Note 4—Fair Value Measurements

NOTE 4—FAIR VALUE MEASUREMENTS

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of January 29, 2016 and January 30, 2015:

		Successor
		January 29, 2016																January 30, 2015
		Level 1				Level 2				Level 3								Level 1				Level 2				Level 3
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Total				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Total
		(in millions)
Assets:
Cash equivalents:
Money market funds		$	3,832			$	—			$	—			$	3,832			$	1,778			$	—			$	—			$	1,778
Derivative instruments			—				195				—				195				—				437				—				437
Common stock purchase agreement			—				—				10				10				—				—				—				—
Total assets		$	3,832			$	195			$	10			$	4,037			$	1,778			$	437			$	—			$	2,215
Liabilities:
Derivative instruments		$	—			$	12			$	—			$	12			$	—			$	56			$	—			$	56
Debt—Other			—				—				28				28				—				—				—				—
Total liabilities		$	—			$	12			$	28			$	40			$	—			$	56			$	—			$	56

The Company did not transfer any securities between levels during the fiscal year ended January 29, 2016.

The following section describes the valuation methodologies the Company uses to measure financial instruments at fair value:

Money Market Funds—The Company’s money market funds are classified as cash equivalents with original maturities of 90 days or less and are recognized at fair value. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Company reviews security pricing and assesses liquidity on a quarterly basis.

Derivative Instruments—The Company’s derivative financial instruments consist primarily of foreign currency forward and purchased option contracts and interest rate swaps. The fair value of the portfolio is determined using valuation models based on market observable inputs, including interest rate curves, forward and spot prices for currencies, and implied volatilities. Credit risk is also factored into the fair value calculation of the Company’s derivative instrument portfolio. See Note 7 of the Notes to the Audited Consolidated Financial Statements for a description of the Company’s derivative financial instrument activities.

Debt—Other—As of January 29, 2016, the Company recognized a portion of its long-term debt at fair value. This debt is represented by promissory notes issued on August 3, 2015 and September 14, 2015. The Company determined fair value using a discounted cash flow model which included significant unobservable inputs and assumptions. The unobservable inputs used include projected cash outflows over varying possible maturity dates, weighted by the probability of those possible outcomes, along with assumed discount rates.

- F-24 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Varying these inputs could alter the fair value recognized for this instrument, but no material changes in fair value are expected given the maximum settlement amount of approximately $28 million under the agreement pursuant to which the promissory notes were issued. 

Common Stock Purchase Agreements—The equity financing agreements obtained by Parent in connection with the EMC merger transaction described in Note 1 of the Notes to the Audited Consolidated Financial Statements permit Michael S. Dell, the MSD Partners Funds, Silver Lake Partners, and Temasek to purchase Parent common stock at a fixed price per share contingent on the closing of the EMC merger transaction. Each agreement also provides for a price protection in the event additional equity investors purchase Parent common stock at a lower price. The agreements with Michael S. Dell, the MSD Partners Funds, and Silver Lake Partners are not required to be remeasured to fair value and are effectively capital commitments, because of the degree of control and influence such persons can exercise over Parent, including control over when and at what price Parent will issue new shares, as well as the fact that the equity agreements were entered into solely for the purpose of financing the EMC merger transaction. The provision relating to price protection is considered substantive to Temasek as an unrelated party. Consequently, the Company has recognized the contract as an asset or liability, initially recorded at fair value of zero, with subsequent changes in fair value recorded in earnings. As of January 29, 2016, the Company recognized an asset of $10 million related to the Temasek equity contract.

The Company determined the fair value of this forward contract using a Black-Scholes valuation model, which included significant unobservable inputs and assumptions. The unobservable inputs used include the current value of the Parent common stock, which was estimated based on a combination of a discounted cash flow methodology and a market approach, the probability of the EMC merger occurring, the time period to contract expiration, and the probability that Parent will issue its shares below the foregoing fixed price per share. Varying these inputs could materially alter the fair value recognized for this instrument.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis—Certain assets are measured at fair value on a nonrecurring basis and therefore are not included in the recurring fair value table above. These assets consist primarily of non-financial assets such as goodwill and intangible assets and investments accounted for under the cost method. See Note 8 of the Notes to the Audited Consolidated Financial Statements for additional information about goodwill and intangible assets. Investments accounted for under the cost method are measured at fair value initially. Subsequently, when there is an indicator of impairment, the impairment is recognized.