Item 7A. Quantitative and qualitative disclosures about market risk

Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in factors such as interest rates and foreign currency exchange rates. Our exposure to market risk from changes in interest rates and foreign exchange rates is limited. Management monitors risk exposures on an ongoing basis and establishes and oversees the implementation of policies governing our funding, investments and use of derivative financial instruments to manage these risks.

Foreign currency and interest rate exposures are managed through our risk management activities, which are discussed further in Note 23 (Derivative and Hedging Instruments) to the consolidated financial statements included in Part II, Item 8.

Foreign Exchange Risk

We enter into foreign exchange derivative contracts to manage currency exposure associated with anticipated receipts and disbursements occurring in a currency other than the functional currency of the entity. We may also enter into foreign currency derivative contracts to offset possible changes in value of assets and liabilities due to foreign exchange fluctuations. The objective of these activities is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against our functional and reporting currencies, principally the U.S. dollar and euro. The effect of a hypothetical 10% adverse change in the value of the functional currencies could result in a fair value loss of approximately $58 million and $144 million on our foreign exchange derivative contracts outstanding at December 31, 2020 and 2019, respectively, before considering the offsetting effect of the underlying hedged activity.

We are also subject to foreign exchange risk as part of our daily settlement activities. To manage this risk, we enter into short duration foreign exchange contracts based upon anticipated receipts and disbursements for the respective currency position. This risk is typically limited to a few days between when a payment transaction takes place and the subsequent settlement with our customers. The effect of a hypothetical 10% adverse change in the value of the functional currencies could result in a fair value loss of approximately $23 million on our short duration foreign exchange derivative contracts outstanding at December 31, 2020. The Company did not have any outstanding short duration foreign exchange derivative contracts related to this activity at December 31, 2019.

Interest Rate Risk

Our available-for-sale debt investments include fixed and variable rate securities that are sensitive to interest rate fluctuations. Our policy is to invest in high quality securities, while providing adequate liquidity and maintaining diversification to avoid significant exposure. A hypothetical 100 basis point adverse change in interest rates would not have a material impact to the fair value of our investments at December 31, 2020 and 2019.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Item 8. Financial statements and supplementary data

Mastercard Incorporated

Index to consolidated financial statements

									Page
As of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018
			Management’s report on internal control over financial reporting						57
			Report of independent registered public accounting firm						58
			Consolidated Statement of Operations						60
			Consolidated Statement of Comprehensive Income						61
			Consolidated Balance Sheet						62
			Consolidated Statement of Changes in Equity						63
			Consolidated Statement of Cash Flows						65
			Notes to consolidated financial statements						66

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s report on internal control over financial reporting

The management of Mastercard Incorporated (“Mastercard”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of Mastercard’s internal control over financial reporting as of December 31, 2020. In making its assessment, management has utilized the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that, based on its assessment, Mastercard’s internal control over financial reporting was effective as of December 31, 2020. The effectiveness of Mastercard’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on the next page.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Mastercard Incorporated

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Mastercard Incorporated and its subsidiaries (the “Company”) as of December 31, 2020 and 2019 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on internal control over financial reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition - Rebates and Incentives

As described in Notes 1 and 3 to the consolidated financial statements, the Company provides certain customers with rebates or incentives which totaled $8.3 billion for the year ended December 31, 2020. The Company has business agreements with certain customers that provide for rebates or other support when customers meet certain volume hurdles as well as other support incentives, which are tied to performance. Rebates and incentives are recorded as a reduction of gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. Rebates and incentives are calculated based upon estimated customer performance and the terms of the related business agreements. As disclosed by management, various factors are considered in estimating customer performance, including forecasted transactions, card issuance and card conversion volumes, expected payments and historical experience with that customer.

The principal considerations for our determination that performing procedures relating to rebates and incentives is a critical audit matter are (i) the significant judgment by management when developing estimates related to rebates and incentives based on customer performance; and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s estimates related to customer performance, including the reasonableness of the various applicable factors considered by management in the estimate.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to rebates and incentives, including controls over evaluating estimated customer performance. These procedures also included, among others, evaluating the reasonableness of estimated customer performance for a sample of customer agreements, including (i) evaluating rebate and incentive contracts to identify whether all incentives are identified and recorded accurately; (ii) testing management’s process for developing estimated customer performance, including evaluating the reasonableness of the various applicable factors considered by management; and (iii) evaluating estimated customer performance as compared to actual results in the period the customer reports actual performance.

/s/ PricewaterhouseCoopers LLP

New York, New York

February 12, 2021

We have served as the Company’s auditor since 1989.

