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EX-32.01 - CERTIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350 - GOOGLE INC.exhibit3201googq22015.htm
EX-31.02 - CERTIFICATION OF CFO PURSUANT TO EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A) - GOOGLE INC.exhibit3102googq22015.htm
EX-31.01 - CERTIFICATION OF CEO PURSUANT TO EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A) - GOOGLE INC.exhibit3101googq22015.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-Q
________________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-36380
________________________________________________________________
Google Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________________
Delaware
77-0493581
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
1600 Amphitheatre Parkway
Mountain View, CA 94043
(Address of principal executive offices, including zip code)
(650) 253-0000
(Registrant’s telephone number, including area code) 
________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 ý 
  
Accelerated filer
¨
Non-accelerated filer (Do not check if a smaller reporting company)
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 17, 2015, there were 289,886,273 shares of Google’s Class A common stock outstanding, 51,720,104 shares of Google’s Class B common stock outstanding, and 343,928,872 Google's Class C capital stock outstanding.





Google Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2015
TABLE OF CONTENTS

 
 
Page No.
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
Item 1
Item 1A
Item 2
Item 6
 
 
 


i


NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business;
our plans to continue to invest in new businesses, products and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions;
seasonal fluctuations in internet usage and advertiser expenditures, traditional retail seasonality and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results;
the potential for declines in our revenue growth rate;
our expectation that growth in advertising revenues from our websites will continue to exceed that from our Google Network Members’ websites, which will have a positive impact on our operating margins;
our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce the number of accidental clicks;
fluctuations in aggregate paid clicks and average cost-per-click;
our belief that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates;
the expected increase of costs related to hedging activities under our foreign exchange risk management program;
our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues;
our potential exposure in connection with pending investigations, proceedings, and other contingencies;
our expectation that our traffic acquisition costs will fluctuate in the future;
our continued investments in international markets;
estimates of our future compensation expenses;
fluctuations in our effective tax rate;
the sufficiency of our sources of funding;
our payment terms to certain advertisers, which may increase our working capital requirements;
fluctuations in our capital expenditures;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report and other documents we file with the Securities and Exchange Commission (SEC), including without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, as may be updated in our subsequent Quarterly Reports on Form 10-Q. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, “Google,” “we,” “our,” and similar terms include Google Inc. and its subsidiaries, unless the context indicates otherwise.
“Google” and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

1


PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Google Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts which are reflected in thousands
and par value per share amounts)
 
As of December 31, 2014
 
As of
June 30,
2015
 
 
 
(unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
18,347

 
$
18,453

Marketable securities
46,048

 
51,327

Total cash, cash equivalents, and marketable securities (including securities loaned of $4,058 and $4,448)
64,395

 
69,780

Accounts receivable, net of allowance of $225 and $235
9,383

 
9,394

Receivable under reverse repurchase agreements
875

 
625

Deferred income taxes, net
1,322

 
1,316

Income taxes receivable, net
591

 
0

Prepaid revenue share, expenses and other assets
3,412

 
3,049

Total current assets
79,978

 
84,164

Prepaid revenue share, expenses and other assets, non-current
3,280

 
3,403

Non-marketable investments
3,079

 
4,409

Property and equipment, net
23,883

 
27,008

Intangible assets, net
4,607

 
4,213

Goodwill
15,599

 
15,610

Total assets
$
130,426

 
$
138,807

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,715

 
$
1,315

Short-term debt
2,009

 
3,008

Accrued compensation and benefits
3,069

 
2,466

Accrued expenses and other current liabilities
4,434

 
4,396

Accrued revenue share
1,952

 
1,823

Securities lending payable
2,778

 
2,694

Deferred revenue
752

 
712

Income taxes payable, net
96

 
948

Total current liabilities
16,805

 
17,362

Long-term debt
3,228

 
2,225

Deferred revenue, non-current
104

 
108

Income taxes payable, non-current
3,340

 
3,615

Deferred income taxes, net, non-current
1,971

 
1,754

Other long-term liabilities
1,118

 
1,960

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding
0

 
0

Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 680,172 (Class A 286,560, Class B 53,213, Class C 340,399) and par value of $680 (Class A $287, Class B $53, Class C $340) and 685,490 (Class A 289,834, Class B 51,748, Class C 343,908) and par value of $686 (Class A $290, Class B $52, Class C $344) shares issued and outstanding
28,767

 
30,722

Accumulated other comprehensive income (loss)
27

 
(929
)
Retained earnings
75,066

 
81,990

Total stockholders’ equity
103,860

 
111,783

Total liabilities and stockholders’ equity
$
130,426

 
$
138,807

See accompanying notes.

