Financial Instruments | Financial Instruments Debt Securities We classify our marketable debt securities within Level 2 in the fair value hierarchy because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine fair value. In January 2018, we reclassified our U.S. government notes included in marketable debt securities from Level 1 to Level 2 within the fair value hierarchy as these securities are priced based on a combination of quoted prices for identical or similar instruments in active markets and models with significant observable market inputs. Prior period amounts have been reclassified to conform with current period presentation. The vast majority of our government bond holdings are highly liquid U.S. government notes. We classify our non-marketable debt securities within Level 3 in the fair value hierarchy because they are preferred stock and convertible notes issued by private companies without quoted market prices. To estimate the fair value of our non-marketable debt securities, we use a combination of valuation methodologies, including market and income approaches based on prior transaction prices; estimated timing, probability, and amount of cash flows; and illiquidity considerations. Financial information of private companies may not be available and consequently we estimate the fair value based on the best available information at the measurement date. The following tables summarize our debt securities by significant investment categories as of December 31, 2017 and 2018 (in millions): As of December 31, 2017 Adjusted Cost Gross Unrealized Gains Gross Fair Cash and Marketable Non-Marketable Level 2: Time deposits (1) $ 359 $ 0 $ 0 $ 359 $ 357 $ 2 $ 0 Government bonds (2) 51,548 10 (406 ) 51,152 1,241 49,911 0 Corporate debt securities 24,269 21 (135 ) 24,155 126 24,029 0 Mortgage-backed and asset-backed securities 16,789 13 (180 ) 16,622 0 16,622 0 92,965 44 (721 ) 92,288 1,724 90,564 0 Level 3: Non-marketable debt securities 1,083 811 0 1,894 0 0 1,894 Total $ 94,048 $ 855 $ (721 ) $ 94,182 $ 1,724 $ 90,564 $ 1,894 As of December 31, 2018 Adjusted Cost Gross Unrealized Gains Gross Fair Cash and Cash Equivalents Marketable Non-Marketable Level 2: Time deposits (1) $ 2,202 $ 0 $ 0 $ 2,202 $ 2,202 $ 0 $ 0 Government bonds (2) 53,634 71 (414 ) 53,291 3,717 49,574 0 Corporate debt securities 25,383 15 (316 ) 25,082 44 25,038 0 Mortgage-backed and asset-backed securities 16,918 11 (324 ) 16,605 0 16,605 0 98,137 97 (1,054 ) 97,180 5,963 91,217 0 Level 3: Non-marketable debt securities 147 116 0 263 0 0 263 Total $ 98,284 $ 213 $ (1,054 ) $ 97,443 $ 5,963 $ 91,217 $ 263 (1) As of December 31, 2017, the majority of our time deposits were foreign deposits. As of December 31, 2018, the majority of our time deposits are domestic deposits. (2) Government bonds are comprised primarily of U.S. government notes, and also includes U.S. government agencies, foreign government bonds, and municipal securities. We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method. We recognized gross realized gains of $251 million , $185 million , and $1.3 billion for the years ended December 31, 2016 , 2017 , and 2018 , respectively. We recognized gross realized losses of $304 million , $295 million , and $143 million for the years ended December 31, 2016 , 2017 , and 2018 , respectively. We reflect these gains and losses as a component of other income (expense), net, in the Consolidated Statements of Income. The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions): As of Due in 1 year $ 23,669 Due in 1 year through 5 years 54,504 Due in 5 years through 10 years 2,236 Due after 10 years 10,808 Total $ 91,217 The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2017 and 2018 , aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions): As of December 31, 2017 Less than 12 Months 12 Months or Greater Total Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized Government bonds (1) $ 28,836 $ (211 ) $ 17,660 $ (195 ) $ 46,496 $ (406 ) Corporate debt securities 18,300 (114 ) 1,710 (21 ) 20,010 (135 ) Mortgage-backed and asset-backed securities 11,061 (105 ) 3,449 (75 ) 14,510 (180 ) Total $ 58,197 $ (430 ) $ 22,819 $ (291 ) $ 81,016 $ (721 ) As of December 31, 2018 Less than 12 Months 12 Months or Greater Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Government bonds (1) $ 12,019 $ (85 ) $ 23,877 $ (329 ) $ 35,896 $ (414 ) Corporate debt securities 10,171 (107 ) 11,545 (209 ) 21,716 (316 ) Mortgage-backed and asset-backed securities 5,534 (75 ) 8,519 (249 ) 14,053 (324 ) Total $ 27,724 $ (267 ) $ 43,941 $ (787 ) $ 71,665 $ (1,054 ) (1) Government bonds are comprised primarily of U.S. government notes, and also includes U.S. government