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PART II

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statement of Operations
						For the Years Ended December 31,
						2020						2019						2018
						(in millions, except per share data)
Net Revenue						$	15,301					$	16,883					$	14,950
Operating Expenses
General and administrative						5,910						5,763						5,174
Advertising and marketing						657						934						907
Depreciation and amortization						580						522						459
Provision for litigation						73						—						1,128
Total operating expenses						7,220						7,219						7,668
Operating income						8,081						9,664						7,282
Other Income (Expense)
Investment income						24						97						122
Gains (losses) on equity investments, net						30						167						—
Interest expense						(380)						(224)						(186)
Other income (expense), net						5						27						(14)
Total other income (expense)						(321)						67						(78)
Income before income taxes						7,760						9,731						7,204
Income tax expense						1,349						1,613						1,345
Net Income						$	6,411					$	8,118					$	5,859
Basic Earnings per Share						$	6.40					$	7.98					$	5.63
Basic weighted-average shares outstanding						1,002						1,017						1,041
Diluted Earnings per Share						$	6.37					$	7.94					$	5.60
Diluted weighted-average shares outstanding						1,006						1,022						1,047
The accompanying notes are an integral part of these consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statement of Comprehensive Income
						For the Years Ended December 31,
						2020						2019						2018
						(in millions)
Net Income						$	6,411					$	8,118					$	5,859
Other comprehensive income (loss):
Foreign currency translation adjustments						345						10						(319)
Income tax effect						(59)						13						40
Foreign currency translation adjustments, net of income tax effect						286						23						(279)
Translation adjustments on net investment hedge						(177)						36						96
Income tax effect						40						(8)						(21)
Translation adjustments on net investment hedge, net of income tax effect						(137)						28						75
Cash flow hedges						(189)						14						—
Income tax effect						42						(3)						—
Reclassification adjustment for cash flow hedges						4						—						—
Income tax effect						(1)						—						—
Cash flow hedges, net of income tax effect						(144)						11						—
Defined benefit pension and other postretirement plans						(12)						(21)						(16)
Income tax effect						2						3						3
Reclassification adjustment for defined benefit pension and other postretirement plans						(1)						(1)						(2)
Income tax effect						—						—						—
Defined benefit pension and other postretirement plans, net of income tax effect						(11)						(19)						(15)
Investment securities available-for-sale						(1)						3						(3)
Income tax effect						—						(1)						1
Investment securities available-for-sale, net of income tax effect						(1)						2						(2)
Other comprehensive income (loss), net of income tax effect						(7)						45						(221)
Comprehensive Income						$	6,404					$	8,163					$	5,638
The accompanying notes are an integral part of these consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheet
						December 31,
						2020						2019
						(in millions, except per share data)
Assets
Current assets:
Cash and cash equivalents						$	10,113					$	6,988
Restricted cash for litigation settlement						586						584
Investments						483						688
Accounts receivable						2,646						2,514
Settlement due from customers						1,706						2,995
Restricted security deposits held for customers						1,696						1,370
Prepaid expenses and other current assets						1,883						1,763
Total current assets						19,113						16,902
Property, equipment and right-of-use assets, net						1,902						1,828
Deferred income taxes						491						543
Goodwill						4,960						4,021
Other intangible assets, net						1,753						1,417
Other assets						5,365						4,525
Total Assets						$	33,584					$	29,236
Liabilities, Redeemable Non-controlling Interests and Equity
Current liabilities:
Accounts payable						$	527					$	489
Settlement due to customers						1,475						2,714
Restricted security deposits held for customers						1,696						1,370
Accrued litigation						842						914
Accrued expenses						5,430						5,489
Current portion of long-term debt						649						—
Other current liabilities						1,228						928
Total current liabilities						11,847						11,904
Long-term debt						12,023						8,527
Deferred income taxes						86						85
Other liabilities						3,111						2,729
Total Liabilities						27,067						23,245
Commitments and Contingencies
Redeemable Non-controlling Interests						29						74
Stockholders’ Equity
Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,396 and 1,391 shares issued and 987 and 996 shares outstanding, respectively						—						—
Class B common stock, $0.0001 par value; authorized 1,200 shares, 8 and 11 shares issued and outstanding, respectively						—						—
Additional paid-in-capital						4,982						4,787
Class A treasury stock, at cost, 409 and 395 shares, respectively						(36,658)						(32,205)
Retained earnings						38,747						33,984
Accumulated other comprehensive income (loss)						(680)						(673)
Mastercard Incorporated Stockholders' Equity						6,391						5,893
Non-controlling interests						97						24
Total Equity						6,488						5,917
Total Liabilities, Redeemable Non-controlling Interests and Equity						$	33,584					$	29,236
The accompanying notes are an integral part of these consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statement of Changes in Equity
						Stockholders’ Equity
						Common Stock												Additional Paid-In Capital						Class A Treasury Stock						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Mastercard Incorporated Stockholders' Equity						Non- Controlling Interests						Total Equity
						Class A						Class B
						(in millions, except per share data)
Balance at December 31, 2017						$	—					$	—					$	4,365					$	(20,764)					$	22,364					$	(497)					$	5,468					$	29					$	5,497
Adoption of revenue standard						—						—						—						—						366						—						366						—						366
Adoption of intra-entity asset transfers standard						—						—						—						—						(183)						—						(183)						—						(183)
Net income						—						—						—						—						5,859						—						5,859						—						5,859
Activity related to non-controlling interests						—						—						—						—						—						—						—						(6)						(6)
Redeemable non-controlling interest adjustments						—						—						—						—						(3)						—						(3)						—						(3)
Other comprehensive income (loss)						—						—						—						—						—						(221)						(221)						—						(221)
Dividends						—						—						—						—						(1,120)						—						(1,120)						—						(1,120)
Purchases of treasury stock						—						—						—						(4,991)						—						—						(4,991)						—						(4,991)
Share-based payments						—						—						215						5						—						—						220						—						220
Balance at December 31, 2018						—						—						4,580						(25,750)						27,283						(718)						5,395						23						5,418
Net income						—						—						—						—						8,118						—						8,118						—						8,118
Activity related to non-controlling interests						—						—						—						—						—						—						—						1						1
Redeemable non-controlling interest adjustments						—						—						—						—						(9)						—						(9)						—						(9)
Other comprehensive income (loss)						—						—						—						—						—						45						45						—						45
Dividends						—						—						—						—						(1,408)						—						(1,408)						—						(1,408)
Purchases of treasury stock						—						—						—						(6,463)						—						—						(6,463)						—						(6,463)
Share-based payments						—						—						207						8						—						—						215						—						215
Balance at December 31, 2019						—						—						4,787						(32,205)						33,984						(673)						5,893						24						5,917