2


Google Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
 
(unaudited)
Revenues
$
15,955

 
$
17,727

 
$
31,375

 
$
34,985

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
6,114

 
6,583

 
12,075

 
12,939

Research and development
2,238

 
2,789

 
4,364

 
5,542

Sales and marketing
1,941

 
2,080

 
3,670

 
4,145

General and administrative
1,404

 
1,450

 
2,893

 
3,087

Total costs and expenses
11,697

 
12,902

 
23,002

 
25,713

Income from operations
4,258

 
4,825

 
8,373

 
9,272

Interest and other income, net
145

 
131

 
502

 
288

Income from continuing operations before income taxes
4,403

 
4,956

 
8,875

 
9,560

Provision for income taxes
984

 
1,025

 
1,887

 
2,114

Net income from continuing operations
3,419

 
3,931

 
6,988

 
7,446

Net loss from discontinued operations
(68
)
 
0

 
(266
)
 
0

Net income
$
3,351

 
$
3,931

 
$
6,722

 
$
7,446

Less: Adjustment Payment to Class C capital stockholders
0

 
522

 
0

 
522

Net income available to all stockholders
$
3,351

 
$
3,409

 
$
6,722

 
$
6,924

Basic net income (loss) per share of Class A and B common stock:
 
 
 
 
 
 
 
Continuing operations
$
5.06

 
$
4.99

 
$
10.37

 
$
10.15

Discontinued operations
(0.10
)
 
0.00

 
(0.39
)
 
0.00

Basic net income per share of Class A and B common stock
$
4.96

 
$
4.99

 
$
9.98

 
$
10.15

Basic net income (loss) per share of Class C capital stock:
 
 
 
 
 
 
 
Continuing operations
$
5.06

 
$
6.51

 
$
10.37

 
$
11.68

Discontinued operations
(0.10
)
 
0.00

 
(0.39
)
 
0.00

Basic net income per share of Class C capital stock
$
4.96

 
$
6.51

 
$
9.98

 
$
11.68

Diluted net income (loss) per share of Class A and B common stock:
 
 
 
 
 
 
 
Continuing operations
$
4.98

 
$
4.93

 
$
10.19

 
$
10.03

Discontinued operations
(0.10
)
 
0.00

 
(0.39
)
 
0.00

Diluted net income per share of Class A and B common stock
$
4.88

 
$
4.93

 
$
9.80

 
$
10.03

Diluted net income (loss) per share of Class C capital stock:
 
 
 
 
 
 
 
Continuing operations
$
4.98

 
$
6.43

 
$
10.19

 
$
11.53

Discontinued operations
(0.10
)
 
0.00

 
(0.39
)
 
0.00

Diluted net income per share of Class C capital stock
$
4.88

 
$
6.43

 
$
9.80

 
$
11.53

See accompanying notes.

3


Google Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
 
(unaudited)
Net income
$
3,351

 
$
3,931

 
$
6,722

 
$
7,446

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(11
)
 
218

 
54

 
(705
)
Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
228

 
(336
)
 
445

 
(115
)
Less: reclassification adjustment for net gains included in net income
(40
)
 
(50
)
 
(107
)
 
(77
)
Net change (net of tax effect of $62, $92, $104, and $31)
188

 
(386
)
 
338

 
(192
)
Cash flow hedges:
 
 
 
 
 
 
 
Change in net unrealized gains
(16
)
 
(61
)
 
(6
)
 
501

Less: reclassification adjustment for net gains included in net income
(4
)
 
(329
)
 
(9
)
 
(560
)
Net change (net of tax effect of $21, $202, $9, and $10)
(20
)
 
(390
)
 
(15
)
 
(59
)
Other comprehensive income (loss)
157

 
(558
)
 
377

 
(956
)
Comprehensive income
$
3,508

 
$
3,373

 
$
7,099

 
$
6,490

See accompanying notes.

4


Google Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Six Months Ended
 
June 30,
 
2014
 
2015
 
(unaudited)
Operating activities
 
 
 
Net income
$
6,722

 
$
7,446

Adjustments:
 
 
 
Depreciation expense and impairment of property and equipment
1,629

 
1,949

Amortization and impairment of intangible and other assets
536

 
462

Stock-based compensation expense
1,802

 
2,335

Excess tax benefits from stock-based award activities
(292
)
 
(216
)
Deferred income taxes
(138
)
 
(150
)
Gain on equity interest
(126
)
 
0

(Gain) loss on marketable and non-marketable investments, net
(239
)
 
33

Other
91

 
116

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(454
)
 
(69
)
Income taxes, net
90

 
1,950

Prepaid revenue share, expenses and other assets
519

 
62

Accounts payable
14

 
(398
)
Accrued expenses and other liabilities
(68
)
 
237

Accrued revenue share
(68
)
 
