1. Summary of significant accounting policies

Business

Amgen Inc. is a global biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology.

Basis of presentation

The financial information for the three and nine months ended September 30, 2009 and 2008 is unaudited but includes all adjustments (consisting of only normal recurring adjustments, unless otherwise indicated), which Amgen Inc., including its subsidiaries (referred to as “Amgen,” “the Company,” “we,” “our” or “us”), considers necessary for a fair presentation of the results of operations for those periods. Interim results are not necessarily indicative of results for the full fiscal year.

The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

During the three months ended September 30, 2009, the FASB Accounting Standards Codification (“ASC” or “Codification”) became the authoritative source of accounting principles generally accepted in the United States (“GAAP”) recognized by the FASB. All existing FASB accounting standards and guidance were superseded by the ASC. Instead of issuing new accounting standards in the form of statements, FASB staff positions and Emerging Issues Task Force abstracts, the FASB now issues Accounting Standards Updates that update the Codification. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws continue to be additional sources of authoritative GAAP for SEC registrants.

Change in method of accounting for convertible debt instruments

Effective January 1, 2009, we adopted a new accounting standard that changed the method of accounting for convertible debt that may be partially or wholly settled in cash. As required by this new standard, we retrospectively applied this change in accounting to all prior periods for which we had applicable outstanding convertible debt. Under this method of accounting, the debt and equity components of our convertible notes are bifurcated and accounted for separately. The equity components of our convertible notes, including our 2011 Convertible Notes, 2013 Convertible Notes and 2032 Modified Convertible Notes, are included in “Common stock and additional paid-in capital” in the Condensed Consolidated Balance Sheets, with a corresponding reduction in the carrying values of these convertible notes as of the date of issuance or modification, as applicable. The reduced carrying values of our convertible notes are being accreted back to their principal amounts through the recognition of non-cash interest expense. This results in recognizing interest expense on these borrowings at effective rates approximating what we would have incurred had we issued nonconvertible debt with otherwise similar terms. See Note 2, “Change in method of accounting for convertible debt instruments” and Note 9, “Financing arrangements.”

Principles of consolidation

The condensed consolidated financial statements include the accounts of Amgen as well as its wholly owned subsidiaries. We do not have any significant interests in any variable interest entities. All material intercompany transactions and balances have been eliminated in consolidation.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

 

Fair value measurement

We adopted a new accounting standard that defines fair value and establishes a framework for fair value measurements effective January 1, 2008 for financial assets and liabilities and effective January 1, 2009 for non-financial assets and liabilities that are not remeasured on a recurring basis. Under this standard, fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The adoption of this accounting standard did not have a material impact on our condensed consolidated results of operations, financial position or cash flows.

During the three months ended June 30, 2009, we adopted a new accounting standard that modifies the guidance used in determining whether the impairment of a debt security is other-than-temporary. Under this accounting standard, the impairment of a debt security is considered other-than-temporary if an entity concludes that it intends to sell the impaired security, that it is more likely than not it will be required to sell the security before the recovery of its cost basis or that it does not otherwise expect to recover the entire cost basis of the security. This accounting standard also amends the presentation requirements of other-than-temporarily impaired debt securities and expands disclosure requirements in the financial statements for investments in both debt and equity securities. The adoption of this accounting standard did not have a material impact on our condensed consolidated results of operations, financial position or cash flows.

During the three months ended June 30, 2009, we adopted two new accounting standards that require disclosures at each interim balance sheet date of the fair value of financial instruments and valuation techniques used to determine fair value. Previously, these disclosures were only required annually. One of these accounting standards also provides additional guidance in estimating fair value when the market volume and level of activity for an asset or liability have significantly decreased and identifying circumstances that indicate a transaction may not be orderly. The adoption of these two accounting standards did not have a material impact on our condensed consolidated results of operations, financial position or cash flows.

See Note 11, “Fair value measurement.”