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statement of Changes in Equity (Continued)
						Stockholders’ Equity
						Common Stock												Additional Paid-In Capital						Class A Treasury Stock						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Mastercard Incorporated Stockholders' Equity						Non- Controlling Interests						Total Equity
						Class A						Class B
						(in millions, except per share data)
Balance at December 31, 2019						—						—						4,787						(32,205)						33,984						(673)						5,893						24						5,917
Net income						—						—						—						—						6,411						—						6,411						—						6,411
Activity related to non-controlling interests						—						—						—						—						—						—						—						73						73
Redeemable non-controlling interest adjustments						—						—						—						—						(7)						—						(7)						—						(7)
Other comprehensive income (loss)						—						—						—						—						—						(7)						(7)						—						(7)
Dividends						—						—						—						—						(1,641)						—						(1,641)						—						(1,641)
Purchases of treasury stock						—						—						—						(4,459)						—						—						(4,459)						—						(4,459)
Share-based payments						—						—						195						6						—						—						201						—						201
Balance at December 31, 2020						$	—					$	—					$	4,982					$	(36,658)					$	38,747					$	(680)					$	6,391					$	97					$	6,488
The accompanying notes are an integral part of these consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statement of Cash Flows
						For the Years Ended December 31,
						2020						2019						2018
						(in millions)
Operating Activities
Net income						$	6,411					$	8,118					$	5,859
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of customer and merchant incentives						1,072						1,141						1,235
Depreciation and amortization						580						522						459
(Gains) losses on equity investments, net						(30)						(167)						—
Share-based compensation						254						250						196
Deferred income taxes						73						(7)						(244)
Other						14						24						31
Changes in operating assets and liabilities:
Accounts receivable						(86)						(246)						(317)
Income taxes receivable						(2)						(202)						(120)
Settlement due from customers						1,288						(444)						(1,078)
Prepaid expenses						(1,552)						(1,661)						(1,769)
Accrued litigation and legal settlements						(73)						(662)						869
Restricted security deposits held for customers						326						290						(6)
Accounts payable						26						(42)						101
Settlement due to customers						(1,242)						477						849
Accrued expenses						(114)						657						439
Long-term taxes payable						(37)						2						(20)
Net change in other assets and liabilities						316						133						(261)
Net cash provided by operating activities						7,224						8,183						6,223
Investing Activities
Purchases of investment securities available-for-sale						(220)						(643)						(1,300)
Purchases of investments held-to-maturity						(198)						(215)						(509)
Proceeds from sales of investment securities available-for-sale						361						1,098						604
Proceeds from maturities of investment securities available-for-sale						140						376						379
Proceeds from maturities of investments held-to-maturity						121						383						929
Purchases of property and equipment						(339)						(422)						(330)
Capitalized software						(369)						(306)						(174)
Purchases of equity investments						(214)						(467)						(91)
Acquisition of businesses, net of cash acquired						(989)						(1,440)						—
Settlement of interest rate derivative contracts						(175)						—						—
Other investing activities						3						(4)						(14)
Net cash used in investing activities						(1,879)						(1,640)						(506)
Financing Activities
Purchases of treasury stock						(4,473)						(6,497)						(4,933)
Dividends paid						(1,605)						(1,345)						(1,044)
Proceeds from debt, net						3,959						2,724						991
Payment of debt						—						(500)						—
Acquisition of redeemable non-controlling interests						(49)						—						—
Contingent consideration paid						—						(199)						—
Tax withholdings related to share-based payments						(150)						(161)						(80)
Cash proceeds from exercise of stock options						97						126						104
Other financing activities						69						(15)						(4)
Net cash used in financing activities						(2,152)						(5,867)						(4,966)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents						257						(44)						(6)
Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents						3,450						632						745
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period						8,969						8,337						7,592
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period						$	12,419					$	8,969					$	8,337
The accompanying notes are an integral part of these consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes to consolidated financial statements

Note 1. Summary of Significant Accounting Policies

Organization

Mastercard Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (“Mastercard International” and together with Mastercard Incorporated, “Mastercard” or the “Company”), is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks. The Company makes payments easier and more efficient by providing a wide range of payment solutions and services through its family of well-known brands, including Mastercard®, Maestro® and Cirrus®. The Company operates a multi-rail network that offers customers one partner to turn to for their domestic and cross-border payment needs. Through its unique and proprietary global payments network, which is referred to as the core network, the Company switches (authorizes, clears and settles) payment transactions and delivers related products and services. Mastercard has additional payment capabilities that include automated clearing house (“ACH”) transactions (both batch and real-time account-based payments). The Company also provides integrated value-added offerings such as cyber and intelligence products, information and analytics services, consulting, loyalty and reward programs, processing and open banking. The Company’s payment solutions offer customers choice and flexibility and are designed to ensure safety and security for the global payments system.

A typical transaction on the Company’s core network involves four participants in addition to the Company: account holder (a person or entity who holds a card or uses another device enabled for payment), issuer (the account holder’s financial institution), merchant and acquirer (the merchant’s financial institution). The Company does not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of the Company’s products. In most cases, account holder relationships belong to, and are managed by, the Company’s financial institution customers.

Significant Accounting Policies

Consolidation and basis of presentation - The consolidated financial statements include the accounts of Mastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Investments in VIEs for which the Company is not considered the primary beneficiary are not consolidated and are accounted for as equity method or measurement alternative method investments and recorded in other assets on the consolidated balance sheet. At December 31, 2020 and 2019, there were no significant VIEs which required consolidation and the investments were not considered material to the consolidated financial statements. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).

Non-controlling interests represent the equity interest not owned by the Company and are recorded for consolidated entities in which the Company owns less than 100% of the interests. Changes in a parent’s ownership interest while the parent retains its controlling interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are remeasured at fair value, with any gain or loss recognized in earnings. For 2020, 2019 and 2018, net losses from non-controlling interests were not material and, as a result, amounts are included on the consolidated statement of operations within other income (expense).

Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty, including the potential impacts and duration of the COVID-19 pandemic, as well as other factors; accordingly, accounting estimates require the exercise of judgment. These financial statements were prepared using information reasonably available as of December 31, 2020 and through the date of this Report. The accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates.

Revenue recognition - Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. Revenue is primarily generated from assessing customers based on the dollar volume of activity, or gross dollar volume, on the products that carry the Company’s brands, from fees to issuers, acquirers and other stakeholders for providing switching services, as well as from value-added products and services that are typically integrated and sold with the Company’s payment offerings.

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Volume-based revenue (domestic assessments and cross-border volume fees) is recorded as revenue in the period it is earned, which is primarily based on the related volume generated on the cards. Certain volume-based revenue is based upon information reported by customers. Transaction-based revenue (transaction processing) is primarily based on the number and type of transactions and is recognized as revenue in the same period in which the related transactions occur. Other payment-related products and services are recognized as revenue in the period in which the related services are performed or transactions occur. For services provided to customers where delivery involves the use of a third-party, the Company recognizes revenue on a gross basis if it acts as the principal, controlling the service to the customer and on a net basis if it acts as the agent, arranging for the service to be provided.

