Financial Instruments

Cash Equivalents and Available-for-Sale Investments

Cash equivalents and available-for-sale investments were as follows:



	As of October 31, 2016									As of October 31, 2015
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	In millions
Cash Equivalents:
Time deposits	$	4,074	$	—	$	—		$	4,074	$	2,367	$	—	$	—		$	2,367
Money market funds	6,549		—		—			6,549		4,592		—		—			4,592
Mutual funds	—		—		—			—		173		—		—			173
Total cash equivalents	10,623		—		—			10,623		7,132		—		—			7,132
Available-for-Sale Investments:
Debt securities:
Time deposits	11		—		—			11		106		—		—			106
Foreign bonds	218		69		—			287		244		69		—			313
Other debt securities	47		—		(12		)	35		53		—		(13		)	40
Total debt securities	276		69		(12		)	333		403		69		(13		)	459
Equity securities:
Mutual funds	—		—		—			—		73		—		—			73
Equity securities in public companies	21		—		(4		)	17		55		7		(9		)	53
Total equity securities	21		—		(4		)	17		128		7		(9		)	126
Total available-for-sale investments	297		69		(16		)	350		531		76		(22		)	585
Total cash equivalents and available-for-sale investments	$	10,920	$	69	$	(16	)	$	10,973	$	7,663	$	76	$	(22	)	$	7,717

In the fourth quarter of fiscal 2016, as a result of the MphasiS transaction, $33 million of time deposits and $214 million of mutual funds previously included in cash equivalents, and $41 million of time deposits, $37 million of foreign bonds and $118 million of mutual funds previously included in available-for-sale investments were divested.

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of October 31, 2016 and 2015, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Interest income related to cash, cash equivalents and debt securities was approximately $122 million in fiscal 2016, $54 million in fiscal 2015 and $64 million in fiscal 2014. Time deposits were primarily issued by institutions outside the U.S. as of October 31, 2016 and 2015. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.

The gross unrealized loss as of October 31, 2016 and 2015 was due primarily to a decline in the fair value of a debt security of $12 million and $13 million, respectively, that has been in a continuous loss position for more than twelve months. The Company does not intend to sell this debt security, and it is not likely that the Company will be required to sell this debt security prior to the recovery of the amortized cost.

Contractual maturities of investments in available-for-sale debt securities were as follows:



	As of October 31, 2016
	Amortized Cost		Fair Value
	In millions
Due in more than five years	$	276	$	333
	$	276	$	333

During fiscal 2016, the Company recognized a $30 million impairment charge related to a public equity investment, as the Company determined that such impairment was other-than-temporary. The Company made its determination primarily based on closing prices during the quarter of impairment and the prospect of recovery in the near term.

Equity securities in privately held companies that are accounted for as cost basis investments are included in Long-term financing receivables and other assets in the Consolidated Balance Sheets. These investments amounted to $128 million and $45 million at October 31, 2016 and 2015, respectively.

Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Consolidated Balance Sheet. These amounted to $2.6 billion at October 31, 2016. For additional information, see Note 20, "Equity Method Investments".

Derivative Instruments

The Company is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, interest rate swaps and total return swaps to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. The Company does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. The Company may designate its derivative contracts as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, the Company categorizes those economic hedges as other derivatives. Derivative instruments directly attributable to the Company are recognized at fair value in the Consolidated Balance Sheets. The change in fair value of the derivative instruments is recognized in the Consolidated and Combined Statements of Earnings or Consolidated and Combined Statements of Comprehensive Income depending upon the type of hedge as further discussed below. The Company classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Consolidated and Combined Statements of Cash Flows.

As a result of its use of derivative instruments, the Company is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, the Company has a policy of only entering into derivative contracts with carefully selected major financial institutions based on their credit ratings and other factors, and the Company maintains dollar risk limits that correspond to each financial institution's credit rating and other factors. The Company's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically reassessing the creditworthiness of its counterparties. Master netting agreements also mitigate credit exposure to counterparties by permitting the Company to net amounts due from the Company to a counterparty against amounts due to the Company from the same counterparty under certain conditions.