(121
)
Deferred revenue
0

 
(34
)
Net cash provided by operating activities
10,018

 
13,602

Investing activities
 
 
 
Purchases of property and equipment
(4,991
)
 
(5,442
)
Purchases of marketable securities
(24,857
)
 
(33,126
)
Maturities and sales of marketable securities
23,605

 
27,586

Purchases of non-marketable investments
(467
)
 
(1,449
)
Cash collateral related to securities lending
1,713

 
(84
)
Investments in reverse repurchase agreements
0

 
250

Acquisitions, net of cash acquired, and purchases of intangibles and other assets
(3,490
)
 
(142
)
Net cash used in investing activities
(8,487
)
 
(12,407
)
Financing activities
 
 
 
Net payments related to stock-based award activities
(921
)
 
(1,004
)
Excess tax benefits from stock-based award activities
292

 
216

Adjustment Payment to Class C capital stockholders
0

 
(47
)
Proceeds from issuance of debt, net of costs
6,293

 
6,698

Repayments of debt
(6,304
)
 
(6,704
)
Net cash used in financing activities
(640
)
 
(841
)
Effect of exchange rate changes on cash and cash equivalents
(9
)
 
(248
)
Net increase in cash and cash equivalents
882

 
106

Cash and cash equivalents at beginning of period
18,898

 
18,347

Reclassification of assets previously held for sale
(160
)
 
0

Cash and cash equivalents at end of period
$
19,620

 
$
18,453

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for taxes
$
1,666

 
$
234

Cash paid for interest
$
38

 
$
48

Non-cash financing activity:
 
 
 
Shares issued in connection with the Class C Adjustment Payment
$
0

 
$
475

See accompanying notes.


5


Google Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Google Inc. and Summary of Significant Accounting Policies
We were incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. We generate revenues primarily by delivering relevant, cost-effective online advertising.
On October 29, 2014, we sold the Motorola Mobile business (Motorola Mobile) to Lenovo Group Limited (Lenovo). The financial results of Motorola Mobile are presented as net loss from discontinued operations on the Consolidated Statements of Income for the three and six months ended June 30, 2014. See Note 8 for further discussion of the sale.
Basis of Consolidation
The consolidated financial statements include the accounts of Google Inc. and our subsidiaries. All intercompany balances and transactions have been eliminated.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of June 30, 2015, the Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2015, the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2015, and the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2015 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of June 30, 2015, our results of operations for the three and six months ended June 30, 2014 and 2015, and our cash flows for the six months ended June 30, 2014 and 2015. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on February 6, 2015.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-10 (ASU 2014-10) "Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation". ASU 2014-10 removes the definition of a development stage entity from the Master Glossary of the ASC thereby removing the financial reporting distinction between development stage entities and other reporting entities. The amendment eliminating the exception to the sufficiency-of-equity-at-risk criterion for development stage entities will be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. Early application of these amendments is permitted. We are

6


currently in the process of evaluating the impact of the adoption of ASU 2014-10 on our consolidated financial statements.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02) "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
Revision of Previously Issued Financial Statements
In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015 in the cumulative amount of $711 million. We have evaluated the materiality of the income tax expense impact quantitatively and qualitatively and concluded it was not material to any of the prior periods impacted and that correction of income tax expense as an out of period adjustment in the quarter ended June 30, 2015 would not be material to our consolidated financial statements for the year ending December 31, 2015. Consolidated revenues are not impacted. We have elected to revise previously issued financial statements for periods contained on this Form 10-Q to correct the effect of this immaterial income tax expense underaccrual for the corresponding periods. Periods not presented herein will be revised, as applicable, as they are included in future filings. Refer to Note 15 for additional information.
Note 2. Financial Instruments
Fair Value Measurements
We measure our cash equivalents, marketable securities, foreign currency and interest rate derivative contracts, and non-marketable debt securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.
Level 3 - Unobservable inputs that are supported by little or no market activities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. We classify our non-marketable investments within Level 3 as the valuation inputs are not observable in an active market.
Cash, Cash Equivalents and Marketable Securities
 The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of December 31, 2014 and June 30, 2015 (in millions):

7


 
As of December 31, 2014
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
$
9,863

 
$
0

 
$
0

 
$
9,863

 
$
9,863

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
2,532

 
0

 
0

 
2,532

 
2,532

 
0

U.S. government notes
15,320

 
37

 
(4
)
 
15,353

 
1,128

 
14,225

Marketable equity securities
988

 
428

 
(64
)
 
1,352

 
0

 
1,352

 
18,840

 
465

 
(68
)
 
19,237

 
3,660

 
15,577

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
2,409

 
0

 
0

 
2,409

 
2,309

 
100

Money market and other funds(2)
1,762

 
0

 
0

 
1,762

 
1,762

 
0

Fixed-income bond funds(3)
385

 
0

 
(38
)
 