agencies, foreign government bonds, and municipal securities. During the years ended December 31, 2016 , 2017 and 2018 , we did not recognize any significant other-than-temporary impairment losses. Losses on impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 6 for further details on other income (expense), net. The following table presents a reconciliation for our non-marketable debt securities measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions): Year Ended December 31, 2017 2018 Beginning balance $ 1,165 $ 1,894 Total net gains (losses) Included in earnings (10 ) 603 Included in other comprehensive income 707 (1 ) Purchases 88 47 Sales (2 ) (52 ) Settlements (1) (54 ) (2,228 ) Ending balance $ 1,894 $ 263 (1) During the year ended December 31, 2018 the terms of a non-marketable debt security were modified resulting in an unrealized $1.3 billion gain recognized in other income (expense), net and a reclassification of the security to non-marketable equity securities. Equity Investments The following discusses our marketable equity securities, non-marketable equity securities, realized and unrealized gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method. Marketable equity securities Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets. Prior to January 1, 2018, we accounted for the majority of our marketable equity securities at fair value with unrealized gains and losses recognized in accumulated other comprehensive income on the balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized in other income (expense), net. Starting January 1, 2018, upon our adoption of ASU 2016-01, unrealized gains and losses during the year are recognized in other income (expense), net. Upon adoption, we reclassified $98 million net unrealized gains related to marketable equity securities from accumulated other comprehensive income to opening retained earnings. The following table summarizes marketable equity securities measured at fair value by significant investment categories as of December 31, 2017 and 2018 (in millions): As of December 31, 2017 Cash and Cash Equivalents Marketable Level 1: Money market funds $ 1,833 $ 0 Marketable equity securities 0 340 1,833 340 Level 2: Mutual funds (1) 0 252 Total $ 1,833 $ 592 (1) The fair value option was elected for mutual funds with gains (losses) recognized in other income (expense), net. As of December 31, 2018 Cash and Cash Equivalents Marketable Level 1: Money market funds $ 3,493 $ 0 Marketable equity securities 0 994 3,493 994 Level 2: Mutual funds 0 228 Total $ 3,493 $ 1,222 Non-marketable equity securities Our non-marketable equity securities are investments in privately held companies without readily determinable market values. Prior to January 1, 2018, we accounted for our non-marketable equity securities at cost less impairment. Realized gains and losses on non-marketable securities sold or impaired were recognized in other income (expense), net. As of December 31, 2017, non-marketable equity securities accounted for under the cost method had a carrying value of $ 4.5 billion and a fair value of approximately $ 8.8 billion . On January 1, 2018, we adopted ASU 2016-01 which changed the way we account for non-marketable securities. The carrying value of our non-marketable equity securities is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. Because we adopted ASU 2016-01 prospectively, we recognize unrealized gains that occurred in prior periods in the first period after January 1, 2018 when there is an observable transaction for our securities. Non-marketable equity securities remeasured during the year ended December 31, 2018 are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods using the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. The following is a summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to the carrying value of non-marketable equity securities held as of December 31, 2018 (in millions): Twelve Months Ended December 31, 2018 Upward adjustments $ 4,285 Downward adjustments (including impairment) (178 ) Total unrealized gain (loss) for non-marketable equity securities $ 4,107 The following table summarizes the total carrying value of our non-marketable equity securities held as of December 31, 2018 including cumulative unrealized upward and downward adjustments made to the initial cost basis of the securities (in millions): Initial cost basis (1) $ 8,168 Upward adjustments 4,285 Downward adjustments (including impairment) (178 ) Total carrying value at the end of the period $ 12,275 (1) Includes $2.2 billion for a non-marketable equity security reclassified from a non-marketable debt security during 2018. During the year