Mastercard has business agreements with certain customers that provide for rebates or other support when the customers meet certain volume hurdles as well as other support incentives, which are tied to performance. Rebates and incentives are recorded as a reduction of gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. Rebates and incentives are calculated based upon estimated customer performance and the terms of the related business agreements. In addition, Mastercard may make payments to a customer directly related to entering into an agreement, which are generally capitalized and amortized over the life of the agreement on a straight-line basis.

Contract assets include unbilled consideration typically resulting from executed data analytic and consulting services performed for customers in connection with Mastercard’s payment network service arrangements. Collection for these services typically occurs over the contractual term. Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet.

The Company defers the recognition of revenue when consideration has been received prior to the satisfaction of performance obligations. As these performance obligations are satisfied, revenue is subsequently recognized. Deferred revenue is primarily derived from data analytic and consulting services. Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet.

Business combinations - The Company accounts for business combinations under the acquisition method of accounting. The Company measures the tangible and intangible identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree and contingent consideration at fair value as of the acquisition date. Acquisition-related costs are expensed as incurred and are included in general and administrative expenses on the consolidated statement of operations. Any excess purchase price over the fair value of net assets acquired, including identifiable intangible assets, is recorded as goodwill. Measurement period adjustments, if any, to the preliminary estimated fair value of the intangibles assets as of the acquisition date are recorded in goodwill.

Goodwill and other intangible assets - Indefinite-lived intangible assets consist of goodwill, which represents the synergies expected to arise after the acquisition date and the assembled workforce, and customer relationships. Finite-lived intangible assets consist of capitalized software costs, customer relationships and other intangible assets. Intangible assets with finite useful lives are amortized over their estimated useful lives, on a straight-line basis, which range from one to twenty years. Capitalized software includes internal and external costs incurred directly related to the design, development and testing phases of each capitalized software project.

Impairment of assets - Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment at the reporting unit level in the fourth quarter, or sooner when circumstances indicate an impairment may exist. The impairment evaluation for goodwill utilizes a qualitative assessment to determine whether it is more likely than not that goodwill is impaired. The qualitative factors may include, but are not limited to, macroeconomic conditions, industry and market conditions, operating environment, financial performance and other relevant events. If it is determined that it is more likely than not that goodwill is impaired, then the Company is required to perform a quantitative goodwill impairment test. If the fair value of a reporting unit exceeds the carrying value, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying value, then goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment charge.

The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate relevant events and circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. If the qualitative assessment indicates that it is more likely than not that indefinite-lived intangible assets are impaired, then a quantitative assessment is required.

Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment is recorded.

Impairment charges, if any, are recorded in general and administrative expenses on the consolidated statement of operations.

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Litigation - The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters. The Company evaluates the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable. Loss contingencies are recorded in provision for litigation on the consolidated statement of operations. These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. Legal costs are expensed as incurred and recorded in general and administrative expenses on the consolidated statement of operations.

Settlement and other risk management - Mastercard’s rules guarantee the settlement of many of the transactions between its customers. Settlement exposure is the outstanding settlement risk to customers under Mastercard’s rules due to the difference in timing between the payment transaction date and subsequent settlement. While the term and amount of the guarantee are unlimited, the duration of settlement exposure is short term and typically limited to a few days.

The Company also enters into agreements in the ordinary course of business under which the Company agrees to indemnify third parties against damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company. As the extent of the Company’s obligations under these agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable.

The Company accounts for each of its guarantees by recording the guarantee at its fair value at the inception or modification date through earnings.

Income taxes - The Company follows an asset and liability based approach in accounting for income taxes as required under GAAP. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between the financial statement carrying amounts and income tax bases of assets and liabilities. Deferred income taxes are displayed separately as noncurrent assets and liabilities on the consolidated balance sheet. Valuation allowances are provided against assets which are not more likely than not to be realized. The Company recognizes all material tax positions, including uncertain tax positions in which it is more likely than not that the position will be sustained based on its technical merits and if challenged by the relevant taxing authorities. At each balance sheet date, unresolved uncertain tax positions are reassessed to determine whether subsequent developments require a change in the amount of recognized tax benefit. The allowance for uncertain tax positions is recorded in other current and noncurrent liabilities on the consolidated balance sheet. The Company records interest expense related to income tax matters as interest expense on the consolidated statement of operations. The Company includes penalties related to income tax matters in the income tax provision.

Cash and cash equivalents - Cash and cash equivalents include certain investments with daily liquidity and with an original maturity of three months or less from the date of purchase. Cash equivalents are recorded at cost, which approximates fair value.

Restricted cash - The Company classifies cash and cash equivalents as restricted when it is unavailable for withdrawal or use in its general operations. The Company has the following types of restricted cash and restricted cash equivalents which are included in the reconciliation of beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows:

• Restricted cash for litigation settlement - The Company has restricted cash for litigation within a qualified settlement fund related to the settlement agreement for the U.S. merchant class litigation. The funds continue to be restricted for payments until the litigation matter is resolved.

• Restricted security deposits held for customers - The Company requires collateral from certain customers for settlement of their transactions. The majority of collateral for settlement is in the form of standby letters of credit and bank guarantees which are not recorded on the consolidated balance sheet. Additionally, the Company holds cash deposits and certificates of deposit from certain customers as collateral for settlement of their transactions, which are recorded as assets on the consolidated balance sheet. These assets are fully offset by corresponding liabilities included on the consolidated balance sheet. These security deposits are typically held for the duration of the agreement with the customers.

• Other restricted cash balances - The Company has other restricted cash balances which include contractually restricted deposits, as well as cash balances that are restricted based on the Company’s intention with regard to usage. These funds are classified on the consolidated balance sheet within prepaid expenses and other current assets and other assets.

Fair value - The Company measures certain financial assets and liabilities at fair value on a recurring basis by estimating the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The Company classifies these recurring fair value measurements into a three-level hierarchy (“Valuation Hierarchy”).