347

 
0

 
347

U.S. government agencies
2,327

 
8

 
(1
)
 
2,334

 
750

 
1,584

Foreign government bonds
1,828

 
22

 
(10
)
 
1,840

 
0

 
1,840

Municipal securities
3,370

 
33

 
(6
)
 
3,397

 
3

 
3,394

Corporate debt securities
11,499

 
114

 
(122
)
 
11,491

 
0

 
11,491

Agency residential mortgage-backed securities
8,196

 
109

 
(42
)
 
8,263

 
0

 
8,263

Asset-backed securities
3,456

 
1

 
(5
)
 
3,452

 
0

 
3,452

 
35,232

 
287

 
(224
)
 
35,295

 
4,824

 
30,471

Total
$
63,935

 
$
752

 
$
(292
)
 
$
64,395

 
$
18,347

 
$
46,048

 
As of June 30, 2015
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
 
(unaudited)
Cash
$
12,391

 
$
0

 
$
0

 
$
12,391

 
$
12,391

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
2,114

 
0

 
0

 
2,114

 
2,114

 
0

U.S. government notes
15,258

 
63

 
0

 
15,321

 
0

 
15,321

Marketable equity securities
978

 
266

 
(32
)
 
1,212

 
0

 
1,212

 
18,350

 
329

 
(32
)
 
18,647

 
2,114

 
16,533

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
3,161

 
0

 
0

 
3,161

 
1,871

 
1,290

Money market and other funds(2)
2,055

 
0

 
0

 
2,055

 
2,055

 
0

Fixed-income bond funds(3)
370

 
0

 
(54
)
 
316

 
0

 
316

U.S. government agencies
1,752

 
5

 
0

 
1,757

 
0

 
1,757

Foreign government bonds
2,042

 
17

 
(13
)
 
2,046

 
0

 
2,046

Municipal securities
4,008

 
20

 
(16
)
 
4,012

 
22

 
3,990

Corporate debt securities
13,600

 
88

 
(114
)
 
13,574

 
0

 
13,574

Agency residential mortgage-backed securities
8,296

 
70

 
(63
)
 
8,303

 
0

 
8,303

Asset-backed securities
3,518

 
2

 
(2
)
 
3,518

 
0

 
3,518

 
38,802

 
202

 
(262
)
 
38,742

 
3,948

 
34,794

Total
$
69,543

 
$
531

 
$
(294
)
 
$
69,780

 
$
18,453

 
$
51,327

(1) 
The majority of our time deposits are foreign deposits.
(2) 
The balances as of December 31, 2014 and June 30, 2015 were related to cash collateral received in connection with our securities lending program, which was invested in reverse repurchase agreements maturing within three months. See section titled "Securities Lending Program" below for further discussion of this program.
(3) 
Fixed-income bond funds consist of mutual funds that primarily invest in corporate and government bonds.

8


We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $58 million and $156 million for the three and six months ended June 30, 2014 and $104 million and $181 million for the three and six months ended June 30, 2015. We recognized gross realized losses of $10 million and $34 million for the three and six months ended June 30, 2014 and $51 million and $96 million for the three and six months ended June 30, 2015. We reflect these gains and losses as a component of Interest and other income, net in the accompanying Consolidated Statements of Income.
The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions):
 
As of
June 30, 2015
 
(unaudited)
Due in 1 year
$
7,979

Due in 1 year through 5 years
25,388

Due in 5 years through 10 years
7,542

Due after 10 years
8,890

Total
$
49,799

Non-marketable Investments
We included $90 million and $998 million of available-for-sale debt securities in our non-marketable investments as of December 31, 2014 and June 30, 2015. These debt securities are primarily preferred stock with certain features and convertible notes issued by private companies that do not have readily determinable market values and are categorized accordingly as Level 3 in the fair value hierarchy. To estimate the fair value of these 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 the private companies may not be available and consequently we will estimate the value based on the best available information at the measurement date. As of December 31, 2014 and June 30, 2015, the estimated fair value of these securities approximated their carrying value. In addition, since these securities do not have contractual maturity dates and we do not intend to liquidate them in the next 12 months, we have classified them as non-current assets on the accompanying Consolidated Balance Sheet as of December 31, 2014 and June 30, 2015.
The following table presents reconciliations for our assets measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions):
 
 
Level 3
 
 
(unaudited)
Balance as of December 31, 2014
 
$
90

Purchases, issuances, and settlements(1)
 
908

Balance as of June 30, 2015
 
$
998

(1) 
Purchases of securities included our $900 million investment in SpaceX, a space exploration and space transport company, made during January 2015.

