E. Financial instruments (excluding derivatives)
Fair value of financial instruments
Cash and cash equivalents, debt and marketable equity 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. 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 are used to estimate fair values:
Loans and Long-term 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.
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. The carrying amount of long-term debt is $22,689 million and $23,039 million and the estimated fair value is $23,351 million and $26,544 million at December 31, 2008 and 2007, respectively.
Debt and marketable equity securities
The following table summarizes the company’s debt and marketable equity securities all of which are considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.
| ($ in millions) | ||
| Fair Value | ||
|---|---|---|
| At December 31: | 2008 | 2007 |
|
* Included within cash and cash equivalents in the Consolidated Statement of Financial Position. ** Reported as marketable securities within the Consolidated Statement of Financial Position. *** Included within investments and sundry assets in the Consolidated Statement of Financial Position. See note I, “Investments and Sundry Assets.” |
||
| Cash and cash equivalents:* | ||
| Time deposits and certificates of deposit | $4,805 | $5,573 |
| Commercial paper | 3,194 | 3,375 |
| Money market funds | 1,950 | 3,632 |
| Other securities | 60 | 4 |
| Total | $10,009 | $12,584 |
| Debt securities — current:** | ||
| Commercial paper | $166 | $ — |
| Time deposits and certificates of deposit | — | 782 |
| Securities of other U.S. political subdivisions (states and municipalities) | — | 283 |
| Other securities | — | 90 |
| Total | $166 | $1,155 |
| Debt securities — noncurrent:*** | ||
| Securities of U.S. federal government and its agencies | $ — | $106 |
| Other securities | 6 | 425 |
| Total | $6 | $531 |
| Non-equity method alliance investments*** | $165 | $746 |
Gross unrealized gains (before taxes) on debt securities were $1 million and $7 million at December 31, 2008 and 2007, respectively. Gross unrealized gains (before taxes) on marketable equity securities were $31 million and $545 million at December 31, 2008 and 2007, respectively. Gross unrealized losses (before taxes) on debt securities were immaterial to the Consolidated Financial Statements at December 31, 2008 and 2007. Gross unrealized losses (before taxes) on marketable equity securities were $27 million and $18 million at December 31, 2008 and 2007, respectively. Based on an evaluation of available evidence as of December 31, 2008, the company believes that unrealized losses on marketable equity securities are temporary and do not represent a need for an other-than-temporary impairment. See note N, “Stockholders’ Equity Activity,” for net change in unrealized gains and losses on debt and marketable equity securities.
Proceeds from sales of debt securities and marketable equity securities were approximately $787 million and $286 million at December 31, 2008 and 2007, respectively. The gross realized gains and losses (before taxes) on these sales totaled $182 million and $13 million, respectively in 2008. The gross realized gains and losses (before taxes) on these sales totaled $85 million and $3 million, respectively, in 2007.
The contractual maturities of substantially all available-for-sale debt securities are due in less than one year at December 31, 2008.