To further mitigate credit exposure to counterparties, the Company has collateral security agreements, which allows the Company to hold collateral from, or require the Company to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of the Company and its counterparties. If the Company's credit rating falls below a specified credit rating, the counterparty has the right to request full collateralization of the derivatives' net liability position. Conversely, if the counterparty's credit rating falls below a specified credit rating, the Company has the right to request full collateralization of the derivatives' net liability position. Collateral is generally posted within two business days. The fair value of the Company's derivatives with credit contingent features in a net liability position was $9 million and $35 million at October 31, 2016 and 2015, respectively, all of which were fully collateralized within two business days.

Under the Company's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting the Company that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect the Company's financial position or cash flows as of October 31, 2016 and 2015.

Fair Value Hedges

The Company issues long-term debt in U.S. dollars based on market conditions at the time of financing. The Company may enter into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest rate. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, the Company may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, the Company may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and may designate these swaps as fair value hedges.

In fiscal 2015, concurrent with the issuance of fixed-rate Senior Notes, the Company entered into interest rate swaps to reduce the exposure of $9.5 billion of aggregate principal amount of fixed-rate Senior Notes to changes in fair value resulting from changes in interest rates by achieving LIBOR-based floating interest rate. See Note 13, "Borrowings", for more information related to the issuance of Senior Notes.

For derivative instruments that are designated and qualify as fair value hedges, the Company recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated and Combined Statements of Earnings in the period of change.

Cash Flow Hedges

The Company uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. The Company's foreign currency cash flow hedges mature generally within twelve months; however, forward contracts associated with sales-type and direct-financing leases and intercompany loans extend for the duration of the lease or loan term, which typically range from two to five years.

For derivative instruments that are designated and qualify as cash flow hedges, the Company initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss as a separate component of equity in the Consolidated Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. The Company reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.

Net Investment Hedges

The Company uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. The Company records the effective portion of such derivative instruments together with changes in the fair value of the hedged items in Cumulative translation adjustment as a separate component of Equity in the Consolidated Balance Sheets.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. The Company also uses total return swaps and, to a lesser extent, interest rate swaps, based on equity or fixed income indices, to hedge its executive deferred compensation plan liability.

For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated and Combined Statements of Earnings in the period of change.

Hedge Effectiveness

For interest rate swaps designated as fair value hedges, the Company measures hedge effectiveness by offsetting the change in fair value of the hedged items with the change in fair value of the derivative. For forward contracts designated as cash flow or net investment hedges, the Company measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. The Company recognizes any ineffective portion of the hedge in the Consolidated and Combined Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Consolidated and Combined Statements of Earnings in the period they arise.

Fair Value of Derivative Instruments in the Consolidated Balance Sheets

The gross notional and fair value of derivative instruments in the Consolidated Balance Sheets was as follows:



	As of October 31, 2016										As of October 31, 2015
			Fair Value										Fair Value
	Outstanding Gross Notional		Other Current Assets		Long-Term Financing Receivables and Other Assets		Other Accrued Liabilities		Long-Term Other Liabilities		Outstanding Gross Notional		Other Current Assets		Long-Term Financing Receivables and Other Assets		Other Accrued Liabilities		Long-Term Other Liabilities
	In millions
Derivatives designated as hedging instruments
Fair value hedges:
Interest rate contracts	$	9,500	$	—	$	109	$	—	$	6	$	9,500	$	—	$	—	$	—	$	55
Cash flow hedges:
Foreign currency contracts	7,255		296		172		40		15		8,692		296		206		28		8
Net investment hedges:
Foreign currency contracts	1,891		53		28		23		28		1,861		114		66		7		4
Total derivatives designated as hedging instruments	18,646		349		309		63		49		20,053		410		272		35		67
Derivatives not designated as hedging instruments
Foreign currency contracts	16,496		100		11		103		11		9,283		46		88		50		40
Other derivatives	158		—		—		2		—		127		3		—		—		—
Total derivatives not designated as hedging instruments	16,654		100		11		105		11		9,410		49		88		50		40
Total derivatives	$	35,300	$	449	$	320	$	168	$	60	$	29,463	$	459	$	360	$	85	$	107

