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.

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


September 30, 2016

Assets

Mutual funds	$	1,516	$	0	$	0	$	1,516	$	0		$	1,516
Commercial paper		0		745		0		745		0			745
Certificates of deposit		0		1,304		0		1,304		0			1,304
U.S. government and agency securities		106,431		6,260		0		112,691		0			112,691
Foreign government bonds		10		5,723		0		5,733		0			5,733
Mortgage- and asset-backed securities		0		4,620		0		4,620		0			4,620
Corporate notes and bonds		0		6,502		1		6,503		0			6,503
Municipal securities		0		343		0		343		0			343
Common and preferred stock		6,696		2,377		18		9,091		0			9,091
Derivatives		6		533		0		539		(164	)		375

Total	$	114,659	$	28,407	$	19	$	143,085	$	(164	)	$	142,921


Liabilities

Derivatives and other	$	3	$	184	$	0	$	187	$	(161	)	$	26



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


June 30, 2016

Assets

Mutual funds	$	1,012	$	0	$	0	$	1,012	$	0		$	1,012
Commercial paper		0		298		0		298		0			298
Certificates of deposit		0		1,000		0		1,000		0			1,000
U.S. government and agency securities		86,492		3,707		0		90,199		0			90,199
Foreign government bonds		10		5,705		0		5,715		0			5,715
Mortgage- and asset-backed securities		0		4,803		0		4,803		0			4,803
Corporate notes and bonds		0		6,361		1		6,362		0			6,362
Municipal securities		0		342		0		342		0			342
Common and preferred stock		6,918		2,114		18		9,050		0			9,050
Derivatives		6		633		0		639		(401	)		238

Total	$	94,438	$	24,963	$	19	$	119,420	$	(401	)	$	119,019


Liabilities

Derivatives and other	$	17	$	613	$	0	$	630	$	(398	)	$	232

(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 the balance sheet presentation of these same assets in Note 4 – Investments.


(In millions)


	September 30, 2016			June 30, 2016

Net fair value of assets measured at fair value on a recurring basis	$	142,921		$	119,019
Cash		3,473			3,501
Common and preferred stock measured at fair value on a nonrecurring basis		802			767
Other investments measured at fair value on a nonrecurring basis		587			593
Less derivative net assets classified as other current assets		(393	)		(246	)
Other		2			12

Recorded basis of investment components	$	147,392		$	123,646

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

During the three months ended September 30, 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.