ended December 31, 2018 , included in the $12.3 billion of non-marketable equity securities, $6.9 billion were measured at fair value based on observable market transactions, resulting in a net unrealized gain of $4.1 billion . Gains and losses on marketable and non-marketable equity securities Realized and unrealized gains and losses for our marketable and non-marketable equity securities for the year ended December 31, 2018 are summarized below (in millions): Twelve Months Ended December 31, 2018 Realized gain (loss) for equity securities sold during the period $ 1,458 Unrealized gain (loss) on equity securities held as of the end of the period (1) 4,002 Total gain (loss) recognized in other income (expense), net $ 5,460 (1) Includes $4,107 million related to non-marketable equity securities for the year ended December 31, 2018 . Equity securities accounted for under the Equity Method As of December 31, 2017 and 2018 , equity securities accounted for under the equity method had a carrying value of approximately $1.4 billion and $1.3 billion , respectively. Our share of gains and losses including impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 6 for further details on other income (expense), net. Derivative Financial Instruments We classify our foreign currency and interest rate derivative contracts primarily within Level 2 in the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments. We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the Consolidated Statements of Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in AOCI, as discussed below. As a result of our adoption of Accounting Standard Update No. 2017-12 (ASU 2017-12) "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," the components excluded from the assessment of hedge effectiveness are recognized in the same income statement line as the hedged item beginning January 1, 2018. We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows, earnings, and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. We also use interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and debt issuances. Our program is not used for trading or speculative purposes. We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. To further reduce credit risk, we enter into collateral security arrangements under which the counterparty is required to provide collateral when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of the collateral in the event of counterparty default. As of December 31, 2017 and 2018 , we received cash collateral related to the derivative instruments under our collateral security arrangements of $15 million and $327 million , respectively, which was included in other current assets. Cash Flow Hedges We use foreign currency forwards and option contracts, including collars (an option strategy comprised of a combination of purchased and written options), designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. The notional principal of these contracts was approximately $11.7 billion and $11.8 billion as of December 31, 2017 and 2018 , respectively. These contracts have maturities of 24 months or less. For forwards and option contracts, we exclude the change in the forward points and time value from our assessment of hedge effectiveness. The initial value of the excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI. We reflect the gains or losses of a cash flow hedge included in our hedge effective assessment as a component of AOCI and subsequently reclassify these gains and losses to revenues when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are immediately reclassified to other income (expense), net. As of December 31, 2018 , the net gain or loss of our foreign currency cash flow hedges before tax effect was a net accumulated gain of $247 million , of which a net gain of $247 million is expected to be reclassified from AOCI into earnings within the next 12 months. Fair Value Hedges We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. We exclude changes in forward points for the forward contracts from the assessment of hedge effectiveness. We recognize changes in the excluded component in other income (expense), net. The notional principal of these contracts was $2.9 billion and $2.0 billion as of December 31, 2017 and 2018 , respectively. Gains and losses on these forward contracts are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items. Net Investment Hedges During the year ended December 31, 2018 , we entered into forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. We exclude changes in forward points for the forward contracts from the assessment of hedge effectiveness. We recognize changes in the excluded component in other income (expense), net. The notional principal of these contracts was $6.7 billion as of December 31, 2018 . Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment. Other Derivatives Other derivatives not designated as hedging instruments consist of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of the outstanding foreign exchange contracts was $15.2 billion and $20.1 billion as of December 31, 2017 and 2018 , respectively. The fair values of our outstanding derivative instruments were as follows (in millions): As of December 31, 2017 Balance Sheet Location Fair Value of Fair Value of Total Fair Derivative Assets: Level 2: Foreign exchange contracts Other current and non-current assets $ 51 $ 29 $ 80 Total $ 51 $ 29 $ 80 Derivative Liabilities: Level 2: Foreign exchange contracts Accrued expenses and other liabilities, current and non-current $ 230 $ 122 $ 352 Total $ 230 $ 122 $ 352 As of December 31, 2018 Balance Sheet Location Fair Value of Fair Value of Total Fair Derivative Assets: Level 2: Foreign exchange contracts Other current and non-current assets $ 459 $ 54 $ 513 Total $ 459 $ 54 $ 513 Derivative Liabilities: Level 2: Foreign exchange contracts Accrued expenses and other liabilities, current and non-current $ 5 $ 228 $ 233 Total $ 5 $ 228 $ 233 The gains (losses) on derivatives in cash flow hedging and net investment hedging relationships recognized in other comprehensive income (OCI) are summarized below (in millions): Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect Year Ended December 31, 2016 2017 2018 Derivatives in Cash Flow Hedging Relationship: Foreign exchange contracts Amount included in the assessment of effectiveness $ 773 $ (955 ) $ 332 Amount excluded from the assessment of effectiveness 0 0 26 Derivatives in Net Investment Hedging Relationship: Foreign exchange contracts Amount included in the assessment of effectiveness 0 0 136 Total $ 773 $ (955 ) $ 494 The effect of derivative instruments on income is summarized below (in millions): Gains (Losses) Recognized in Income Year Ended December 31, 2016 2017 2018 Revenues Other income (expense), net Revenues Other income (expense), net Revenues Other income (expense), net Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded $ 90,272 $ 434 $ 110,855 $ 1,047 $ 136,819 $ 8,592 Gains (Losses) on Derivatives in Cash Flow Hedging Relationship: Foreign exchange contracts Amount of gains (losses) reclassified from AOCI to income $ 539 $ 0 $ (169 ) $ 0 $ (139 ) $ 0 Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach 0 0 0 0 1 0 Amount excluded from the assessment of effectiveness 0 (381 ) 0 83 0 0 Gains (Losses) on Derivatives in Fair Value Hedging Relationship: Foreign exchange contracts Hedged items 0 (139 ) 0 197 0 (96 ) Derivatives designated as hedging instruments 0 139 0 (197 ) 0 96 Amount excluded from the assessment of effectiveness 0 6 0 23 0 37 Gains (Losses) on Derivatives in Net Investment Hedging Relationship: Foreign exchange contracts Amount excluded from the assessment of effectiveness 0 0 0 0 0 78 Gains (Losses) on Derivatives Not Designated as Hedging Instruments: Foreign exchange contracts Derivatives not designated as hedging instruments 0 130 0 (230 ) 0 54 Total gains (losses) $ 539 $ (245 ) $ (169 ) $ (124 ) $ (138 ) $ 169 Offsetting of Derivatives We present our forwards and purchased options at gross fair values in the Consolidated Balance Sheets. For foreign currency collars, we present at net fair values where both purchased and written options are with the same counterparty. Our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2017 and 2018 , information related to these offsetting arrangements were as follows (in millions): Offsetting of Assets As of December 31, 2017 Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Non-Cash Collateral Received Net Assets Exposed Derivatives $ 102 $ (22 ) $ 80 $ (64 ) (1) $ (4 ) $ (2 ) $ 10 As of December 31, 2018 Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Non-Cash Collateral Received Net Assets Exposed Derivatives $ 569 $ (56 ) $ 513 $ (90 ) (1) $ (307 ) $ (14 ) $ 102 (1) The balances as of December 31, 2017 and 2018 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements. Offsetting of Liabilities As of December 31, 2017 Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Non-Cash Collateral Pledged Net Liabilities Derivatives $ 374 $ (22 ) $ 352 $ (64 ) (2) $ 0 $ 0 $ 288 As of December 31, 2018 Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Non-Cash Collateral Pledged Net Liabilities Derivatives $ 289 $ (56 ) $ 233 $ (90 ) (2) $ 0 $ 0 $ 143 (2) The balances as of December 31, 2017 and 2018 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements. |