Derivative instruments

Effective January 1, 2009, we adopted a new accounting standard that requires disclosures about our derivative instruments and hedging activities. This standard requires that the objectives for using derivative instruments be disclosed to better convey the purpose of derivative use in terms of the risks that we are intending to manage. This standard also requires disclosure of how derivatives and related hedged items affect our financial statements. The adoption of this standard did not have a material impact on our condensed consolidated results of operations, financial position or cash flows. See Note 12, “Derivative instruments.”

Inventories

Inventories are stated at the lower of cost or market. Cost, which includes amounts related to materials, labor and overhead, is determined in a manner which approximates the first-in, first-out (“FIFO”) method.

Property, plant and equipment, net

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation of $4.5 billion and $4.1 billion as of September 30, 2009 and December 31, 2008, respectively.

Goodwill

Goodwill principally relates to our 2002 acquisition of Immunex Corporation (“Immunex”). We perform an impairment test annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable.

Product sales

Product sales primarily consist of sales of Aranesp® (darbepoetin alfa), EPOGEN® (Epoetin alfa), Neulasta® (pegfilgrastim), NEUPOGEN® (Filgrastim) and Enbrel® (etanercept).

Sales of our products are recognized when shipped and title and risk of loss have passed. Product sales are recorded net of accruals for estimated rebates, wholesaler chargebacks, discounts and other incentives (collectively “sales incentives”) and returns. Taxes assessed by government authorities on the sale of the Company’s products, primarily in Europe, are excluded from revenues.

 

We have the exclusive right to sell Epoetin alfa for dialysis, certain diagnostics and all non-human, non-research uses in the United States. We sell Epoetin alfa under the brand name EPOGEN®. We granted to Ortho Pharmaceutical Corporation (which has assigned its rights under the product license agreement to Ortho Biotech Products, L.P. (“Ortho Biotech”)), a subsidiary of Johnson & Johnson (“J&J”), a license relating to Epoetin alfa for sales in the United States for all human uses except dialysis and diagnostics. This license agreement, which is perpetual, may be terminated for various reasons, including upon mutual agreement of the parties, or default. The parties are required to compensate each other for Epoetin alfa sales that either party makes into the other party’s exclusive market, sometimes referred to as “spillover.” Accordingly, we do not recognize product sales we make into the exclusive market of J&J and do recognize the product sales made by J&J into our exclusive market. Sales in our exclusive market are derived from our sales to our customers, as adjusted for spillover. We are employing an arbitrated audit methodology to measure each party’s spillover based on estimates of and subsequent adjustments thereto of third-party data on shipments to end users and their usage.

Research and development costs

Research and development (“R&D”) costs are expensed as incurred and primarily include salaries, benefits and other staff-related costs; facilities and overhead costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs; information systems’ costs and amortization of acquired technology used in R&D with alternative future uses. R&D expenses also include costs incurred under R&D arrangements with our corporate partners, such as activities performed on behalf of Kirin-Amgen Inc. (“KA”), and costs and cost recoveries associated with collaborative R&D and in-licensing arrangements, including upfront fees and milestones paid to collaboration partners in connection with technologies that have no alternative future use. Net payment or reimbursement of R&D costs for R&D collaborations is recognized when the obligations are incurred or as we become entitled to the cost recovery.

Selling, general and administrative costs

Selling, general and administrative (“SG&A”) expenses are primarily comprised of salaries, benefits and other staff-related costs associated with sales and marketing, finance, legal and other administrative personnel; facilities and overhead costs; outside marketing, advertising and legal expenses and other general and administrative costs.

SG&A expenses include costs and cost recoveries associated with certain collaborative arrangements. Net payment or reimbursement of SG&A costs for collaborations is recognized when the obligations are incurred or as we become entitled to the cost recovery.

Subsequent events

During the three months ended June 30, 2009, we adopted a new accounting standard that establishes general standards for the accounting and disclosing of events that occur after the balance sheet date that are not addressed elsewhere in the Codification. This standard requires entities to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued. We have evaluated subsequent events through the date of issuance of our financial statements in this Form 10-Q.