Impairment Considerations for Available-for-sale Investments
The following tables present gross unrealized losses and fair values for those marketable investments that were in an unrealized loss position as of December 31, 2014 and June 30, 2015, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):

9


 
 
As of December 31, 2014
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
U.S. government notes
 
$
4,490

 
$
(4
)
 
$
0

 
$
0

 
$
4,490

 
$
(4
)
U.S. government agencies
 
830

 
(1
)
 
0

 
0

 
830

 
(1
)
Foreign government bonds
 
255

 
(7
)
 
43

 
(3
)
 
298

 
(10
)
Municipal securities
 
877

 
(3
)
 
174

 
(3
)
 
1,051

 
(6
)
Corporate debt securities
 
5,851

 
(112
)
 
225

 
(10
)
 
6,076

 
(122
)
Agency residential mortgage-backed securities
 
609

 
(1
)
 
2,168

 
(41
)
 
2,777

 
(42
)
Asset-backed securities
 
2,388

 
(4
)
 
174

 
(1
)
 
2,562

 
(5
)
Fixed-income bond funds
 
347

 
(38
)
 
0

 
0

 
347

 
(38
)
Marketable equity securities
 
690

 
(64
)
 
0

 
0

 
690

 
(64
)
Total
 
$
16,337

 
$
(234
)
 
$
2,784

 
$
(58
)
 
$
19,121

 
$
(292
)
 
 
As of June 30, 2015
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
 
(unaudited)
Foreign government bonds
 
$
795

 
$
(11
)
 
$
21

 
$
(2
)
 
$
816

 
$
(13
)
Municipal securities
 
1,930

 
(15
)
 
19

 
(1
)
 
1,949

 
(16
)
Corporate debt securities
 
7,431

 
(104
)
 
206

 
(10
)
 
7,637

 
(114
)
Agency residential mortgage-backed securities
 
2,754

 
(25
)
 
1,078

 
(38
)
 
3,832

 
(63
)
Asset-backed securities
 
1,828

 
(2
)
 
0

 
0

 
1,828

 
(2
)
Fixed-income bond funds
 
316

 
(54
)
 
0

 
0

 
316

 
(54
)
Marketable equity securities
 
755

 
(32
)
 
0

 
0

 
755

 
(32
)
Total
 
$
15,809

 
$
(243
)
 
$
1,324

 
$
(51
)
 
$
17,133

 
$
(294
)
We periodically review our available-for-sale debt and equity securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three and six months ended June 30, 2014 and 2015, we did not recognize any other-than-temporary impairment loss.
Securities Lending Program
From time to time, we enter into securities lending agreements with financial institutions to enhance investment income. We loan certain securities which are collateralized in the form of cash or securities. Cash collateral is invested in reverse repurchase agreements which are collateralized in the form of securities.
We classify loaned securities as cash equivalents or marketable securities and record the cash collateral as an asset with a corresponding liability in the accompanying Consolidated Balance Sheets. We classify reverse repurchase agreements maturing within three months as cash equivalents and those longer than three months as receivable under reverse repurchase agreements in the accompanying Consolidated Balance Sheets. For security collateral received, we do not record an asset or liability except in the event of counterparty default.
Our securities lending transactions were accounted for as secured borrowings with significant investment categories as follows (in millions):

10


 
As of June 30, 2015
 
Remaining Contractual Maturity of the Agreements
Securities Lending Transactions
Overnight and Continuous
 
Up to 30 days
 
30 - 90 Days
 
Greater Than 90 Days
 
Total
 
(unaudited)
U.S. government notes
$
2,175

 
$
0

 
$
0

 
$
204

 
$
2,379

U.S. government agencies
114

 
0

 
0

 
0

 
114

Corporate debt securities
201

 
0

 
0

 
0

 
201

Total
$
2,490

 
$
0

 
$
0

 
$
204

 
$
2,694

Gross amount of recognized liabilities for securities lending in offsetting disclosure
 
$
2,694

Amounts related to agreements not included in securities lending in offsetting disclosure
 
