708		0			4,708
Corporate notes and bonds		0		6,520		1		6,521		0			6,521
Municipal securities		0		332		0		332		0			332
Common and preferred stock		7,833		2,114		18		9,965		0			9,965
Derivatives		1		699		0		700		(243	)		457

Total	$	87,007	$	25,511	$	19	$	112,537	$	(243	)	$	112,294


Liabilities

Derivatives and other	$	15	$	360	$	0	$	375	$	(240	)	$	135



(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	^(a)		Net Fair Value


June 30, 2015

Assets

Mutual funds	$	1,100	$	0	$	0	$	1,100	$	0		$	1,100
Commercial paper		0		1		0		1		0			1
Certificates of deposit		0		906		0		906		0			906
U.S. government and agency securities		71,930		955		0		72,885		0			72,885
Foreign government bonds		131		5,299		0		5,430		0			5,430
Mortgage- and asset-backed securities		0		4,917		0		4,917		0			4,917
Corporate notes and bonds		0		7,108		1		7,109		0			7,109
Municipal securities		0		319		0		319		0			319
Common and preferred stock		8,585		2,277		14		10,876		0			10,876
Derivatives		4		979		5		988		(162	)		826

Total	$	81,750	$	22,761	$	20	$	104,531	$	(162	)	$	104,369


Liabilities

Derivatives and other	$	5	$	159	$	54	$	218	$	(161	)	$	57

(a)	These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.

The changes in our Level 3 financial instruments that are measured at fair value on a recurring basis were immaterial during the periods presented.

The following table reconciles the total “Net Fair Value” of assets above to our balance sheet presentation of these same assets in Note 4 – Investments.


(In millions)


March 31, 2016				June 30, 2015

Net fair value of assets measured at fair value on a recurring basis	$	112,294		$	104,369
Cash		3,691			3,679
Common and preferred stock measured at fair value on a nonrecurring basis		770			561
Other investments measured at fair value on a nonrecurring basis		557			589
Less derivative net assets classified as other current assets		(486	)		(648	)
Other		16			4

Recorded basis of investment components	$	116,842		$	108,554

Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three and nine months ended March 31, 2016 and 2015, we did not record any material other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.