Recent accounting pronouncements

In June 2009, the FASB issued a new accounting standard which amends guidance regarding consolidation of variable interest entities to address the elimination of the concept of a qualifying special purpose entity. This standard also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of the variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, this standard requires any enterprise that holds a variable interest in a variable interest entity to make ongoing assessments of whether it has a controlling financial interest in the variable interest entity and to provide enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in the variable interest entity. This standard is effective for us for interim and annual reporting periods beginning on or after January 1, 2010. The adoption of this standard is not expected to have a material impact on our condensed consolidated results of operations, financial position or cash flows.

In August 2009, the FASB issued a new accounting standard which clarifies guidance for determining the fair value of a liability when a quoted price in an active market for an identical liability is not available. This standard provides for the use of one or more valuation techniques including use of quoted prices of identical or similar liabilities when traded as assets, quoted prices of similar liabilities and other techniques consistent with the fair value measurement framework, such as the amount an entity would pay to transfer the identical liability or would receive to enter into the identical liability. This standard is effective for us for interim and annual periods beginning on or after October 1, 2009. The adoption of this standard is not expected to have a material impact on our condensed consolidated results of operations, financial position or cash flows.

In October 2009, the FASB issued a new accounting standard which amends guidance on accounting for revenue arrangements involving the delivery of more than one element of goods and/or services. This standard addresses the unit of accounting for arrangements involving multiple deliverables and removes the previous separation criteria that objective and reliable evidence of fair value of any undelivered item must exist for the delivered item to be considered a separate unit of accounting. This standard also addresses how the arrangement consideration should be allocated to each deliverable. Finally, this standard expands disclosures related to multiple element revenue arrangements. This standard is effective for us for annual periods beginning on or after January 1, 2011. The adoption of this standard is not expected to have a material impact on our condensed consolidated results of operations, financial position or cash flows.

2. Change in method of accounting for convertible debt instruments

As discussed in Note 1, “Summary of significant accounting policies - Change in method of accounting for convertible debt instruments,” effective January 1, 2009, we adopted a new accounting standard which changed the method of accounting for certain types of convertible debt and, as required by this standard, we retrospectively applied this change in accounting to all prior periods for which we had applicable outstanding convertible debt.

The following tables illustrate the impact of adopting this accounting standard on the Condensed Consolidated Statements of Income (in millions, except per share information):

 

		Three months ended September 30, 2009
		Excluding the   effect of the accounting standard			Effect of the   accounting standard			Including the   effect of the accounting standard
Operating income		$	1,605		$	-		$	1,605
Interest expense, net			76			63			139
Interest and other income, net			74			-			74
Income before income taxes			1,603			(63)			1,540
Provision for income taxes			178			(24)			154
Net income		$	1,425		$	(39)		$	1,386
Earnings per share:
Basic		$	1.40		$	(0.04)		$	1.36
Diluted		$	1.39		$	(0.03)		$	1.36
		Three months ended September 30, 2008
		As originally reported			Effect of the accounting standard			“Revised”
Operating income		$	1,483		$	-		$	1,483
Interest expense, net			74			59			133
Interest and other income, net			62			-			62
Income before income taxes			1,471			(59)			1,412
Provision for income taxes			313			(22)			291
Net income		$	1,158		$	(37)		$	1,121
Earnings per share:
Basic		$	1.09		$	(0.03)		$	1.06
Diluted		$	1.09		$	(0.04)		$	1.05

 