The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the Valuation Hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the Valuation Hierarchy are as follows:

• Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets

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• Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets and inputs that are observable for the asset or liability

• Level 3 - inputs to the valuation methodology are unobservable and cannot be directly corroborated by observable market data

Certain assets are measured at fair value on a nonrecurring basis. The Company’s non-financial assets measured at fair value on a nonrecurring basis include property, equipment and right-of-use assets, goodwill and other intangible assets. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

The valuation methods for goodwill and other intangible assets acquired in business combinations involve assumptions concerning comparable company multiples, discount rates, growth projections and other assumptions of future business conditions. The Company uses various valuation techniques to determine fair value, primarily discounted cash flows analysis, relief-from-royalty, and multi-period excess earnings for estimating the fair value of its intangible assets. As the assumptions employed to measure these assets are based on management’s judgment using internal and external data, these fair value determinations are classified in Level 3 of the Valuation Hierarchy.

Contingent consideration - Certain business combinations involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones. These liabilities are classified within Level 3 of the Valuation Hierarchy as the inputs used to measure fair value are unobservable and require management’s judgment. The fair value of the contingent consideration at the acquisition date and subsequent periods is determined utilizing an income approach based on a Monte Carlo technique and is recorded in other current liabilities and other liabilities on the consolidated balance sheet. Changes to projected performance milestones of the acquired businesses could result in a higher or lower contingent consideration liability. The changes in fair value as a result of updated assumptions are recorded in general and administrative expenses on the consolidated statement of operations.

Investment securities - The Company classifies investments as available-for-sale or held-to-maturity at the date of acquisition.

• Available-for-sale debt securities:

◦Investments in debt securities that are available to meet the Company’s current operational needs are classified as current assets and the securities that are not available for current operational needs are classified as non-current assets on the consolidated balance sheet.

The debt securities are carried at fair value, with unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statement of comprehensive income. Net realized gains and losses on debt securities are recognized in investment income on the consolidated statement of operations. The specific identification method is used to determine realized gains and losses.

The Company evaluates its debt securities for impairment on an ongoing basis. When there has been a decline in fair value of a debt security below the amortized cost basis, the Company recognizes an impairment if: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis; or (3) it does not expect to recover the entire amortized cost basis of the security. The credit loss component of the impairment is recognized as an allowance and recorded in other income (expense), net on the consolidated statement of operations while the non-credit related loss remains in accumulated other comprehensive income (loss) until realized from a sale or subsequent impairment.

• Held-to-maturity securities:

◦Time deposits - The Company classifies time deposits with original maturities greater than three months as held-to-maturity. Held-to-maturity securities that mature within one year are classified as current assets within investments on the consolidated balance sheet while held-to-maturity securities with maturities of greater than one year are classified as non-current assets. Time deposits are carried at amortized cost on the consolidated balance sheet and are intended to be held until maturity.

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Equity investments - The Company holds equity securities of publicly traded and privately held companies.

• Marketable equity securities - Marketable equity securities are strategic investments in publicly traded companies and are measured at fair value using quoted prices in their respective active markets with changes recorded through gain (losses) on equity investments, net on the consolidated statement of operations. Securities that are not for use in current operations are classified in other assets on the consolidated balance sheet.

• Nonmarketable equity investments - The Company’s nonmarketable equity investments, which are reported in other assets on the consolidated balance sheet, include investments in privately held companies without readily determinable market values. The Company uses discounted cash flows and market assumptions to estimate the fair value of its nonmarketable equity investments when certain events or circumstances indicate that impairment may exist. The Company’s nonmarketable equity investments are accounted for under the equity method or measurement alternative method.

◦Equity method - The Company accounts for investments in common stock or in-substance common stock under the equity method of accounting when it has the ability to exercise significant influence over the investee, generally when it holds between 20% and 50% ownership in the entity. The excess of the cost over the underlying net equity of investments accounted for under the equity method is allocated to identifiable tangible and intangible assets and liabilities based on fair values at the date of acquisition. The amortization of the excess of the cost over the underlying net equity of investments and Mastercard’s share of net earnings or losses of entities accounted for under the equity method of accounting is included in other income (expense), net on the consolidated statement of operations. In addition, investments in flow-through entities such as limited partnerships and limited liability companies are also accounted for under the equity method when the Company has the ability to exercise significant influence over the investee, generally when the investment ownership percentage is equal to or greater than 5% of the outstanding ownership interest. The Company’s share of net earnings or losses for these investments are included in gains (losses) on equity investments, net on the consolidated statement of operations.

◦Measurement alternative method - The Company accounts for investments in common stock or in-substance common stock under the measurement alternative method of accounting when it does not exercise significant influence, generally when it holds less than 20% ownership in the entity or when the interest in a limited partnership or limited liability company is less than 5% and the Company has no significant influence over the operation of the investee. Investments in companies that Mastercard does not control, but that are not in the form of common stock or in-substance common stock, are also accounted for under the measurement alternative method of accounting. Measurement alternative investments are measured at cost, less any impairment and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. Fair value adjustments, as well as impairments, are included in gain (losses) on equity investments, net on the consolidated statement of operations.

Derivative and hedging instruments - The Company’s derivative financial instruments are recorded as either assets or liabilities on the balance sheet and measured at fair value. The Company’s foreign exchange and interest rate derivative contracts are included in Level 2 of the Valuation Hierarchy as the fair value of the contracts are based on inputs, which are observable based on broker quotes for the same or similar instruments. The Company does not enter into derivative contracts for trading or speculative purposes. For derivative contracts that are not designated as hedging instruments, realized and unrealized gains and losses from the change in fair value of the contracts are recognized in current earnings.

The Company’s derivatives that are designated as hedging instruments are required to meet established accounting criteria. In addition, an effectiveness assessment is required to demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value or cash flows of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The method of assessing hedge effectiveness and measuring hedge results is formally documented at hedge inception and assessed at least quarterly throughout the designated hedge period. For cash flow hedges, the fair value adjustments are recorded, net of tax, in other comprehensive income (loss) on the consolidated statement of comprehensive income. Any gains and losses deferred in accumulated other comprehensive income (loss) are subsequently reclassified to the corresponding line item on the consolidated statement of operations when the underlying hedged transactions impact earnings. For hedging instruments that are no longer deemed highly effective, hedge accounting is discontinued prospectively, and any gains and losses remaining in accumulated other comprehensive income (loss) are reclassified to earnings when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, the associated gains or losses in accumulated other comprehensive income (loss) are reclassified to the corresponding line item on the consolidated statement of operations in current earnings.