$
0

Derivative Financial Instruments
We recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e. gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as Interest and other income, net, as part of revenues, or as a component of accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets, as discussed below.
We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We use certain interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and our anticipated debt issuance. 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, 2014 and June 30, 2015, we received cash collateral related to the derivative instruments under our collateral security arrangements of $268 million and $161 million.
Cash Flow Hedges
We use 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 $13.6 billion and $13.4 billion as of December 31, 2014 and June 30, 2015. These foreign exchange contracts have maturities of 36 months or less.
In 2012, we entered into forward-starting interest rate swaps, with a total notional amount of $1.0 billion and terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate, that effectively locked in an interest rate on our anticipated debt issuance of $1.0 billion in 2014. We issued $1.0 billion of unsecured senior notes in February 2014 (see details in Note 3). As a result, we terminated the forward-starting interest rate swaps upon the debt issuance. The gain associated with the termination is reported within operating activities in the Consolidated Statement of Cash Flows for the six months ended June 30, 2014, consistent with the impact of the hedged item.
We reflect gains or losses on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to Interest and other income, net. Further, we exclude the change in the time value of the options from our assessment of hedge effectiveness. We record the premium paid or time value of an option on the date of purchase as an asset. Thereafter, we recognize changes to this time value in Interest and other income, net.
As of June 30, 2015, the effective portion of our cash flow hedges before tax effect was $747 million, of which $619 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 the time value for these forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $1.5 billion and $1.6 billion as of December 31, 2014 and June 30, 2015.

11


We use interest rate swaps designated as fair value hedges to hedge interest rate risk for certain fixed rate securities. The notional principal of these contracts was $175 million and $290 million as of December 31, 2014 and June 30, 2015.
Gains and losses on these forward contracts and interest rate swaps are recognized in Interest and other income, net along with the offsetting losses and gains of the related hedged items. Cash flows from these forward contracts and interest rate swaps are reported within investment activities in the Consolidated Statements of Cash Flows, consistent with the impact of the hedged items.
Other Derivatives
Other derivatives not designated as hedging instruments consist of 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 Interest and other income, net along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of foreign exchange contracts outstanding was $6.2 billion and $3.8 billion as of December 31, 2014 and June 30, 2015.
We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related costs, in Interest and other income, net. The gains and losses are generally economically offset by unrealized gains and losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into Interest and other income, net. The total notional amounts of interest rate contracts outstanding were $150 million as of December 31, 2014 and $95 million as of June 30, 2015.
The fair values of our outstanding derivative instruments were as follows (in millions):
 
 
 
As of December 31, 2014
  
Balance Sheet Location
 
Fair Value of
Derivatives
Designated as
Hedging Instruments
 
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
 
Total Fair
Value
Derivative Assets:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid revenue share, expenses and other assets, current and non-current
 
$
851

 
$
0

 
$
851

Interest rate contracts
Prepaid revenue share, expenses and other assets, current and non-current
 
1

 
0

 
1

Total
 
 
$
852

 
$
0

 
$
852

Derivative Liabilities:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued expenses and other current liabilities
 
$
0

 
$
3

 
$
3

Interest rate contracts
Accrued expenses and other liabilities, current and non-current
 
1

 
0

 
1

Total
 
 
$
1

 
$
3

 
$
4


12


 
 
 
As of June 30, 2015
  
Balance Sheet Location
 
Fair Value of
Derivatives
Designated as
Hedging Instruments
 
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
 
Total Fair
Value
 
 
 
(unaudited)
Derivative Assets:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid revenue share, expenses and other assets, current and non-current
 
$
791

 
$
0

 
$
791

Total
 
 
$
791

 
$
0

 
$
791

Derivative Liabilities:
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued expenses and other current liabilities
 
$
8

 
$
1

 
$
9

Interest rate contracts
Accrued expenses and other liabilities, current and non-current
 
1

 
0

 
1

Total
 
 
$
9

 
$
1

 
$
10

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions):
 
Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Derivatives in Cash Flow Hedging Relationship
2014
 
2015
 
2014
 
2015
 
(unaudited)
Foreign exchange contracts
$
9

 
$
(120
)
 
$
22

 
$
716

Interest rate contracts
0

 
0

 
(31
)
 
0

Total
$
9

 
$
(120
)
 
$
(9
)
 
$
716

 
 
Gains Reclassified from AOCI into Income (Effective Portion)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives in Cash Flow Hedging Relationship
Income Statement Location
 
2014
 
2015
 
2014
 
2015
 
 
 
(unaudited)
Foreign exchange contracts
Revenues
 
$
6

 
$
471

 
$
14

 
$
782

Interest rate contracts
Interest and other income, net
 
1

 
1

 
1

 
2

Total
 
 
$
7

 
$
472

 
$
15

 
$
784


13


 
Gains (Losses) Recognized in Income on Derivatives (1)
(Amount Excluded from  Effectiveness Testing and Ineffective Portion)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives in Cash Flow Hedging Relationship
Income Statement Location
 
2014
 
2015
 
2014
 
2015
 
 
 
(unaudited)
Foreign exchange contracts
Interest and other income, net
 
$
(67
)
 
$
(66
)
 
$
(134
)
 
$
(167
)
Interest rate contracts
Interest and other income, net
 
0

 
0

 
4

 
0

Total
 
 
$
(67
)
 
$
(66
)
 