		Nine months ended September 30, 2009
		Excluding the   effect of the accounting standard			Effect of the   accounting standard			Including the   effect of the accounting standard
Operating income		$	4,383		$	-		$	4,383
Interest expense, net			250			186			436
Interest and other income, net			182			-			182
Income before income taxes			4,315			(186)			4,129
Provision for income taxes			525			(70)			455
Net income		$	3,790		$	(116)		$	3,674
Earnings per share:
Basic		$	3.72		$	(0.12)		$	3.60
Diluted		$	3.70		$	(0.12)		$	3.58
		Nine months ended September 30, 2008
		As originally reported			Effect of the accounting standard			“Revised”
Operating income		$	4,077		$	-		$	4,077
Interest expense, net			245			174			419
Interest and other income, net			264			-			264
Income before income taxes			4,096			(174)			3,922
Provision for income taxes			861			(66)			795
Net income		$	3,235		$	(108)		$	3,127
Earnings per share:
Basic		$	3.01		$	(0.10)		$	2.91
Diluted		$	3.00		$	(0.10)		$	2.90

 

The following tables illustrate the impact of adopting this accounting standard on the Condensed Consolidated Balance Sheets (in millions):

 

		September 30, 2009
		Excluding the   effect of the accounting standard			Effect of the   accounting standard			Including the   effect of the accounting standard
Non-current assets:
Other assets		$	1,227		$	(13)		$	1,214
Non-current liabilities:
Convertible notes			5,082			(635)			4,447
Other non-current liabilities			2,404			239			2,643
Stockholders’ equity:
Common stock and additional paid-in capital			25,939			914			26,853
Accumulated deficit			(3,511)			(531)			(4,042)
		December 31, 2008
		As originally reported			Effect of the accounting standard			“Revised”
Non-current assets:
Other assets		$	1,016		$	(16)		$	1,000
Non-current liabilities:
Convertible notes			5,081			(824)			4,257
Other non-current liabilities			1,995			309			2,304
Stockholders’ equity:
Common stock and additional paid-in capital			25,527			914			26,441
Accumulated deficit			(5,258)			(415)			(5,673)

The effect of this accounting standard on “Other non-current liabilities” in the Condensed Consolidated Balance Sheets reflects the impact of deferred taxes. In addition, the effect of this accounting standard on “Common stock and additional paid-in capital” in the Condensed Consolidated Balance Sheets reflects, principally, the impact of the equity component of our convertible debt partially offset by deferred taxes.

As a result of the accounting change, our accumulated deficit as of January 1, 2008, increased from $7.2 billion, as originally reported, to $7.4 billion after applying this accounting standard. There was no impact resulting from this accounting change on our cash flows from operating activities, investing activities or financing activities as reflected in the Condensed Consolidated Statements of Cash Flows.

3. Income taxes

The effective tax rates for the three and nine months ended September 30, 2009 and September 30, 2008 are different from the federal statutory tax rate primarily as a result of indefinitely invested earnings of our foreign operations. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be invested indefinitely outside the United States. In addition, the effective tax rates for the three and nine months ended September 30, 2009 were further reduced by favorable resolution of certain matters with tax authorities for prior periods.

One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely audited by the tax authorities in those jurisdictions. Significant disputes can arise with these tax authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income among various tax jurisdictions because of differing interpretations of tax laws and regulations. We are no longer subject to U.S. federal income tax examinations for years ending on or before December 31, 2004 or to California state income tax examinations for years ending on or before December 31, 2003.

 

As of September 30, 2009, we have settled the examinations of our U.S. income tax returns with the Internal Revenue Service for certain matters for the years ended December 31, 2005 and 2006 and have remeasured our unrecognized tax benefits (“UTBs”) accordingly. As of September 30, 2009, we have also settled the examinations of our California state income tax returns for certain matters for the years ended December 31, 2004 and 2005 and have remeasured our UTBs accordingly.

During the three and nine months ended September 30, 2009, the gross amount of our UTBs increased approximately $80 million and $225 million, respectively, as a result of tax positions taken during the current year. During the three and nine months ended September 30, 2009, the gross amount of our UTBs increased approximately $37 million as a result of tax positions taken during prior periods. During the three and nine months ended September 30, 2009, the gross amount of our UTBs decreased approximately $140 million and $310 million, respectively, primarily as a result of resolving certain tax matters related to prior periods. The majority of our UTBs as of September 30, 2009, if recognized, would affect our effective tax rate.

