NOTES TO FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF THE PLAN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Plan Description
The Microsoft Corporation Savings Plus
401(k) Plan (the Plan), a defined contribution plan, is sponsored by Microsoft Corporation (the Company or Microsoft). Participating employers included in the Plan are Microsoft Corporation; MOL Corporation;
Vexcel Corporation; Microsoft Online, Inc; Microsoft Payments, Inc; Microsoft Open Technologies, Inc; and Microsoft Technology Licensing. These entities represent Microsoft or wholly owned subsidiaries of Microsoft. Twisted Pixel Games was removed
as a participating employer from the Plan as of September 30, 2015. The Plan year is January 1 through December 31. The Plan is administered by the 401(k) Administrative Committee (the Plan Administrator) and subject to the
provisions of the Employee Retirement Income Security Act of 1974. The information below summarizes certain aspects of the Plan, and is intended to be a summary only. Plan participants should refer to the Summary Plan Description for more complete
information.
Accounting Principles
The financial
statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Eligibility
Regular and retail services employees of
participating employers who are on U.S. payroll and have reached age 18 may enroll in the Plan at any time.
Eligible Compensation
Eligible compensation includes wages, salary, bonuses, commissions, and overtime. Compensation does not include, for example, items such as stock
awards, amounts realized on the exercise of Microsoft stock options, reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, welfare plan benefits including health or life insurance, or
bonuses or expense allowances which are not based upon performance as an employee.
Contributions
Participant Contributions
Participants may contribute to
the Plan on a pre-tax basis and/or Roth basis using eligible compensation each pay period, subject to regulatory limitations. Participants reaching age 50 or older by the end of the Plan year may also elect to make additional catch-up contributions
to the Plan on a pre-tax basis and/or Roth basis. Additionally, all participants may contribute up to $20,000 annually on an after-tax basis. A participants aggregate contribution election (combined pre-tax, Roth, after-tax, pre-tax catch-up
and Roth catch-up) may not exceed 75 percent of their eligible compensation per pay period. Participant contributions may be suspended at any time and reinstated at any subsequent entry date.
Participants may also choose to make rollover contributions to the Plan of amounts received from an eligible employer plan maintained by another
company, including direct rollovers from such plans.
4
Employer Contributions
In 2015, the Company made a pre-tax matching contribution of $0.50 for every $1.00 contributed (up to a 6 percent combined pre-tax and Roth contribution
rate). Participants are matched only on regular pre-tax and Roth contributions and do not receive a match on after-tax contributions or catch-up contributions. The maximum Company match in 2015 was 3 percent of the participants eligible
compensation, subject to regulatory limitations.
Beginning in January 2016, the Company increased their pre-tax matching contribution to $0.50 for
every $1.00 contributed on a pre-tax and/or Roth basis (up to 50 percent of the maximum annual 401(k) pre-tax and Roth contribution limit of $18,000 for 2016).
Transfers
Nokia, Inc. (Nokia) was acquired by
the Company in 2014 and the Nokia Plan assets merged into the Plan during 2015. The merged amounts are included as transfers in on the statements of changes in net assets available for benefits for the year ended December 31, 2015.
Employee Stock Ownership Plan Feature
The Plan includes an
Employee Stock Ownership Plan (ESOP) feature for the portion of the Plan designed to invest primarily in Microsoft Common Stock. The ESOP feature allows participants to either reinvest their cash dividends earned on Microsoft Common
Stock or receive those dividends in cash. Amounts invested in Microsoft Common Stock are treated as being held through the ESOP, provided that at the time such amounts were received by the Plan (e.g., through contributions or transfers), the
participants whose Plan accounts received such assets were employed by Microsoft or a corporation that is part of the same controlled group of corporations as Microsoft.
Participants who are not employed by an employer established as a corporation that is part of the same controlled group of corporations as Microsoft may
not participate in the ESOP, but may invest their contributions and earnings in Microsoft Common Stock. Employees that are not eligible to participate in the ESOP feature are not eligible to receive dividends on Microsoft Common Stock in cash paid
directly to them. Instead, dividends paid on contributions invested in Microsoft Common Stock and the earnings that accumulate on those contributions will automatically be reinvested in Microsoft Common Stock.