$
(130
)
 
$
(167
)
 
(1) 
Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented.
The effect of derivative instruments in fair value hedging relationships on income is summarized below (in millions):
 
Gains (Losses) Recognized in Income on Derivatives(2)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives in Fair Value Hedging Relationship
Income Statement Location
 
2014
 
2015
 
2014
 
2015
 
 
 
(unaudited)
Foreign Exchange Hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Interest and other income, net
 
$
(19
)
 
$
(44
)
 
$
(21
)
 
$
67

Hedged item
Interest and other income, net
 
17

 
42

 
17

 
(71
)
Total
 
 
$
(2
)
 
$
(2
)
 
$
(4
)
 
$
(4
)
Interest Rate Hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
Interest and other income, net
 
$
0

 
$
1

 
$
0

 
$
(1
)
Hedged item
Interest and other income, net
 
0

 
(1
)
 
0

 
1

Total
 
 
$
0

 
$
0

 
$
0

 
$
0

(2) 
Losses related to the amount excluded from effectiveness testing of the hedges were $2 million and $4 million for the three and six months ended June 30, 2014 and $2 million and $4 million for the three and six months ended June 30, 2015.
The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):
 
Gains (Losses) Recognized in Income on Derivatives
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives Not Designated As Hedging Instruments
Income Statement Location
 
2014
 
2015
 
2014
 
2015
 
 
 
(unaudited)
Foreign exchange contracts
Interest and other income, net and net loss from discontinued operations
 
$
(76
)
 
$
(66
)
 
$
(113
)
 
$
91

Interest rate contracts
Interest and other income, net
 
(1
)
 
4

 
0

 
(3
)
Total
 
 
$
(77
)
 
$
(62
)
 
$
(113
)
 
$
88

Offsetting of Derivatives, Securities Lending and Reverse Repurchase Agreements
We present our derivatives, securities lending and reverse repurchase agreements at gross fair values in the

14


Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2014 and June 30, 2015, information related to these offsetting arrangements was as follows (in millions):
Offsetting of Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
 
Description
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
$
852

 
$
0

 
$
852

 
$
(1
)
(1) 
$
(251
)
 
$
(412
)
 
$
188

Reverse repurchase agreements
2,637

 
0

 
2,637

(2) 
0

 
0

 
(2,637
)
 
0

Total
$
3,489

 
$
0

 
$
3,489

 
$
(1
)
 
$
(251
)
 
$
(3,049
)
 
$
188

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2015
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
 
Description
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
 
(unaudited)
Derivatives
$
791

 
$
0

 
$
791

 
$
(3
)
(1) 
$
(159
)
 
$
(344
)
 
$
285

Reverse repurchase agreements
2,680

 
0

 
2,680

(2) 
0

 
0

 
(2,680
)
 
0

Total
$
3,471

 
$
0

 
$
3,471

 
$
(3
)
 
$
(159
)
 
$
(3,024
)
 
$
285

(1) 
The balances as of December 31, 2014 and June 30, 2015 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.
(2) 
The balances as of December 31, 2014 and June 30, 2015 included $1,762 million and $2,055 million recorded in cash and cash equivalents, respectively, and $875 million and $625 million recorded in receivable under reverse repurchase agreements, respectively.

15


Offsetting of Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
 
Description
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
$
4

 
$
0

 
$
4

 
$
(1
)
(3) 
$
0

 
$
0

 
$
3

Securities lending agreements
2,778

 
0

 
2,778

 
0

 
0

 
(2,740
)
 
38

Total
$
2,782

 
$
0

 
$
2,782

 
$
(1
)
 
$
0

 
$
(2,740
)
 
$
41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2015
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
Description
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
 
(unaudited)
Derivatives
$
10

 
$
0

 
$
10

 
$
(3
)
(3) 
$
0

 
$
0

 
$
7

Securities lending agreements
2,694

 
0

 
2,694

 
0

 
0

 
(2,669
)
 
25

Total
$
2,704

 
$
0

 
$
2,704

 
$
(3
)
 
$
0

 
$
(2,669
)
 