4. Earnings per share

Basic earnings per share (“EPS”) is based upon the weighted-average number of common shares outstanding. Diluted EPS is based upon the weighted-average number of common shares and dilutive potential common shares outstanding. Potential common shares outstanding principally include stock options, restricted stock (including restricted stock units) and other equity awards under our employee compensation plans and potential issuance of stock upon the assumed conversion of our 2011 Convertible Notes, 2013 Convertible Notes and 2032 Modified Convertible Notes, as discussed below, and upon the assumed exercise of our warrants using the treasury stock method (collectively “dilutive securities”). The convertible note hedges purchased in connection with the issuance of our 2011 Convertible Notes and 2013 Convertible Notes are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.

Upon conversion of our 2011 Convertible Notes, 2013 Convertible Notes and 2032 Modified Convertible Notes, the principal amount or accreted value would be settled in cash and the excess of conversion value over the principal amount or accreted value may be settled in cash and/or shares of common stock. Therefore, only the shares of common stock potentially issuable with respect to the excess of the notes’ conversion value over their principal amount or accreted value, if any, are considered as dilutive potential common shares for purposes of calculating diluted EPS. For the three and nine months ended September 30, 2009 and 2008, the conversion values for our convertible notes were less than the related principal amounts or accreted value and, accordingly, no shares were assumed to be issued for purposes of computing diluted EPS. For further information regarding our convertible notes, see Note 9, “Financing arrangements.”

The following table sets forth the computation for basic and diluted EPS (in millions, except per share information):

 

		Three months ended       September 30,						Nine months ended       September 30,
		2009			2008			2009			2008
Income (Numerator):
Net income for basic and diluted EPS		$	1,386		$	1,121		$	3,674		$	3,127
Shares (Denominator):
Weighted-average shares for basic EPS			1,016			1,058			1,020			1,075
Effect of dilutive securities			6			6			5			4
Weighted-average shares for diluted EPS			1,022			1,064			1,025			1,079
Basic EPS		$	1.36		$	1.06		$	3.60		$	2.91
Diluted EPS		$	1.36		$	1.05		$	3.58		$	2.90

For the three and nine months ended September 30, 2009, there were employee stock options, calculated on a weighted average basis, to purchase 31 million and 43 million shares, respectively, with exercise prices greater than the average market prices of our common stock for these periods that are not included in the computation of diluted EPS as their impact would have been anti-dilutive. For the three and nine months ended September 30, 2008, there were employee stock options, calculated on a weighted average basis, to purchase 35 million and 47 million shares, respectively, with exercise prices greater than the average market prices of our common stock for these periods that are not included in the computation of diluted EPS as their impact would have been anti-dilutive. In addition, shares which may be issued upon conversion of our convertible debt or upon exercise of our warrants are not included in any of the periods presented above as their impact on diluted EPS would have been anti-dilutive. Shares which may be issued under our 2007 and 2009 performance award programs were also excluded for the applicable periods because conditions under the programs were not met.

