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Fair value measurement | 9 Months Ended
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Sep. 30, 2018
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, 2018, using: |  |  |  |  | Total
Assets: |  |  |  |  |  |  |  |
Interest-bearing securities: |  |  |  |  |  |  |  |
U.S. Treasury notes |  | $ | 2,626 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,626 |
U.S. Treasury bills |  | 5,376 |  |  | — |  |  | — |  |  | 5,376 |
Other government-related debt securities: |  |  |  |  |  |  |  |
U.S. |  | — |  |  | 109 |  |  | — |  |  | 109 |
Foreign and other |  | — |  |  | 1,008 |  |  | — |  |  | 1,008 |
Corporate debt securities: |  |  |  |  |  |  |  |
Financial |  | — |  |  | 2,697 |  |  | — |  |  | 2,697 |
Industrial |  | — |  |  | 2,578 |  |  | — |  |  | 2,578 |
Other |  | — |  |  | 573 |  |  | — |  |  | 573 |
Residential-mortgage-backed securities |  | — |  |  | 1,462 |  |  | — |  |  | 1,462 |
Other mortgage- and asset-backed securities |  | — |  |  | 473 |  |  | — |  |  | 473 |
Money market mutual funds |  | 8,955 |  |  | — |  |  | — |  |  | 8,955 |
Other short-term interest-bearing securities |  | — |  |  | 3,561 |  |  | — |  |  | 3,561 |
Equity securities |  | 217 |  |  | — |  |  | — |  |  | 217 |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | — |  |  | 121 |  |  | — |  |  | 121 |
Cross-currency swap contracts |  | — |  |  | 261 |  |  | — |  |  | 261 |
Total assets |  | $ | 17,174 |  |  | $ | 12,843 |  |  | $ | — |  |  | $ | 30,017 |
Liabilities: |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | $ | — |  |  | $ | 49 |  |  | $ | — |  |  | $ | 49 |
Cross-currency swap contracts |  | — |  |  | 306 |  |  | — |  |  | 306 |
Interest rate swap contracts |  | — |  |  | 310 |  |  | — |  |  | 310 |
Contingent consideration obligations |  | — |  |  | — |  |  | 66 |  |  | 66 |
Total liabilities |  | $ | — |  |  | $ | 665 |  |  | $ | 66 |  |  | $ | 731 |
|  | 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, 2017, using: |  |  |  |  | Total
Assets: |  |  |  |  |  |  |  |
Interest-bearing securities: |  |  |  |  |  |  |  |
U.S. Treasury notes |  | $ | 8,242 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,242 |
Other government-related debt securities: |  |  |  |  |  |  |  |
U.S. |  | — |  |  | 223 |  |  | — |  |  | 223 |
Foreign and other |  | — |  |  | 2,422 |  |  | — |  |  | 2,422 |
Corporate debt securities: |  |  |  |  |  |  |  |
Financial |  | — |  |  | 10,072 |  |  | — |  |  | 10,072 |
Industrial |  | — |  |  | 9,670 |  |  | — |  |  | 9,670 |
Other |  | — |  |  | 1,390 |  |  | — |  |  | 1,390 |
Residential-mortgage-backed securities |  | — |  |  | 2,168 |  |  | — |  |  | 2,168 |
Other mortgage- and asset-backed securities |  | — |  |  | 2,297 |  |  | — |  |  | 2,297 |
Money market mutual funds |  | 3,245 |  |  | — |  |  | — |  |  | 3,245 |
Other short-term interest-bearing securities |  | — |  |  | 1,440 |  |  | — |  |  | 1,440 |
Equity securities |  | 149 |  |  | — |  |  | — |  |  | 149 |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | — |  |  | 6 |  |  | — |  |  | 6 |
Cross-currency swap contracts |  | — |  |  | 270 |  |  | — |  |  | 270 |
Interest rate swap contracts |  | — |  |  | 10 |  |  | — |  |  | 10 |
Total assets |  | $ | 11,636 |  |  | $ | 29,968 |  |  | $ | — |  |  | $ | 41,604 |
Liabilities: |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |
Foreign currency contracts |  | $ | — |  |  | $ | 204 |  |  | $ | — |  |  | $ | 204 |
Cross-currency swap contracts |  | — |  |  | 220 |  |  | — |  |  | 220 |
Interest rate swap contracts |  | — |  |  | 61 |  |  | — |  |  | 61 |
Contingent consideration obligations |  | — |  |  | — |  |  | 69 |  |  | 69 |
Total liabilities |  | $ | — |  |  | $ | 485 |  |  | $ | 69 |  |  | $ | 554 |
Interest-bearing and equity securities 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 Standard & Poor’s Financial Services LLC (S&P), Moody’s Investors Service, Inc. (Moody’s) 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 use 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 use 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 or 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. Derivatives All of our foreign currency forward and option derivative 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, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, the London Interbank Offered Rate (LIBOR), swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts include implied volatility measures. These inputs, where applicable, are at commonly quoted intervals. See Note 14, Derivative instruments. Our cross-currency swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit default swap rates and cross-currency basis swap spreads. See Note 14, Derivative instruments. Our interest rate swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. 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. These inputs include LIBOR, swap rates and obligor credit default swap rates. See Note 14, Derivative instruments. 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 fair values by using probability-adjusted discounted cash flows, and we revalue these 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 licensing rights and product candidates acquired in business combinations, and are reviewed quarterly by management in our R&D and commercial sales organizations. These 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, or 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,
| 2018 |  | 2017 |  | 2018 |  | 2017
Beginning balance | $ | 72 |  |  | $ | 182 |  |  | $ | 69 |  |  | $ | 179 |
Addition from K-A acquisition | — |  |  | — |  |  | 45 |  |  | — |
Net changes in valuations | (6 | ) |  | (114 | ) |  | (48 | ) |  | (111 | )
Ending balance | $ | 66 |  |  | $ | 68 |  |  | $ | 66 |  |  | $ | 68 |
As a result of our acquisition of BioVex Group, Inc., in 2011, we are obligated to pay its former shareholders additional consideration contingent upon achieving certain sales-related milestones with regard to IMLYGIC® (talimogene laherparepvec). As a result of our acquisition of K-A in 2018, we are obligated to make single-digit royalty payments to Kirin contingent upon sales of brodalumab. See Note 3, Business combinations. During 2017, we decided to discontinue the internal development of AMG 899, an IPR&D asset, and accordingly, reduced from $116 million to zero the related contingent consideration liabilities. The remeasurement of these liabilities is included in Other items, net, in the Condensed Consolidated Statements of Cash Flows. During the nine months ended September 30, 2018 and 2017, there were no transfers of assets or liabilities between fair value measurement levels. During the nine months ended September 30, 2018 and 2017, there were no material remeasurements to fair values of assets and liabilities that are not measured at fair value on a recurring basis, except with respect to IPR&D assets discussed above, and in Note 10, Goodwill and other intangible assets. Summary of the fair values of other financial instruments Cash equivalents The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments. Borrowings We estimated the fair values of our borrowings by using Level 2 inputs. As of September 30, 2018 and December 31, 2017, the aggregate fair values of our borrowings were $36.0 billion and $38.6 billion, respectively, and the carrying values were $34.4 billion and $35.3 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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