Offsetting of Derivative Instruments

The Company recognizes all derivative instruments on a gross basis in the Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under collateral security agreements. As of October 31, 2016 and 2015, information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements was as follows:



	As of October 31, 2016
	In the Consolidated Balance Sheets
	(i)		(ii)	(iii) = (i)–(ii)		(iv)		(v)			(vi) = (iii)–(iv)–(v)
						Gross Amounts Not Offset
	Gross Amount Recognized		Gross Amount Offset	Net Amount Presented		Derivatives		Financial Collateral			Net Amount
	In millions
Derivative assets	$	769		$	769	$	214	$	465	(1)	$	90
Derivative liabilities	$	228		$	228	$	214	$	10	(2)	$	4



	As of October 31, 2015
	In the Consolidated Balance Sheets
	(i)		(ii)		(iii) = (i)–(ii)		(iv)		(v)			(vi) = (iii)–(iv)–(v)
							Gross Amounts Not Offset
	Gross Amount Recognized		Gross Amount Offset		Net Amount Presented		Derivatives		Financial Collateral			Net Amount
	In millions
Derivative assets	$	819	$	—	$	819	$	153	$	631	(1)	$	35
Derivative liabilities	$	192	$	—	$	192	$	153	$	19	(2)	$	20

_______________________________________________________________________________


(1)	Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.


(2)	Represents the collateral posted by the Company through re-use of counterparty cash collateral as of the respective reporting date for the Company's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.

Effect of Derivative Instruments on the Consolidated and Combined Statements of Earnings

The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the fiscal years ended October 31, 2016, 2015 and 2014 was as follows:



	Gains (Losses) Recognized in Income on Derivative and Related Hedged Item
Derivative Instrument	Location	2016		2015			2014		Hedged Item	Location	2016			2015		2014
		In millions									In millions
Interest rate contracts	Interest and other, net	$	158	$	(55	)	$	—	Fixed-rate debt	Interest and other, net	$	(158	)	$	55	$	—

The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the fiscal years ended October 31, 2016, 2015 and 2014 was as follows:



	Gains (Losses) Recognized in OCI on Derivatives (Effective Portion)									Gains (Losses) Reclassified from Accumulated OCI Into Earnings (Effective Portion)
	2016			2015			2014			Location	2016		2015			2014
	In millions										In millions
Cash flow hedges:
Foreign currency contracts	$	(16	)	$	279		$	149		Net revenue	$	19	$	276		$	(4	)
Foreign currency contracts	6			(3		)	13			Cost of products	—		6			3
Foreign currency contracts	—			(2		)	9			Other operating expenses	—		(4		)	(9		)
Foreign currency contracts	—			—			—			Gain on MphasiS divestiture	8		—			—
Foreign currency contracts	236			207			(60		)	Interest and other, net	243		202			(50		)
Total currency hedges	$	226		$	481		$	111			$	270	$	480		$	(60	)
Net investment hedges:
Foreign currency contracts	$	(58	)	$	228		$	57		Interest and other, net	$	—	$	—		$	—

As of October 31, 2016, 2015 and 2014 no portion of the hedging instruments' gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material for fiscal 2016, 2015 and 2014.

As of October 31, 2016, the Company expects to reclassify an estimated net Accumulated other comprehensive gain of approximately $40 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.

The pre-tax effect of derivative instruments not designated as hedging instruments on the Consolidated and Combined Statements of Earnings for the fiscal years ended October 31, 2016, 2015 and 2014 was as follows:



	Gains (Losses) Recognized in Income on Derivatives
	Location	2016			2015		2014
		In millions
Foreign currency contracts	Interest and other, net	$	(425	)	$	11	$	169
Other derivatives	Interest and other, net	(5		)	1		—
Total		$	(430	)	$	12	$	169