The Company has numerous investments in its foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates. The Company may use foreign currency denominated debt and/or derivative instruments to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates. The effective portion of the foreign currency gains and losses related to the hedging instruments are reported in accumulated other comprehensive income (loss) on the consolidated balance sheet as a cumulative translation adjustment component of equity. Amounts excluded from

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effectiveness testing of net investment hedges are recognized in earnings over the life of the hedging instrument. The Company evaluates the effectiveness of the net investment hedge each quarter.

Settlement due from/due to customers - The Company operates systems for clearing and settling payment transactions among customers. Net settlements are generally cleared daily among customers through settlement cash accounts by wire transfer or other bank clearing means. However, some transactions may not settle until subsequent business days, resulting in amounts due from and due to customers.

Property, equipment and right-of-use assets - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements and amortization of finance leases is included in depreciation and amortization expense on the consolidated statement of operations. Operating lease amortization expense is included in general and administrative expenses on the consolidated statement of operations.

The useful lives of the Company’s assets are as follows:

Asset Category						Estimated Useful Life
Buildings						30 years
Building equipment						10 - 15 years
Furniture and fixtures and equipment						3 - 5 years
Leasehold improvements						Shorter of life of improvement or lease term
Right-of-use assets						Shorter of life of the asset or lease term

The Company determines if a contract is, or contains, a lease at contract inception. The Company’s right-of-use (“ROU”) assets are primarily related to operating leases for office space, automobiles and other equipment. Leases are included in property, equipment and right-of-use assets, other current liabilities and other liabilities on the consolidated balance sheet.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In addition, ROU assets include initial direct costs incurred by the lessee as well as any lease payments made at or before the commencement date, and exclude lease incentives. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is determined by using the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of one year or less are excluded from ROU assets and liabilities.

The Company excludes variable lease payments in measuring ROU assets and lease liabilities, other than those that depend on an index, a rate or are in-substance fixed payments. Lease and nonlease components are generally accounted for separately. When available, consideration is allocated to the separate lease and nonlease components in a lease contract on a relative standalone price basis using observable standalone prices.

Pension and other postretirement plans - The Company recognizes the funded status of its single-employer defined benefit pension plans and postretirement plans as assets or liabilities on its consolidated balance sheet and recognizes changes in the funded status in the year in which the changes occur through accumulated other comprehensive income (loss). The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation at December 31, the measurement date. Overfunded plans, if any, are aggregated and recorded in other assets, while underfunded plans are aggregated and recorded as accrued expenses and other liabilities on the consolidated balance sheet.

Net periodic pension and postretirement benefit cost/(income), excluding the service cost component, is recognized in other income (expense) on the consolidated statement of operations. These costs include interest cost, expected return on plan assets, amortization of prior service costs or credits and gains or losses previously recognized as a component of accumulated other comprehensive income (loss). The service cost component is recognized in general and administrative expenses on the consolidated statement of operations.

Defined contribution plans - The Company’s contributions to defined contribution plans are recorded as employees render service to the Company. The charge is recorded in general and administrative expenses on the consolidated statement of operations.

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Advertising and marketing - Expenses incurred to promote Mastercard’s brand, products and services are recognized in advertising and marketing on the consolidated statement of operations. The timing of recognition is dependent on the type of advertising or marketing expense.

Foreign currency remeasurement and translation - Monetary assets and liabilities are remeasured to functional currencies using current exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are recorded at historical exchange rates. Revenue and expense accounts are remeasured at the weighted-average exchange rate for the period. Resulting exchange gains and losses related to remeasurement are included in general and administrative expenses on the consolidated statement of operations.

Where a non-U.S. currency is the functional currency, translation from that functional currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss).

Treasury stock - The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.

Share-based payments - The Company measures share-based compensation expense at the grant date, based on the estimated fair value of the award and uses the straight-line method of attribution, net of estimated forfeitures, for expensing awards over the requisite employee service period. The Company estimates the fair value of its non-qualified stock option awards (“Options”) using a Black-Scholes valuation model. The fair value of restricted stock units (“RSUs”) is determined and fixed on the grant date based on the Company’s stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation model is used to determine the grant date fair value of performance stock units (“PSUs”) granted. All share-based compensation expenses are recorded in general and administrative expenses on the consolidated statement of operations.

Redeemable non-controlling interests - The Company’s business combinations may include provisions allowing non-controlling equity owners the ability to require the Company to purchase additional interests in the subsidiary at their discretion. The interests are initially recorded at fair value and in subsequent reporting periods are accreted or adjusted to the estimated redemption value. The adjustments to the redemption value are recorded to retained earnings or additional paid-in capital on the consolidated balance sheet. The redeemable non-controlling interests are considered temporary and reported outside of permanent equity on the consolidated balance sheet at the greater of the carrying amount adjusted for the non-controlling interest’s share of net income (loss) or its redemption value.

Earnings per share - The Company calculates basic earnings per share (“EPS”) by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares outstanding during the year, adjusted for the potentially dilutive effect of stock options and unvested stock units using the treasury stock method. The Company may be required to calculate EPS using the two-class method as a result of its redeemable non-controlling interests. If redemption value exceeds the fair value of the redeemable non-controlling interests, the excess would be a reduction to net income for the EPS calculation.

Accounting pronouncements not yet adopted

Simplifying the accounting for income taxes - In December 2019, the FASB issued accounting guidance to simplify the accounting for income taxes. This guidance includes the removal of certain exceptions to the general income tax accounting principles and provides clarity and simplification to other areas of income tax accounting by amending the existing guidance. The guidance is effective for periods beginning after December 15, 2020. The Company will adopt this guidance effective January 1, 2021 and does not expect the impacts to be material.