Beginning January 2016, the investment of new contributions or reallocation of existing account holdings into Microsoft Common Stock within the Plan was
discontinued. Participants with existing Microsoft Common Stock as part of their account can retain those holdings, and dividends can continue to be reinvested or received in cash.
Participant Accounts
Each participants account is
credited with (a) the participant elective deferrals (i.e. participant contributions) and the Companys matching contribution (i.e. employer contributions) and (b) the allocation of Plan earnings and expenses, based on participant earnings or
account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participants vested account. All amounts in participant accounts are participant-directed. Participants may invest in
various instruments including common stock, mutual funds, common collective trusts, and separately managed accounts. Participants also have the option to direct their investments through a brokerage account, which offers mutual funds and the option
to invest in individual stocks.
Vesting
Participants
are fully vested in all Plan accounts at all times.
5
Distributions
Active participants may take a withdrawal from the Plan in the event of a financial hardship. A hardship withdrawal is limited to the following
participant account types: pre-tax and after-tax rollover accounts, after-tax accounts, pre-tax contribution accounts, and pre-tax catch-up contribution accounts. A hardship withdrawal will result in a six-month suspension of contributions to the
Plan. Active participants may also take a withdrawal from their rollover and after-tax account types within the Plan without meeting one of the hardship criteria. After reaching age 59
1
⁄
2
, active participants may withdraw all, or any portion, of the balance in their accounts. Distributions, in full or any portion, may also occur if the participant terminates employment, retires, becomes
permanently disabled, or dies. Distributions of investments in Microsoft Common Stock may be taken in the form of Microsoft Common Stock or cash.
In-Plan Roth
Conversions
Active participants may convert their Plan distribution-eligible balances to their Roth account within the Plan.
Administrative Expenses
Plan administrative expenses are
paid by the Company to the extent not offset by expense reimbursements. Through September 30, 2015, certain PIMCO mutual fund investments offered in the Plan paid reimbursements back to Fidelity Management Trust Company (Fidelity), the
Plan trustee. These reimbursements were used by the trustee to pay for Plan administrative expenses. Effective October 1, 2015, PIMCO no longer pays reimbursements back to Fidelity.
Participants are responsible for fees associated with certain transactions such as loan originations and maintenance, domestic relations order
qualifications, and dividend checks. Participants also pay commission charges to Fidelity for buying and selling Microsoft Common Stock within the Plan.
Plan
Amendment and Termination
Although it has not expressed an interest to do so, the Company has the right to modify, amend, suspend, or terminate
the Plan at any time and for any reason. If the Plan is terminated, all account balances will be distributed in the form and manner determined by the Plan Administrator.
Risks and Uncertainties
The Plan utilizes various
investment instruments, including common stock, mutual funds, common collective trusts, and separately managed accounts. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility.
Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in
the financial statements.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein. Actual results could differ from these estimates.
The Plan has no contingent assets or liabilities for any periods presented in these financial statements.
Valuation of Investments
Investments are recorded at fair value. Security transactions are accounted for as of the trade date. Dividend income is recorded on the ex-dividend
date, and interest income is recorded as earned.
6
Participant Loans
Participant loans are measured at their unpaid principal balance plus any accrued but unpaid interest, and participant loans deemed distributed due to
default are included in benefits paid to participants on the statements of changes in net assets available for benefits.
Other Receivables and Payables
Other receivables and payables as of December 31, 2015 and 2014 primarily consist of unsettled trades. Other receivables also include accrued interest.
Recently Adopted Accounting Guidance
In July 2015, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-12,
Plan Accounting (Topic 960, Topic 962, and Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan
Investment Disclosures, (Part III) Measurement Date Practical Expedient
. Under this ASU, investments need to be disaggregated only by general type within the statement of net assets available for benefits or within the notes. Additionally,
investments representing 5 percent or more of net assets available for benefits no longer need to be listed individually, and presentation of net appreciation or depreciation of investments is required only in the aggregate. Employee benefit plans
are also no longer required to disclose the investment strategies of plan investments that are both measured at fair value using the net asset value (NAV) practical expedient permitted by ASC 820-10 and in a fund entity that directly
files Form 5500 with the U.S. Department of Labor. The ASU is effective for the Plan beginning January 1, 2016, with early adoption permitted.
