D. Financial instruments (excluding derivatives)
Fair value of financial instruments
Cash and cash equivalents, marketable securities and derivative financial instruments are recognized and measured at fair value in the company’s financial statements. Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value. The carrying amount of long-term debt is approximately $23.0 billion and $13.8 billion and the estimated fair value is $26.5 billion and $16.2 billion at December 31, 2007 and 2006, respectively.
In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value. Estimates are not necessarily indicative of the amounts the company could realize in a current market transaction. The following methods and assumptions were used to estimate fair values:
Loans and Financing Receivables
Estimates of fair value are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities.
Restricted Securities
The fair value of restricted securities was estimated based on a quoted price for an identical unrestricted security, adjusted to reflect the effect of the restriction.
Long-Term Debt
For publicly-traded debt, estimates of fair value are based on market prices. For other debt, fair value is estimated based on rates currently available to the company for debt with similar terms and remaining maturities.
Marketable securities*
The following table summarizes the company’s marketable securities, all of which are considered available-for-sale, and alliance investments.
| ($ in millions) | ||
| Fair Value | ||
|---|---|---|
| At December 31: | 2007 | 2006 |
|
* Gross unrealized gains (before taxes) on marketable securities were $7 million and $19 million at December 31, 2007 and 2006, respectively. Gross unrealized gains (before taxes) on alliance investments were $545 million and $178 million at December 31, 2007 and 2006, respectively. Gross unrealized losses (before taxes) on marketable securities were immaterial to the Consolidated Financial Statements at December 31, 2007 and 2006. Gross unrealized losses (before taxes) on alliance investments were $18 million at December 31, 2007 and immaterial to the Consolidated Financial Statements at December 31, 2006. See note M, “Stockholders’ Equity Activity,” for net change in unrealized gains and losses on marketable securities. ** Included within Investments and sundry assets in the Consolidated Statement of Financial Position. See note H, “Investments and Sundry Assets”. |
||
| Marketable securities—current: | ||
| Time deposits and other obligations | $ 1,155 | $ 2,634 |
| Marketable securities—noncurrent:** | ||
| Time deposits and other obligations | $ 530 | $ 359 |
| Non-U.S. government securities and other fixed-term obligations | 1 | 2 |
| Total | $ 531 | $ 361 |
| Non-equity method alliance investments** | $ 879 | $ 628 |