Reference Rate Reform - In March 2020, the FASB issued accounting guidance to provide temporary optional expedients and exceptions to the current contract modifications and hedge accounting guidance in light of the expected market transition from LIBOR to alternative rates. The new guidance provides optional expedients and exceptions to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include (1) contract modifications, (2) hedging relationships, and (3) sale or transfer of debt securities classified as held-to-maturity. The amendments were effective immediately upon issuance of the update. Companies may elect to adopt the amendments prospectively to transactions existing as of or entered from the date of adoption through December 31, 2022. The Company does not expect the impacts to be material.

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Note 2. Acquisitions

In 2020 and 2019, the Company acquired several businesses for total consideration of $1.1 billion and $1.5 billion, respectively, representing both cash and contingent consideration. There were no acquisitions in 2018. These acquisitions align with the Company’s strategy to grow, diversify and build the Company’s business. Refer to Note 1 (Summary of Significant Accounting Policies) for the valuation techniques Mastercard utilizes to fair value the respective components of business combinations and contingent consideration. The residual value allocated to goodwill is primarily attributable to the synergies expected to arise after the acquisition date and a majority of the goodwill is not expected to be deductible for local tax purposes.

In 2020, the Company finalized the purchase accounting for businesses acquired during 2019 and $185 million of the businesses acquired in 2020. The Company is evaluating and finalizing the purchase accounting for the remainder of the businesses acquired during 2020. The preliminary estimated and final fair values of the purchase price allocations in aggregate, as of the acquisition dates, are noted below for the years ended December 31.

						2020						2019
						(in millions)
Assets:
Cash and cash equivalents						$	6					$	54
Other current assets						14						143
Other intangible assets						237						395
Goodwill						844						1,076
Other assets						11						48
Total assets						1,112						1,716
Liabilities:
Other current liabilities						15						121
Deferred income taxes						23						52
Other liabilities						8						32
Total liabilities						46						205
Net assets acquired						$	1,066					$	1,511

The following table summarizes the identified intangible assets acquired during the years ended December 31:

						2020						2019						2020						2019
						Acquisition Date Fair Value												Weighted-Average Useful Life
						(in millions)												(in years)
Developed technologies						$	122					$	199					6.3						7.7
Customer relationships						114						178						12.0						12.6
Other						1						18						1.0						5.0
Other intangible assets						$	237					$	395					9.0						9.7

Pro forma information related to the acquisitions was not included because the impact on the Company's consolidated results of operations was not considered to be material.

Among the businesses acquired in 2020, the largest acquisition relates to Finicity Corporation (“Finicity”), an open-banking provider, headquartered in Salt Lake City, Utah. On November 18, 2020, Mastercard acquired 100% equity interest in Finicity for cash consideration of $809 million. In addition, the Finicity sellers have the potential to earn contingent consideration of up to $160 million if certain revenue targets are met in 2021. As of the acquisition date, the fair value of the contingent consideration was $71 million. The businesses acquired in 2019 were not individually significant to Mastercard.

Pending Acquisition

In August 2019, Mastercard entered into a definitive agreement to acquire the majority of the Corporate Services business of Nets Denmark A/S, for €2.85 billion (approximately $3.5 billion as of December 31, 2020) after adjusting for cash and certain other

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liabilities at closing. The pending acquisition primarily comprises the clearing and instant payment services, and e-billing solutions of Nets Denmark A/S’s Corporate Services business. The Company has secured conditional approval from the European Commission and, subject to other closing conditions, anticipates completing the acquisition in the first quarter of 2021, or shortly thereafter.

Note 3. Revenue

Mastercard’s core network involves four participants in addition to the Company: account holders (a person or entity who holds a card or uses another device enabled for payment), issuers (the account holders’ financial institutions), merchants and acquirers (the merchants’ financial institutions). Revenue from contracts with customers is recognized when services are performed in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those services. Revenue recognized from domestic assessments, cross-border volume fees and transaction processing are derived from Mastercard’s payment network services. Revenue is primarily generated by charging fees to issuers, acquirers and other stakeholders for providing switching services, as well as by assessing customers based primarily on the dollar volume of activity, or gross dollar volume, on the products that carry the Company’s brands. Revenue is generally derived from information accumulated by Mastercard’s systems or reported by customers. In addition, the Company generates other revenues from value-added products and services that are typically integrated and sold with the Company’s payment offerings and are recognized as revenue in the period in which the related transactions occur or services are performed.

The price structure for Mastercard’s products and services is dependent on the nature of volumes, types of transactions and type of products and services offered to customers. Net revenue can be impacted by the following:

• domestic or cross-border transactions

• geographic region or country in which the transaction occurs

• volumes/transactions subject to tiered rates

• processed or not processed by the Company

• amount of usage of the Company’s other products or services

• amount of rebates and incentives provided to customers

The Company classifies its net revenue into the following five categories:

Domestic assessments are fees charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry the Company’s brands where the merchant country and the country of issuance are the same. Revenue from domestic assessments is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brands.

Cross-border volume fees are charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry the Company’s brands where the merchant country and the country of issuance are different. Revenue from cross-border volume is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brands.

Transaction processing revenue is recognized for both domestic and cross-border transactions in the period in which the related transactions occur. Transaction processing includes the following:

• Switched transaction revenue is generated from the following products and services:

◦Authorization is the process by which a transaction is routed to the issuer for approval. In certain circumstances, such as when the issuer’s systems are unavailable or cannot be contacted, Mastercard or others approve such transactions on behalf of the issuer in accordance with either the issuer’s instructions or applicable rules (also known as “stand-in”).

◦Clearing is the determination and exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted at the point of interaction. Transactions are cleared among customers through Mastercard’s central and regional processing systems.

◦Settlement is facilitating the exchange of funds between parties.

• Connectivity fees are charged to issuers, acquirers and other financial institutions for network access, equipment and the transmission of authorization and settlement messages. These fees are based on the size of the data being transmitted and the number of connections to the Company’s network.

• Other processing fees include issuer and acquirer processing solutions; payment gateways for e-commerce merchants; mobile gateways for mobile-initiated transactions; and safety and security.