Plan
management has elected to early adopt this ASU in the current year and has implemented the guidance within these financial statements, including retrospective application to all prior periods presented. The primary impact of adoption resulted in
application of the simplified disclosure guidance in Note 5 Financial Instruments, and the removal of a separate note disclosing the balances of investments and net appreciation in the fair value of investments. There was no impact to total
investments disclosed in the Plans financial statements or the notes.
In May 2015, the FASB issued ASU 2015-07,
Fair Value Measurement
(Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent)
. Under this ASU, investments for which the practical expedient is used to measure fair value at NAV must be removed from
the fair value hierarchy. Instead, those investments must be included as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the statement of net assets available for
benefits. Further, the ASU requires entities to provide certain disclosures only for investments for which they elect to use the NAV practical expedient to determine fair value. The ASU is effective for the Plan beginning January 1, 2016, with early
adoption permitted.
Plan management has elected to early adopt this ASU in the current year and has implemented the guidance within these financial
statements, including retrospective application to all prior periods presented. The primary impact of adoption resulted in application of new disclosure guidance in Note 5 Financial Instruments, which includes separate presentation of the
investments valued using the NAV practical expedient. There was no impact to total investments disclosed in the Plans financial statements or the notes.
NOTE 2 PARTICIPANT LOANS
Participant
loans are available in $100 increments ranging from $1,000 to $49,500. The maximum loan amount is the lesser of (a) 50 percent of the vested account balance, reduced by the current outstanding balance of all other loans from the Plan; or (b)
$50,000, reduced by: (1) the current outstanding balance of all other loans from the Plan, and (2) the excess (if any) of all Plan loans during the previous 12 months over the current outstanding balance of Plan loans. Participants are limited to
two loans one Primary Residence Loan and one General Loan. The term of a Primary Residence Loan may not exceed 15 years (or 30 years for Nokia Plan legacy loans) or be less than 12 months from the first payment date. The term of a General
Loan may not exceed five years (or 15 years for Nokia Plan legacy loans) or be less than 12 months from the first payment date.
The interest rate
for loans is 1 percent plus the prime rate on Corporate Loans. The range of interest rates for outstanding Primary Residence Loans as of December 31, 2015 was 3.25 percent to 9.00 percent, maturing at various dates through March 2044. The range of
interest rates for outstanding General Loans as of December 31, 2015 was 3.25 percent to 4.25 percent, maturing at various dates through January 2021.
7
Loan repayments are made through after-tax payroll deductions. Employees who are terminated have 60 days to
elect to continue to make loan repayments or payoff the loan in full. Failure of the employee to establish a loan repayment service or payoff the loan in full during this 60-day window results in a default of the loan, which is taxable income to the
participant.
NOTE 3 TAX STATUS
The Internal Revenue Service (IRS) has determined and informed the Plan by a letter dated August 21 2014, that the Plan is qualified as
a tax-exempt plan under the appropriate sections of the Internal Revenue Code (IRC). The determination letter covered Plan amendments adopted from September 17, 2010 through August 5, 2014, and the trust agreement with Fidelity adopted
on July 19, 2013. The Plan has been amended since receiving the determination letter; however, the Plan Administrator believes that the Plan is designed and currently being operated in compliance with the applicable requirements of the IRC.
Therefore, the Plan is tax-exempt as of the financial statement date and, accordingly, no provision for income taxes has been recorded in the Plans financial statements.
NOTE 4
PARTY-IN-INTEREST TRANSACTIONS
Certain Plan investments include shares of mutual funds that are managed by affiliates of Fidelity. Fidelity is the trustee and third-party
administrator as defined by the Plan and, therefore, these transactions qualify as party-in-interest transactions.
Transactions in Microsoft Common
Stock also qualify as party-in-interest transactions. As of December 31, 2015 and 2014, the Plan held 20,830,786 shares of Microsoft Common Stock valued at $1,155,692,023 and 21,593,435 shares of Microsoft Common Stock valued at $1,003,015,044,
respectively. During the years ended December 31, 2015 and 2014, the Plan recorded Microsoft Common Stock dividend income of $27,457,802 and $25,293,650, respectively.
NOTE 5 FINANCIAL INSTRUMENTS
The Plan
accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Plan categorizes each of its fair
value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
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Level 1 inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Our
Level 1 non-derivative investments primarily include U.S. government securities, domestic and international equities, and actively traded mutual funds. Our Level 1 derivative assets include those actively traded on exchanges.