5. Related party transactions

We own a 50% interest in KA, a corporation formed in 1984 with Kirin Holdings Company, Limited (“Kirin”) for the development and commercialization of certain products based on advanced biotechnology. We account for our interest in KA under the equity method and include our share of KA’s profits or losses in “Selling, general and administrative” in the Condensed Consolidated Statements of Income. During the three and nine months ended September 30, 2009, our share of KA’s profits was $13 million and $49 million, respectively. During the three and nine months ended September 30, 2008, our share of KA’s profits was $22 million and $53 million, respectively. As of September 30, 2009 and December 31, 2008, the carrying value of our equity method investment in KA, net of dividends received, was $405 million and $356 million, respectively, and is included in non-current “Other assets” in the Condensed Consolidated Balance Sheets. KA’s revenues consist of royalty income related to its licensed technology rights. All of our rights to manufacture and market certain products, including darbepoetin alfa, pegfilgrastim, granulocyte colony-stimulating factor (“G-CSF”) and recombinant human erythropoietin, are pursuant to exclusive licenses from KA, which we currently market under the brand names Aranesp®, Neulasta®, NEUPOGEN® and EPOGEN®, respectively. KA receives royalty income from us, as well as from Kirin, J&J and F. Hoffmann-La Roche Ltd. (“Roche”) under separate product license agreements for certain geographic areas outside of the United States. During the three and nine months ended September 30, 2009, KA earned royalties from us of $85 million and $237 million, respectively. During the three and nine months ended September 30, 2008, KA earned royalties from us of $85 million and $243 million, respectively. These amounts are included in “Cost of sales (excludes amortization of certain acquired intangible assets)” in the Condensed Consolidated Statements of Income. As of September 30, 2009, KA owed us $4 million, which was included in “Other current assets” in the Condensed Consolidated Balance Sheet. At December 31, 2008, we owed KA $82 million, which was included in “Accrued liabilities” in the Condensed Consolidated Balance Sheet.

KA’s expenses primarily consist of costs related to R&D activities conducted on its behalf by Amgen and Kirin. KA pays Amgen and Kirin for such services at negotiated rates. During the three and nine months ended September 30, 2009, we earned revenues from KA of $27 million and $81 million, respectively, for certain R&D activities performed on KA’s behalf. During the three and nine months ended September 30, 2008, we earned revenues from KA of $41 million and $100 million, respectively, for certain R&D activities performed on KA’s behalf. These amounts are included in “Other revenues” in the Condensed Consolidated Statements of Income.

6. Restructuring

On August 15, 2007, we announced a plan to restructure our worldwide operations in order to improve our cost structure. This restructuring plan was primarily the result of regulatory and reimbursement developments that began in 2007 involving erythropoiesis-stimulating agent (“ESA”) products, including our marketed ESA products Aranesp® and EPOGEN®, and the resulting impact on our operations. Key components of our restructuring plan initially included: (i) worldwide staff reductions, (ii) rationalization of our worldwide network of manufacturing facilities and, to a lesser degree, changes to certain R&D capital projects and (iii) abandoning leases primarily for certain R&D facilities that will not be used in our operations. Subsequently, we identified certain additional initiatives designed to further assist in improving our cost structure, including outsourcing certain non-core business functions, most notably certain of our information systems’ infrastructure services, as well as abandoning leases for certain additional facilities that will no longer be used in our operations. As of September 30, 2009, we have substantially completed all of the actions and incurred all related costs included in our restructuring plan and subsequently identified initiatives.

Through September 30, 2009, we have incurred $952 million of costs related to the above-noted actions. The charges included $214 million of separation costs, $476 million of asset impairments, $148 million of accelerated depreciation and $114 million of other net charges, which primarily include $165 million of loss accruals for leases, $10 million loss on the disposal of certain less significant marketed products, $35 million for implementation costs associated with certain cost saving initiatives and $19 million of other charges, offset by $115 million of cost recoveries from Pfizer Inc. (“Pfizer”) (formerly Wyeth).

 

The following tables summarize the charges (credits) related to the above-noted actions by type of activity (in millions):

 

		Separation     costs			Asset     impairments			Other			Total
Three months ended September 30, 2009
R&D		$	-		$	3		$	-		$	3
SG&A			-			-			6			6
Other charges			(3)			-			4			1
		$	(3)		$	3		$	10		$	10
Three months ended September 30, 2008
Other charges		$	-		$	1		$	7		$	8
Interest and other income, net			-			-			9			9
		$	-		$	1		$	16		$	17
Nine months ended September 30, 2009
Cost of sales (excludes amortization of certain acquired intangible assets)		$	-		$	1		$	-		$	1
R&D			(3)			8			1			6
SG&A			(2)			-			25			23
Other charges			31			-			4			35
		$	26		$	9		$	30		$	65
Nine months ended September 30, 2008
Cost of sales (excludes amortization of certain acquired intangible assets)		$	-		$	1		$	-		$	1
R&D			3			-			-			3
SG&A			-			-			(1)			(1)
Other charges			4			15			20			39
Interest and other income, net			-			-			9			9
		$	7		$	16		$	28		$	51

