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Fair value measurement | 9 Months Ended
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Sep. 30, 2017
Fair Value Disclosures [Abstract] |
Fair value measurement | Fair value measurement To estimate the fair value of our financial assets and liabilities, we use valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing an asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:
Level 1 | — | Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
Level 2 | — | Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs
Level 3 | — | Valuations based on inputs that are unobservable and significant to the overall fair value measurement
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement. The fair values of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows (in millions):
|  | Quoted prices in active markets for identical assets (Level 1) |  | Significant other observable inputs (Level 2) |  | Significant unobservable inputs (Level 3) |  |
Fair value measurement as of September 30, 2017, using: |  |  |  |  | Total
Assets: |  |  |  |  |  |  |  |
Available-for-sale investments: |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 8,018 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,018 |
Other government-related debt securities: |  |  |  |  |  |  |  |
U.S. |  | — |  |  | 224 |  |  | — |  |  | 224 |
Foreign and other |  | — |  |  | 2,671 |  |  | — |  |  | 2,671 |
Corporate debt securities: |  |  |  |  |  |  |  |
Financial |  | — |  |  | 10,254 |  |  | — |  |  | 10,254 |
Industrial |  | — |  |  | 9,906 |  |  | — |  |  | 9,906 |
Other |  | — |  |  | 1,261 |  |  | — |  |  | 1,261 |
Residential mortgage-backed securities |  | — |  |  | 2,204 |  |  | — |  |  | 2,204 |
Other mortgage- and asset-backed securities |  | — |  |  | 2,067 |  |  | — |  |  | 2,067 |
Money market mutual funds |  | 2,455 |  |  | — |  |  | — |  |  | 2,455 |
Other short-term interest-bearing securities |  | — |  |  | 1,746 |  |  | — |  |  | 1,746 |
Equity securities |  | 143 |  |  | — |  |  | — |  |  | 143 |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | — |  |  | 7 |  |  | — |  |  | 7 |
Cross-currency swap contracts |  | — |  |  | 224 |  |  | — |  |  | 224 |
Interest rate swap contracts |  | — |  |  | 40 |  |  | — |  |  | 40 |
Forward interest rate contracts |  | — |  |  | 10 |  |  | — |  |  | 10 |
Total assets |  | $ | 10,616 |  |  | $ | 30,614 |  |  | $ | — |  |  | $ | 41,230 |
Liabilities: |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | $ | — |  |  | $ | 179 |  |  | $ | — |  |  | $ | 179 |
Cross-currency swap contracts |  | — |  |  | 308 |  |  | — |  |  | 308 |
Interest rate swap contracts |  | — |  |  | 5 |  |  | — |  |  | 5 |
Contingent consideration obligations in connection with business combinations |  | — |  |  | — |  |  | 68 |  |  | 68 |
Total liabilities |  | $ | — |  |  | $ | 492 |  |  | $ | 68 |  |  | $ | 560 |
|  | Quoted prices in active markets for identical assets (Level 1) |  | Significant other observable inputs (Level 2) |  | Significant unobservable inputs (Level 3) |  |
Fair value measurement as of December 31, 2016, using: |  |  |  |  | Total
Assets: |  |  |  |  |  |  |  |
Available-for-sale investments: |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 6,614 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,614 |
Other government-related debt securities: |  |  |  |  |  |  |  |
U.S. |  | — |  |  | 299 |  |  | — |  |  | 299 |
Foreign and other |  | — |  |  | 1,759 |  |  | — |  |  | 1,759 |
Corporate debt securities: |  |  |  |  |  |  |  |
Financial |  | — |  |  | 8,460 |  |  | — |  |  | 8,460 |
Industrial |  | — |  |  | 8,789 |  |  | — |  |  | 8,789 |
Other |  | — |  |  | 1,077 |  |  | — |  |  | 1,077 |
Residential mortgage-backed securities |  | — |  |  | 1,940 |  |  | — |  |  | 1,940 |
Other mortgage- and asset-backed securities |  | — |  |  | 1,719 |  |  | — |  |  | 1,719 |
Money market mutual funds |  | 2,782 |  |  | — |  |  | — |  |  | 2,782 |
Other short-term interest-bearing securities |  | — |  |  | 4,188 |  |  | — |  |  | 4,188 |
Equity securities |  | 154 |  |  | — |  |  | — |  |  | 154 |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | — |  |  | 203 |  |  | — |  |  | 203 |
Interest rate swap contracts |  | — |  |  | 41 |  |  | — |  |  | 41 |
Total assets |  | $ | 9,550 |  |  | $ | 28,475 |  |  | $ | — |  |  | $ | 38,025 |
Liabilities: |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | $ | — |  |  | $ | 4 |  |  | $ | — |  |  | $ | 4 |
Cross-currency swap contracts |  | — |  |  | 523 |  |  | — |  |  | 523 |
Interest rate swap contracts |  | — |  |  | 7 |  |  | — |  |  | 7 |
Contingent consideration obligations in connection with business combinations |  | — |  |  | — |  |  | 179 |  |  | 179 |
Total liabilities |  | $ | — |  |  | $ | 534 |  |  | $ | 179 |  |  | $ | 713 |
The fair values of our U.S. Treasury securities, money market mutual funds and equity securities are based on quoted market prices in active markets with no valuation adjustment. Most of our other government-related and corporate debt securities are investment grade and have maturity dates of five years or less from the balance sheet date. Our other government-related debt securities portfolio is composed of securities with weighted-average credit ratings of A- or equivalent by Moody’s Investors Service, Inc. (Moody’s), and BBB+ or equivalent by Standard & Poor’s Financial Services LLC (S&P) or Fitch Ratings Inc. (Fitch); and our corporate debt securities portfolio has a weighted-average credit rating of A- or equivalent by Fitch, and BBB + or equivalent by S&P or Moody’s. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. The inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs. Our residential mortgage-, other mortgage- and asset-backed securities portfolio is composed entirely of senior tranches, with credit ratings of AAA by S&P, Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. The inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs. We value our other short-term interest-bearing securities at amortized cost, which approximates fair value given their near-term maturity dates. All of our foreign currency forward and option derivatives contracts have maturities of three years or less, and all are with counterparties that have minimum credit ratings of A- or equivalent by S&P or Moody’s. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. The inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR), swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts include implied volatility measures. The inputs, when applicable, are at commonly quoted intervals. See Note 12, Derivative instruments. Our cross-currency swap contracts are with counterparties that have minimum credit ratings of A- or equivalent by S&P or Moody’s. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly. The inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit default swap rates and cross-currency basis swap spreads. See Note 12, Derivative instruments. Our interest rate swap contracts are with counterparties that have minimum credit ratings of A- or equivalent by S&P or Moody’s. We estimate the fair values of these contracts by using an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly. The inputs included LIBOR, swap rates and obligor credit default swap rates. Contingent consideration obligations As a result of our business acquisitions, we incurred contingent consideration obligations, as discussed below. The contingent consideration obligations are recorded at their estimated fair values by using probability-adjusted discounted cash flows, and we revalue the obligations each reporting period until the related contingencies have been resolved. The fair value measurements of these obligations are based on significant unobservable inputs related to product candidates acquired in business combinations and are reviewed quarterly by management in our R&D and commercial sales organizations. The inputs include, as applicable, estimated probabilities and timing of achieving specified regulatory and commercial milestones and estimated annual sales. Significant changes that increase or decrease the probabilities of achieving the related regulatory and commercial events, that shorten or lengthen the time required to achieve such events, or that increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of the obligations, as applicable. Changes in the fair values of contingent consideration obligations are recognized in Other operating expenses in the Condensed Consolidated Statements of Income. Changes in the carrying amounts of contingent consideration obligations were as follows (in millions):
| Three months ended September 30, |  | Nine months ended September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Beginning balance | $ | 182 |  |  | $ | 171 |  |  | $ | 179 |  |  | $ | 188 |
Net changes in valuation | (114 | ) |  | 5 |  |  | (111 | ) |  | (12 | )
Ending balance | $ | 68 |  |  | $ | 176 |  |  | $ | 68 |  |  | $ | 176 |
As a result of our acquisition of Dezima in October 2015, we are obligated to pay its former shareholders up to $1.25 billion of additional consideration contingent upon achieving certain development and sales-related milestones and low single-digit royalties on net product sales above a certain threshold for AMG 899. The estimated fair value of the contingent consideration obligations had an aggregate value of $110 million at acquisition. During the three months ended September 30, 2017, we decided to discontinue the internal development of AMG 899, resulting in the release of the contingent consideration liabilities. The remeasurement of these liabilities of $116 million was recognized in Other operating expenses in the Condensed Consolidated Statements of Income and included in Other items, net in the Condensed Consolidated Statement of Cash Flows. See Note 8, Goodwill and other intangible assets, for the impact on the related IPR&D asset. As a result of our acquisition of BioVex Group, Inc. in 2011, we are obligated to pay its former shareholders up to $325 million of additional consideration contingent upon the achievement of certain sales thresholds related to IMLYGIC® (talimogene laherparepvec) within specified periods of time. During the nine months ended September 30, 2017 and 2016, there were no transfers of assets or liabilities between fair value measurement levels, and, except with respect to an IPR&D asset discussed in Note 8, Goodwill and other intangible assets, to the condensed consolidated financial statements, there were no material remeasurements of the fair values of assets and liabilities that are not measured at fair value on a recurring basis. Summary of the fair values of other financial instruments Cash equivalents The estimated fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments. Borrowings We estimated the fair value of our borrowings (Level 2) by taking into consideration indicative prices obtained from a third-party financial institution that utilizes industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; credit spreads; benchmark yields; foreign currency exchange rates, as applicable; and other observable inputs. As of September 30, 2017 and December 31, 2016, the aggregate fair values of our borrowings were $39.0 billion and $36.5 billion, respectively, and the carrying values were $35.8 billion and $34.6 billion, respectively.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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