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Level 2 inputs 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 (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. 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, credit
spreads, foreign exchange rates, and forward and spot prices for currencies and commodities. Our Level 2 non-derivative investments consist primarily of mutual funds in our separately managed accounts. Our Level 2 derivative assets and liabilities
primarily include certain over-the-counter futures contracts.
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Level 3 inputs are generally unobservable and typically reflect managements estimates of assumptions that
market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. As of December 31, 2015 and 2014, the Plan did
not hold any financial instruments in Level 3.
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8
Our collective trusts are valued using the NAV provided by the trustee in order to estimate fair value. The
NAV is based on the fair value of the underlying investments held by the fund less its liabilities. Were the Plan to initiate a full redemption of a collective trust, the investment advisor reserves the right to temporarily delay withdrawal from the
collective trust in order to ensure that securities liquidations will be carried out in an orderly business manner. The collective trusts have no unfunded commitments, other redemption restrictions, or redemption notice periods. The portfolios are
comprised of a mix of stocks, bonds, commodities, and cash and gradually become more conservative as the target year approaches.
Financial Instruments Measured
at Fair Value
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December 31, 2015
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Level 1
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Level 2
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Total
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Mutual funds
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$
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910,285,907
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$
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0
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$
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910,285,907
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Microsoft Common Stock
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1,155,692,023
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0
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1,155,692,023
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Separately managed accounts:
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Common stock
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2,342,094,991
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0
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2,342,094,991
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Mutual funds
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0
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|
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574,498,125
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574,498,125
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Other
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105,479,056
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7,521,130
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113,000,186
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Brokerage accounts
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|
497,335,258
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|
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12,065,259
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|
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509,400,517
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Total
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$
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5,010,887,235
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$
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594,084,514
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5,604,971,749
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Collective trusts measured at NAV
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7,977,632,427
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Total Investments
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$
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13,582,604,176
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December 31, 2014
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Level 1
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Level 2
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Total
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Mutual funds
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$
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3,680,485,345
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$
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0
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$
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3,680,485,345
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Microsoft Common Stock
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1,003,015,044
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0
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|
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1,003,015,044
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Separately managed accounts:
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Common stock
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2,337,892,330
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|
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|
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0
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|
|
|
|
|
2,337,892,330
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Mutual funds
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|
|
|
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313,584
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|
|
|
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538,385,292
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|
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538,698,876
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Other
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68,315,046
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|
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2,985,211
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71,300,257
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Brokerage accounts
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419,313,170
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|
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13,783,590
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|
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|
433,096,760
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Total
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$
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7,509,334,519
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$
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555,154,093
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8,064,488,612
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Collective trusts measured at NAV
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4,353,143,465
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Total Investments
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$
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12,417,632,077
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No significant transfers occurred between Level 1 and Level 2 for the years ended December 31, 2015 and 2014.
NOTE 6 DERIVATIVES
Investment
managers acting under the Plan use derivative instruments to manage risks related to foreign currencies and interest rates; to enhance investment returns for the Plan; and to facilitate Plan portfolio diversification. Our Plan derivatives consist of
over-the-counter foreign exchange forward contracts and exchange-traded futures contracts, as well as put and call options, for which no hedge accounting treatment is applied. The related notional amounts, gross fair values, and amounts recognized
in earnings were immaterial as of and for the years ended December 31, 2015 and 2014. These derivative instruments are a component of the Other caption of separately managed accounts in Note 5 Financial Instruments.
9
NOTE 7 RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for benefits per the financial statements to net assets per the Form 5500, which is the annual
return/report for the Plan:
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December 31,
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2015
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2014
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Net assets available for benefits per the financial statements
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$
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13,698,506,532
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$
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12,532,846,244
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Less: benefits payable
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(2,893,690
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)
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(2,444,765
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)
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Net assets per the Form 5500
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$
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13,695,612,842
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$
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12,530,401,479
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The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500:
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December 31,
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2015
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2014
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Benefits paid to participants per the financial statements
|
|
$
|
862,421,212
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$
|
718,024,527
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Plus: increase in benefits payable at year end
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448,925
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232,496
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Benefits paid to participants per the Form 5500
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|
$
|
862,870,137
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$
|
718,257,023
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Benefits payable are recorded on the Form 5500 for payments to participants who requested payment by December 31, but
had not been paid as of that date.
10