Financial Instruments | Financial Instruments Debt Securities We classify our marketable debt securities, which are accounted for as available-for-sale, 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. For certain marketable debt securities, we have elected the fair value option for which changes in fair value are recorded in other income (expense), net. The fair value option was elected for these securities to align with the unrealized gains and losses from related derivative contracts. Unrealized net losses related to debt securities still held where we have elected the fair value option were $35 million and $779 million as of December 31, 2021 and September 30, 2022, respectively. As of December 31, 2021 and September 30, 2022, the fair value of these debt securities was $4.7 billion and $6.6 billion, respectively. The following tables summarize debt securities, for which we did not elect the fair value option, by significant investment categories (in millions): As of December 31, 2021 Adjusted Gross Gross Fair Cash and Cash Marketable Level 2: Time deposits (1) $ 5,133 $ 0 $ 0 $ 5,133 $ 5,133 $ 0 Government bonds 53,288 258 (238) 53,308 5 53,303 Corporate debt securities 35,605 194 (223) 35,576 12 35,564 Mortgage-backed and asset-backed securities 18,829 96 (112) 18,813 0 18,813 Total $ 112,855 $ 548 $ (573) $ 112,830 $ 5,150 $ 107,680 As of September 30, 2022 Adjusted Gross Gross Fair Cash and Cash Marketable Level 2: Time deposits (1) $ 4,925 $ 0 $ 0 $ 4,925 $ 4,920 $ 5 Government bonds 42,863 0 (2,523) 40,340 93 40,247 Corporate debt securities 29,397 0 (1,833) 27,564 179 27,385 Mortgage-backed and asset-backed securities 16,599 0 (1,376) 15,223 0 15,223 Total $ 93,784 $ 0 $ (5,732) $ 88,052 $ 5,192 $ 82,860 (1) The majority of our time deposits are domestic deposits. 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 $109 million and $14 million for the three months ended September 30, 2021 and 2022, respectively, and $360 million and $83 million for the nine months ended September 30, 2021 and 2022, respectively. We recognized gross realized losses of $29 million and $551 million for the three months ended September 30, 2021 and 2022, respectively, and $180 million and $1.2 billion for the nine months ended September 30, 2021 and 2022, respectively. We reflect these gains and losses as a component of other income (expense), net. The following table summarizes the estimated fair value of investments in marketable debt securities by stated contractual maturity dates (in millions): As of Due in 1 year or less $ 7,998 Due in 1 year through 5 years 58,061 Due in 5 years through 10 years 11,848 Due after 10 years 11,353 Total $ 89,260 The following tables present fair values and gross unrealized losses recorded to accumulated other comprehensive income (AOCI), 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, 2021 Less than 12 Months 12 Months or Greater Total Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized Government bonds $ 32,843 $ (236) $ 71 $ (2) $ 32,914 $ (238) Corporate debt securities 22,737 (152) 303 (5) 23,040 (157) Mortgage-backed and asset-backed securities 11,502 (106) 248 (6) 11,750 (112) Total $ 67,082 $ (494) $ 622 $ (13) $ 67,704 $ (507) As of September 30, 2022 Less than 12 Months 12 Months or Greater Total Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized Government bonds $ 31,685 $ (1,864) $ 8,064 $ (659) $ 39,749 $ (2,523) Corporate debt securities 19,378 (1,042) 7,431 (697) 26,809 (1,739) Mortgage-backed and asset-backed securities 11,316 (992) 3,886 (384) 15,202 (1,376) Total $ 62,379 $ (3,898) $ 19,381 $ (1,740) $ 81,760 $ (5,638) During the three and nine months ended September 30, 2021 and 2022, we did not recognize significant credit losses, and the ending allowance balances for credit losses were immaterial as of December 31, 2021 and September 30, 2022. See Note 6 for further details on other income (expense), net. Equity Investments The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method. 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. Our non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3. Gains and losses on marketable and non-marketable equity securities Gains and losses (including impairments) reflected in other income (expense), net, for marketable and non-marketable equity securities are summarized below (in millions): Three Months Ended Nine Months Ended September 30, September 30, 2021 2022 2021 2022 Net gain (loss) on equity securities sold during the period $ (36) $ (73) $ 545 $ (355) Net unrealized gain (loss) on equity securities held as of the end of the period 2,157 (574) 9,185 (1,613) Total gain (loss) recognized in other income (expense), net $ 2,121 $ (647) $ 9,730 $ (1,968) In the table above, net gain (loss) on equity securities sold during the period reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period or the purchase date, if later. Cumulative net gains (losses) on equity securities sold during the period, which is summarized in the following table (in millions), represents the total net gains (losses) recognized after the initial purchase date of the equity security. While these net gains (losses) may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic net gains (losses) on the securities sold during the period. Cumulative net gains (losses) are calculated as the difference between the sale price and the initial purchase price for the equity security sold during the period. Equity Securities Sold Three Months Ended Nine Months Ended September 30, September 30, 2021 2022 2021 2022 Total sale price $ 1,199 $ 296 $ 4,553 $ 1,631 Total initial cost 188 310 955 738 Cumulative net gain (loss) (1) $ 1,011 $ (14) $ 3,598 $ 893 (1) Cumulative net gains for the nine months ended September 30, 2021 excludes cumulative losses of $684 