Question:
The Company classifies its investments in both fixed income securities and publicly traded equity securities as available- for- sale investments. Fixed income securities primarily consist of U. S. government securities, U. S. government agency securities, non- U. S. government and agency securities, and corporate debt securities. These available- for- sale investments are primarily held in the custody of a major financial institution. A specific identification method is used to determine the cost basis of fixed income and public equity securities sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments, to the extent the investments are unhedged, are included as a separate component of accumulated other comprehensive income (AO CI), net of tax. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations. (c) Other- than- Temporary Impairments on Investments When the fair value of a debt security is less than its amortized cost, it is deemed impaired, and the Company will assess whether the impairment is other than temporary. An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If impairment is considered other than temporary based on condition (i) or (iii) described earlier, the entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount rep-resenting credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (OCI). The Company recognizes an impairment charge on publicly traded equity securities when a decline in the fair value of a security below the respective cost basis is judged to be other than temporary. The Company considers various factors in determining whether a decline in the fair value of these investments is other than temporary, including the length of time and extent to which the fair value of the security has been less than the Companys cost basis, the financial condition and near- term prospects of the issuer, and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If impairment is considered other than temporary based on condition (i) or (ii) described earlier, the entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (OCI). The Company recognizes an impairment charge on publicly traded equity securities when a decline in the fair value of a security below the respective cost basis is judged to be other than temporary. The Company considers various factors in determining whether a decline in the fair value of these investments is other than temporary, including the length of time and extent to which the fair value of the security has heen less than the Companys cost basis, the financial condition and near- term prospects of the issuer, and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
a) Summary of Available- for- Sale Investments The following tables summarize the Companys available- for- sale investments (in millions):
( b) Gains and Losses on Available- for- Sale Investments The following table presents the gross realized gains and gross realized losses related to the Companys available- for- sale investments ( in millions):
a) Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present assets and liabilities measured at fair value on a recurring basis as of July 27, 2013 and July 28, 2012 ( in millions):
Level 1 publicly traded equity securities are determined by using quoted prices in active markets for identical assets. Level 2 fixed income securities are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/ dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is ultimately responsible for the financial statements and underlying estimates. The Companys derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented. Level 3 assets include certain derivative instruments, the values of which are determined based on discounted cash flow models using inputs that the Company could not corroborate with market data. The activity related to assets measured at fair value on a recurring basis using significant unobservable inputs ( Level 3) for the year ended July 27, 2013 was not material. Source: Financial Statements from Cisco Corporations 2013 Annual Report. Item 1A. Risk Factors ( excerpt) WE ARE EXPOSED TO FLUCTUATION S IN THE MARKET VAL UES OF OUR PORTFOLIO INVEST-MENTS AND IN INTEREST RATES; IMPAI RMENTS OF OUR INVESTMENTS COULD HA RM OUR EARNING S. We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally classified as available- for- sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income, net of tax. Our portfolio includes fixed income securities and equity investments in publicly traded companies, the values of which are subject to market price volatility to the extent unhedged. If such invest-ments suffer market price declines, as we experienced with some of our investment during fiscal 2009, we may recognize in earnings the decline in fair value of our investment below their cost basis when the decline is judged to be other than temporary.
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Discounted Cash Flows
What is Discounted Cash Flows? Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most...
Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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Gross Gross Amortized Unrealized Unrealized Fair July 27, 2013 Cost Gains Losses Value Fixed inoome securities: U.S. government securities U.S. government agency securities Non-U.S. govemment and agency securities Corporate dabt secunities $27814 3.083 1,094 7876 39,867 2,063 $41,930 S 22 S(13 $27823 3.089 1,095 7881 39,888 2,797 $42,685 7 12) (50) (66) Total fixed income securities 87 733 S825 Publicly traded equity securities Total 170) Gross Gross Amortized Unrealized Unrealized Fai July 28, 2012 Cost Gains Losses Value Fixed income securities: U.S. government securities U.S. government agency securities Non-U.S. govemment and agency securities Corporate debt securities S24,201 5.367 1,629 5.959 37156 1.107 38.263 $ 41 21 74 145 524 S669 $24,241 5,388 1,628 6,030 37,297 1.620 $38,917 13) Total fixed income securities Publicly traded equity securities Total S(15) Year Ended Gross realized gains Gross realized losses July 27, 2013 $264 216 S 48 July 28, 2012 $561 (460) July 30,2011 322 (143) $179 Total July 27,2013 Fair Value Measurements July 28, 2012 Fair Value Measurements Total Total Level Level 2 Balance Le1 Level 2 Level 3 Balance Assets Cash equivalents: Money market funds $ 6,045 $2,506 -S- 2,506 Available-fcr-sale investments: U.S. govemment secuities U.S. government agency sacurities Non-US. govenment and agency securities Corpcrate debt securities Publicly tradad equity securities 24,241 5,388 1,638 6,030 27823 27823 3,089 1.095 7881 3,089 1,095 7,881 2,797 1.620 24.241 5,388 1.638 6,030 1.620 2,797