The following table summarizes the charges and spending relating to the above actions (in millions):

 

		Separation     costs			Other			Total
Restructuring reserves as of January 1, 2009		$	4		$	162		$	166
Expense			26			30			56
Payments			(24)			(54)			(78)
Restructuring reserves as of September 30, 2009		$	6		$	138		$	144

7. Available-for-sale securities

We consider our investment portfolio and marketable equity investments available-for-sale and, accordingly, these investments are recorded at fair value with unrealized gains and losses generally recorded in other comprehensive income. For the three months ended September 30, 2009 and 2008, realized gains related to these investments were $22 million and $18 million, respectively, and realized losses related to these investments were $8 million and $26 million, respectively. For the nine months ended September 30, 2009 and 2008, realized gains related to these investments were $90 million and $94 million, respectively, and realized losses related to these investments were $63 million and $62 million, respectively. The cost of securities sold is based on the specific identification method.

 

The fair values of available-for-sale investments by type of security, contractual maturity and classification in the Condensed Consolidated Balance Sheets are as follows (in millions):

 

September 30, 2009		Amortized   cost			Gross   unrealized   gains			Gross   unrealized   losses			Estimated   fair value
Type of security:
U.S. Treasury securities		$	1,590		$	16		$	(1)		$	1,605
Obligations of U.S. government agencies and FDIC guaranteed bank debt			4,303			85			(1)			4,387
Corporate debt securities			3,976			96			(3)			4,069
Mortgage and asset backed securities			311			5			-			316
Other short-term interest bearing securities			3,530			-			-			3,530
Total debt securities			13,710			202			(5)			13,907
Equity securities			71			10			-			81
		$	13,781		$	212		$	(5)		$	13,988

 

December 31, 2008		Amortized   cost			Gross   unrealized   gains			Gross   unrealized   losses			Estimated   fair value
Type of security:
U.S. Treasury securities		$	1,896		$	58		$	(2)		$	1,952
Obligations of U.S. government agencies and FDIC guaranteed bank debt			3,396			100			(3)			3,493
Corporate debt securities			1,432			10			(72)			1,370
Mortgage and asset backed securities			508			2			(6)			504
Other short-term interest bearing securities			2,126			-			-			2,126
Total debt securities			9,358			170			(83)			9,445
Equity securities			65			-			(8)			57
		$	9,423		$	170		$	(91)		$	9,502

 

Contractual maturity		September 30,   2009			December 31,   2008
Maturing in one year or less		$	4,140		$	3,179
Maturing after one year through three years			5,895			3,724
Maturing after three years through five years			3,454			2,199
Maturing after five years			418			343
Total debt securities			13,907			9,445
Equity securities			81			57
		$	13,988		$	9,502
Classification in the Condensed Consolidated Balance Sheets		September 30,   2009			December 31,   2008
Cash and cash equivalents		$	3,577		$	1,774
Marketable securities			10,436			7,778
Other assets – noncurrent			81			30
			14,094			9,582
Less cash			(106)			(80)
		$	13,988		$	9,502

 

The primary objectives for our investment portfolio are liquidity and safety of principal. Investments are made with the objective of achieving the highest rate of return consistent with these two objectives. Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

We review periodically our available-for-sale securities for other-than-temporary declines in fair value below their cost basis and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. As of September 30, 2009 and December 31, 2008, the Company believes that the cost basis for our available-for-sale securities were recoverable in all material respects