$
32

(3) 
The balances as of December 31, 2014 and June 30, 2015 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.
Note 3. Debt
Short-Term Debt
We have a debt financing program of up to $3.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. As of December 31, 2014 and June 30, 2015, we had $2.0 billion of outstanding commercial paper recorded as short-term debt with weighted-average interest rates of 0.1%. In conjunction with this program, we have a $3.0 billion revolving credit facility which expires in July 2016. The interest rate for the credit facility is determined based on a formula using certain market rates. As of December 31, 2014 and June 30, 2015, we were in compliance with the financial covenants in the credit facility, and no amounts were outstanding under the credit facility as of December 31, 2014 and June 30, 2015. The estimated fair value of the commercial paper approximated its carrying value as of December 31, 2014 and June 30, 2015.
Our short-term debt balance also includes the short-term portion of certain long-term debt, as described in the section below.
Long-Term Debt
We issued $1.0 billion of unsecured senior notes (the "2014 Notes") in February 2014 and $3.0 billion of unsecured senior notes in three tranches (collectively, the "2011 Notes") in May 2011. We used the net proceeds from the issuance of the 2011 Notes to repay a portion of our outstanding commercial paper and for general corporate purposes. We used the net proceeds from the issuance of the 2014 Notes for the repayment of the portion of the principal amount of our 2011 Notes which matured on May 19, 2014 and for general corporate purposes. The total outstanding Notes are summarized below (in millions):

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As of
December 31, 2014
 
As of
June 30, 2015
 
 
 
(unaudited)
Short-Term Portion of Long-Term Debt
 
 
 
2.125% Notes due on May 19, 2016(1)
$
0

 
$
999

Capital Lease Obligation
10

 
9

Total
$
10

 
$
1,008

 
 
 
 
Long-Term Debt
 
 
 
2.125% Notes due on May 19, 2016
$
1,000

 
$
0

3.625% Notes due on May 19, 2021
1,000

 
1,000

3.375% Notes due on February 25, 2024
1,000

 
1,000

Unamortized discount for the Notes above
(8
)
 
(6
)
Subtotal
2,992

 
1,994

Capital Lease Obligation
236

 
231

Total
$
3,228

 
$
2,225

(1) 
The outstanding Notes as of June 30, 2015 are net of unamortized discount of $1 million.
The effective interest yields of the Notes due in 2016, 2021, and 2024 were 2.241%, 3.734% and 3.377%, respectively. Interest on the 2011 and 2014 Notes is payable semi-annually. The 2011 and 2014 Notes rank equally with each other and with all of our other senior unsecured and unsubordinated indebtedness from time to time outstanding. We may redeem the 2011 and 2014 Notes at any time in whole or in part at specified redemption prices. We are not subject to any financial covenants under the 2011 Notes or the 2014 Notes. The total estimated fair value of the outstanding 2011 and 2014 Notes was approximately $3.1 billion as of December 31, 2014 and June 30, 2015. The fair value of the outstanding 2011 and 2014 Notes was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.
In August 2013, we entered into a capital lease obligation on certain property which expires in 2028 with an option to purchase the property in 2016. The effective rate of the capital lease obligation approximates the market rate. The estimated fair value of the capital lease obligation approximated its carrying value as of December 31, 2014 and June 30, 2015.
Note 4. Balance Sheet Components
Property and Equipment
Property and equipment consisted of the following (in millions): 
 
As of
December 31, 2014
 
As of
June 30, 2015
 
 
 
(unaudited)
Land and buildings
$
13,326

 
$
14,546

Information technology assets
10,918

 
12,992

Construction in progress
6,555

 
7,260

Leasehold improvements
1,868

 
2,234

Furniture and fixtures
79

 
80

Property and equipment, gross
32,746

 
37,112

Less: accumulated depreciation and amortization
(8,863
)
 
(10,104
)
Property and equipment, net
$
23,883

 
$
27,008

Property under capital lease with a cost basis of $258 million was included in land and buildings as of June 30, 2015.
Prepaid Revenue Share, Expenses and Other Assets, Non-Current
Note Receivable
In connection with the sale of our Motorola Mobile business on October 29, 2014, we received an interest-free, three-year prepayable promissory note (the "Note Receivable") due October 2017 from Lenovo. The Note Receivable is included in prepaid revenue share, expenses and other assets, non-current on our Consolidated Balance Sheets.

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Based on the general market conditions and the credit quality of Lenovo, we discounted the Note Receivable at an effective interest rate of 4.5% as shown in the table below (in millions):
 
As of
December 31, 2014
 
As of
June 30, 2015
 
 
 
(unaudited)
Principal of the Note Receivable
$
1,500

 
$
1,500

Less: unamortized discount for the Note Receivable
(175
)
 
(144
)
Total
$
1,325

 
$
1,356

As of December 31, 2014 and June 30, 2015, we did not recognize any valuation allowance on the Note Receivable.

Accumulated Other Comprehensive Income (Loss)
The components of AOCI, net of tax, were as follows (in millions, unaudited):
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Unrealized Gains on Cash Flow Hedges
 
Total
Balance as of December 31, 2013
$
16

 
$
50

 
$
59

 
$
125

Other comprehensive income (loss) before reclassifications
54

 
445

 
(6
)
 
493

Amounts reclassified from AOCI
0

 
(107
)
 
(9
)
 
(116
)
Other comprehensive i