v2.4.0.6
Fair Value Measurements
 6 Months Ended
Nov. 30, 2012
Fair Value Measurements

NOTE 5 — Fair Value Measurements

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the FASB that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach).

The levels of hierarchy are described below:

 

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Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

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Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

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Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.

Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include an analysis of period-over-period fluctuations and comparison to another independent pricing vendor.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of November 30, 2012 and May 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

     November 30, 2012
    

Fair Value

Measurements Using

      Assets /
Liabilities at		       
(In millions)    Level 1      Level 2      Level 3      Fair Value      Balance Sheet Classification

ASSETS

                                         

Derivatives:

                                         

Foreign exchange forwards and options

    $ 0       $ 116       $ 0       $ 116       Other current assets and other long-term assets

Interest rate swap contracts

      0         13         0         13       Other long-term assets

Total derivatives

      0         129         0         129        

Available-for-sale securities:

                                         

U.S. Treasury securities

      510         0         0         510       Cash and equivalents

Commercial paper and bonds

      0         212         0         212       Cash and equivalents

Money market funds

      0         492         0         492       Cash and equivalents

U.S. Treasury securities

      707         0         0         707       Short-term investments

U.S. Agency securities

      0         223         0         223       Short-term investments

Commercial paper and bonds

      0         304         0         304       Short-term investments

Non-marketable preferred stock

      0         0         5         5       Other long-term assets

Total available-for-sale securities

      1,217         1,231         5         2,453        

TOTAL ASSETS

    $ 1,217       $ 1,360       $ 5       $ 2,582        

LIABILITIES

                                         

Derivatives:

                                         

Embedded derivatives

    $ 0       $ 1       $ 0       $ 1       Accrued liabilities

Foreign exchange forwards and options

      0         82         0         82       Accrued liabilities and other long-term liabilities

TOTAL LIABILITIES

    $ 0       $ 83       $ 0       $ 83        

 

 

     May 31, 2012
    

Fair Value

Measurements Using

      Assets /
Liabilities at		       
(In millions)    Level 1      Level 2      Level 3      Fair Value      Balance Sheet Classification

ASSETS

                                         

Derivatives:

                                         

Foreign exchange forwards and options

    $ 0       $ 265       $ 0       $ 265       Other current assets and other long-term assets

Embedded derivatives

      0         1         0         1       Other current assets

Interest rate swap contracts

      0         15         0         15       Other current assets and other long-term assets

Total derivatives

      0         281         0         281        

Available-for-sale securities:

                                         

U.S. Treasury securities

      226         0         0         226       Cash and equivalents

U.S. Agency securities

      0         254         0         254       Cash and equivalents

Commercial paper and bonds

      0         159         0         159       Cash and equivalents

Money market funds

      0         770         0         770       Cash and equivalents

U.S. Treasury securities

      927         0         0         927       Short-term investments

U.S. Agency securities

      0         230         0         230       Short-term investments

Commercial paper and bonds

      0         283         0         283       Short-term investments

Non-marketable preferred stock

      0         0         3         3       Other long-term assets

Total available-for-sale securities

      1,153         1,696         3         2,852        

TOTAL ASSETS

    $ 1,153       $ 1,977       $ 3       $ 3,133        

LIABILITIES

                                         

Derivatives:

                                         

Foreign exchange forwards and options

    $ 0       $ 55       $ 0       $ 55       Accrued liabilities and other long-term liabilities

TOTAL LIABILITIES

    $ 0       $ 55       $ 0       $ 55        

Derivative financial instruments include foreign exchange forwards, embedded derivatives and interest rate swap contracts. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates, and considers nonperformance risk of the Company and that of its counterparties. Adjustments relating to these nonperformance risks were not material at November 30, 2012 or May 31, 2012. Refer to Note 9 — Risk Management and Derivatives for additional detail.

Available-for-sale securities comprise investments in U.S. Treasury and agency securities, money market funds, and corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2).

The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These investments are valued using internally developed models with unobservable inputs. These Level 3 investments are an immaterial portion of our portfolio. Changes in Level 3 investment assets were immaterial during the six months ended November 30, 2012 and the year ended May 31, 2012.

No transfers among the levels within the fair value hierarchy occurred during the six months ended November 30, 2012 and the year ended May 31, 2012.

As of November 30, 2012 and May 31, 2012, the Company had no assets or liabilities that were required to be measured at fair value on a non-recurring basis.

Short-Term Investments

As of November 30, 2012 and May 31, 2012, short-term investments consisted of available-for-sale securities. As of November 30, 2012, the Company held $937 million of available-for-sale securities with maturity dates within one year from purchase date and $297 million with maturity dates over one year and less than five years from purchase date within short-term investments. As of May 31, 2012, the Company held $1,129 million of available-for-sale securities with maturity dates within one year from purchase date and $311 million with maturity dates over one year and less than five years from purchase date within short-term investments.

Short-term investments classified as available-for-sale consist of the following at fair value:

 

     November 30,      May 31,  
(In millions)    2012      2012  

Available-for-sale investments:

                  

U.S. treasury and agencies

    $ 930       $ 1,157   

Commercial paper and bonds

      304         283   

TOTAL AVAILABLE-FOR-SALE INVESTMENTS

    $             1,234       $             1,440   

Interest income related to cash and equivalents and short-term investments included within interest (income) expense, net was $6 million and $7 million for each of the three month periods ended November 30, 2012 and 2011, respectively, and $14 million and $15 million for each of the six month periods ended November 30, 2012 and 2011, respectively.

Fair Value of Long-Term Debt and Notes Payable

The Company’s long-term debt is recorded at adjusted cost, net of amortized premiums and discounts and interest rate swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments (Level 2). The fair value of the Company’s long-term debt, including the current portion, was approximately $237 million at November 30, 2012 and $283 million at May 31, 2012.

The carrying amounts reflected in the unaudited condensed consolidated balance sheets for notes payable approximate fair value.