million resulting from our equity derivatives, which hedged the changes in fair value of certain marketable equity securities sold. The associated derivative liabilities arising from these losses were settled against our holdings of the underlying equity securities. Carrying value of marketable and non-marketable equity securities The carrying value is measured as the total initial cost plus the cumulative net gain (loss). The carrying values for marketable and non-marketable equity securities are summarized below (in millions): As of December 31, 2021 Marketable Securities Non-Marketable Securities Total Total initial cost $ 4,211 $ 15,135 $ 19,346 Cumulative net gain (loss) (1) 3,587 12,436 16,023 Carrying value (2) $ 7,798 $ 27,571 $ 35,369 (1) Non-marketable equity securities cumulative net gain (loss) is comprised of $14.1 billion gains and $1.7 billion losses (including impairments). (2) The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $1.4 billion is included within other non-current assets. As of September 30, 2022 Marketable Securities Non-Marketable Securities Total Total initial cost $ 5,752 $ 15,540 $ 21,292 Cumulative net gain (loss) (1) 104 13,104 13,208 Carrying value (2) $ 5,856 $ 28,644 $ 34,500 (1) Non-marketable equity securities cumulative net gain (loss) is comprised of $16.9 billion gains and $3.8 billion losses (including impairments). (2) The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $841 million is included within other non-current assets. Marketable equity securities The following table summarizes marketable equity securities measured at fair value by significant investment categories (in millions): As of December 31, 2021 As of September 30, 2022 Cash and Cash Equivalents Marketable Cash and Cash Equivalents Marketable Level 1: Money market funds $ 7,499 $ 0 $ 8,318 $ 0 Marketable equity securities (1)(2) 0 7,447 0 5,509 7,499 7,447 8,318 5,509 Level 2: Mutual funds 0 351 0 347 Total $ 7,499 $ 7,798 $ 8,318 $ 5,856 (1) The balance as of December 31, 2021 and September 30, 2022 includes investments that were reclassified from non-marketable equity securities following the commencement of public market trading of the issuers or acquisition by public entities (certain investments are subject to short-term lock-up restrictions). (2) As of December 31, 2021 and September 30, 2022 the long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $1.4 billion and $841 million, respectively, is included within other non-current assets. Non-marketable equity securities The following is a summary of unrealized gains and losses (including impairments) recorded in other income (expense), net, which are included as adjustments to the carrying value of non-marketable equity securities held as of the end of the period (in millions): Three Months Ended Nine Months Ended September 30, September 30, 2021 2022 2021 2022 Unrealized gains on non-marketable equity securities $ 1,260 $ 219 $ 6,245 $ 3,234 Unrealized losses on non-marketable equity securities (including impairments) (37) (707) (98) (2,353) Total unrealized gain (loss) recognized on non-marketable equity securities $ 1,223 $ (488) $ 6,147 $ 881 During the three months ended September 30, 2022, included in the $28.6 billion of non-marketable equity securities held as of the end of the period, $1.7 billion were measured at fair value resulting in a net unrealized loss of $488 million. Equity securities accounted for under the Equity Method As of December 31, 2021 and September 30, 2022, equity securities accounted for under the equity method had a carrying value of approximately $ 1.5 billion and $1.3 billion, respectively. Our share of gains and losses, including impairments, 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 enter into derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed with derivative instruments is foreign exchange risk. We use foreign currency contracts 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 enter into derivative instruments to partially offset our exposure to other risks and enhance investment returns. We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value and classify the derivatives primarily within Level 2 in the fair value hierarchy. We present our collar contracts (an option strategy comprised of a combination of purchased and written options) at net fair values where both the purchased and written options are with the same counterparty. For other derivative contracts, we present at gross fair values. We primarily record changes in the fair value 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. We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. Further, we enter into collateral security arrangements that provide for collateral to be received or pledged when the net fair value of certain financial instruments fluctuates from contractually established thresholds. Cash collateral received related to derivative instruments under our collateral security arrangements are included in other current assets with a corresponding liability. Cash and non-cash collateral pledged related to derivative instruments under our collateral security arrangements are included in other current assets. Cash Flow Hedges We designate foreign currency forward and option contracts (including collars) as cash flow hedges to hedge certain f orecasted revenue transactions denominated in currencies other than the U.S. dollar. These contracts have maturities of 24 months or les s. Cash flow hedge amounts included in the assessment of hedge effectiveness are deferred in AOCI and subsequently reclassified to revenue when the hedged item is recognized in earnings. We exclude the change in 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. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are reclassified to other income (expense), net in the period of de-designation. As of September 30, 2022, the net accumulated gain on our foreign currency cash flow hedges before tax effect was $1.9 billion, which is expected to be reclassified from AOCI into earnings within the next 12 months. Fair Value Hedges We designate foreign currency forward contracts as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net. Net Investment Hedges We designate foreign currency forward contracts as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Net investment hedge amounts included in the assessment of hedge effectiveness are recognized in AOCI along with the foreign currency translation adjustment. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net. Other Derivatives Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these contracts, as well as the related costs, are recognized in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. We also use derivatives not designated as hedging instruments to manage risks relating to interest rates, commodity prices, credit exposures and to enhance investment returns. Additionally, from time to time, we enter into derivatives to hedge the market price risk on certain of our marketable equity securities. Gains (losses) arising from these derivatives are reflected within the "other" component of other income (expense), net and the offsetting recognized gains (losses) on the marketable equity securities are reflected within the gain (loss) on equity securities, net component of other income (expense), net. See Note 6 for further details on other income (expense), net. The gross notional amounts of outstanding derivative instruments were as follows (in millions): As of December 31, 2021 As of September 30, 2022 Derivatives Designated as Hedging Instruments: Foreign exchange contracts Cash flow hedges $ 16,362 $ 17,513 Fair value hedges $ 2,556 $ 2,435 Net investment hedges $ 10,159 $ 8,993 Derivatives Not Designated as Hedging Instruments: Foreign exchange contracts $ 41,031 $ 36,988 Other contracts $ 4,275 $ 6,728 The fair values of outstanding derivative instruments were as follows (in millions): As of December 31, 2021 Balance Sheet Location Fair Value of Fair Value of Total Fair Value Derivative Assets: Level 2: Foreign exchange contracts Other current and non-current assets $ 867 $ 42 $ 909 Other contracts Other current and non-current assets 0 52 52 Total $ 867 $ 94 $ 961 Derivative Liabilities: Level 2: Foreign exchange contracts Accrued expenses and other liabilities, current and non-current $ 8 $ 452 $ 460 Other contracts Accrued expenses and other liabilities, current and non-current 0 121 121 Total $ 8 $ 573 $ 581 As of September 30, 2022 Balance Sheet Location Fair Value of Fair Value of Total Fair Value Derivative Assets: Level 2: Foreign exchange contracts Other current and non-current assets $ 2,317 $ 226 $ 2,543 Other contracts Other current and non-current assets 0 46 46 Total $ 2,317 $ 272 $ 2,589 Derivative Liabilities: Level 2: Foreign exchange contracts Accrued expenses and other liabilities, current and non-current $ 13 $ 820 $ 833 Other contracts Accrued expenses and other liabilities, current and non-current 0 45 45 Total $ 13 $ 865 $ 878 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 Three Months Ended Nine Months Ended September 30, September 30, 2021 2022 2021 2022 Derivatives in Cash Flow Hedging Relationship: Foreign exchange contracts Amount included in the assessment of effectiveness $ 336 $ 1,486 $ 438 $ 2,752 Amount excluded from the assessment of effectiveness 18 (77) 63 (131) Derivatives in Net Investment Hedging Relationship: Foreign exchange contracts Amount included in the assessment of effectiveness 212 760 411 1,418 Total $ 566 $ 2,169 $ 912 $ 4,039 The effect of derivative instruments on income is summarized below (in millions): Gains (Losses) Recognized in Income Three Months Ended September 30, 2021 2022 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 $ 65,118 $ 2,033 $ 69,092 $ (902) Gains (Losses) on Derivatives in Cash Flow Hedging Relationship: Foreign exchange contracts Amount of gains (losses) reclassified from AOCI to income $ 65 $ 0 $ 658 $ 0 Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach (3) 0 (20) 0 Gains (Losses) on Derivatives in Fair Value Hedging Relationship: Foreign exchange contracts Hedged items 0 (69) 0 (226) Derivatives designated as hedging instruments 0 69 0 226 Amount excluded from the assessment of effectiveness 0 2 0 6 Gains (Losses) on Derivatives in Net Investment Hedging Relationship: Foreign exchange contracts Amount excluded from the assessment of effectiveness 0 19 0 59 Gains (Losses) on Derivatives Not Designated as Hedging Instruments: Foreign exchange contracts 0 (148) 0 (495) Other Contracts 0 (88) 0 34 Total gains (losses) $ 62 $ (215) $ 638 $ (396) Offsetting of Derivatives The gross amounts of derivative instruments subject to master netting arrangements with various counterparties, and cash and non-cash collateral received and pledged under such agreements were as follows (in millions): Offsetting of Assets As of December 31, 2021 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 $ 999 $ (38) $ 961 $ (434) (1) $ (394) $ (12) $ 121 As of September 30, 2022 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 $ 2,639 $ (50) $ 2,589 $ (755) (1) $ (1,609) $ (32) $ 193 (1) The balances as of December 31, 2021 and September 30, 2022 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, 2021 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 $ 619 $ (38) $ 581 $ (434) (2) $ (4) $ (110) $ 33 As of September 30, 2022 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 $ 928 $ (50) $ 878 $ (755) (2) $ (15) $ (2) $ 106 (2) The balances as of December 31, 2021 and September 30, 2022 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements. |