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Other revenues consist of value-added products and services that are typically sold with the Company’s payment service offerings and are recognized in the period in which the related services are performed or transactions occur. Other revenues include the following:

• Data analytics and consulting fees.

• Cyber and intelligence fees are for products and services offered to prevent, detect and respond to fraud and to ensure the safety of transactions made primarily on Mastercard products.

• Loyalty and rewards solutions fees are charged to issuers for benefits provided directly to consumers with Mastercard-branded cards, such as access to a global airline lounge network, global and local concierge services, individual insurance coverages, emergency card replacement, emergency cash advance services and a 24-hour cardholder service center. Loyalty and reward solution fees also include rewards campaigns and management services.

• Program management services provided to prepaid card issuers consist of foreign exchange margin, commissions, load fees and ATM withdrawal fees paid by cardholders on the sale and encashment of prepaid cards.

• Batch and real-time account-based payment services relating to ACH transactions and other ACH related services.

• Other payment-related products and services and platforms, including account and transaction enhancement services, open banking solutions, rules compliance and publications.

Rebates and incentives (contra-revenue) are provided to customers that meet certain volume targets and can be in the form of a rebate or other support incentives, which are tied to performance. Rebates and incentives are recorded as a reduction of gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. In addition, Mastercard may make incentive payments to a customer directly related to entering into an agreement, which are generally capitalized and amortized over the life of the agreement on a straight-line basis.

The Company’s disaggregated net revenue by source and geographic region were as follows for the years ended December 31:

						2020						2019						2018
						(in millions)
Revenue by source:
Domestic assessments						$	6,656					$	6,781					$	6,138
Cross-border volume fees						3,512						5,606						4,954
Transaction processing						8,731						8,469						7,391
Other revenues						4,717						4,124						3,348
Gross revenue						23,616						24,980						21,831
Rebates and incentives (contra-revenue)						(8,315)						(8,097)						(6,881)
Net revenue						$	15,301					$	16,883					$	14,950
Net revenue by geographic region:
North American Markets						$	5,424					$	5,843					$	5,312
International Markets						9,701						10,869						9,514
Other 1						176						171						124
Net revenue						$	15,301					$	16,883					$	14,950

1Includes revenues managed by corporate functions.

Receivables from contracts with customers of $2.5 billion and $2.3 billion as of December 31, 2020 and 2019, respectively, are recorded within accounts receivable on the consolidated balance sheet. The Company’s customers are generally billed weekly, however, the frequency is dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not typically offer extended payment terms to customers.

Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at December 31, 2020 in the amounts of $59 million and $245 million, respectively. The comparable amounts included in prepaid expenses and other current assets and other assets at December 31, 2019 were $48 million and $152 million, respectively.

Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at December 31, 2020 in the amounts of $355 million and $143 million, respectively. The comparable amounts included in other current liabilities and

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other liabilities at December 31, 2019 were $238 million and $106 million, respectively. In 2020, 2019 and 2018 revenue recognized from the satisfaction of such performance obligations was $1.1 billion, $994 million and $904 million, respectively.

The Company’s remaining performance periods for its contracts with customers for its payment network services are typically long-term in nature (generally up to 10 years). As a payment network service provider, the Company provides its customers with continuous access to its global payments network and stands ready to provide transaction processing and related services over the contractual term. Consideration is variable as the Company generates volume- and transaction-based revenues from assessing its customers’ current period activity. The Company has elected the optional exemption to not disclose the remaining performance obligations related to its payment network services. The Company also earns revenues primarily from other value-added services comprised of both batch and real-time account-based payment services, consulting fees, gateway services, processing, loyalty programs and other payment-related products and services. At December 31, 2020, the estimated aggregate consideration allocated to unsatisfied performance obligations for these other value-added services is $1.3 billion, which is expected to be recognized through 2023. The estimated remaining performance obligations related to these revenues are subject to change and are affected by several factors, including modifications and terminations and are not expected to be material to any future annual period.

Note 4. Earnings Per Share

The components of basic and diluted EPS for common shares for each of the years ended December 31 were as follows:

						2020						2019						2018
						(in millions, except per share data)
Numerator
Net income						$	6,411					$	8,118					$	5,859
Denominator
Basic weighted-average shares outstanding						1,002						1,017						1,041
Dilutive stock options and stock units						4						5						6
Diluted weighted-average shares outstanding 1						1,006						1,022						1,047
Earnings per Share
Basic						$	6.40					$	7.98					$	5.63
Diluted						$	6.37					$	7.94					$	5.60

Note: Table may not sum due to rounding.

1For the years presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.

Note 5. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported on the consolidated balance sheet that total to the amounts shown on the consolidated statement of cash flows for the years ended December 31:

						2020						2019
						(in millions)
Cash and cash equivalents						$	10,113					$	6,988
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement						586						584
Restricted security deposits held for customers						1,696						1,370
Prepaid expenses and other current assets						24						27
Cash, cash equivalents, restricted cash and restricted cash equivalents						$	12,419					$	8,969

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Note 6. Supplemental Cash Flows

The following table includes supplemental cash flow disclosures for each of the years ended December 31:

						2020						2019						2018
						(in millions)
Cash paid for income taxes, net of refunds						$	1,349					$	1,644					$	1,790
Cash paid for interest						311						199						153
Cash paid for legal settlements						149						668						260
Non-cash investing and financing activities
Dividends declared but not yet paid						439						403						340
Accrued property, equipment and right-of-use assets						154						468						10
Fair value of assets acquired, net of cash acquired						1,106						1,662						—
Fair value of liabilities assumed related to acquisitions						46						205						—

Note 7. Investments

The Company’s investments on the consolidated balance sheet include both available-for-sale and held-to-maturity securities (see Investments section below). The Company classifies its investments in equity securities of publicly traded and privately held companies within other assets on the consolidated balance sheet (see Equity Investments section below).

Investments

Investments on the consolidated balance sheet consisted of the following at December 31:

						2020						2019
						(in millions)
Available-for-sale securities						$	321					$	591
Held-to-maturity securities						162						97
Total investments						$	483					$	688

Available-for-Sale Securities

The major classes of the Company’s available-for-sale investment securities and their respective amortized cost basis and fair values were as follows:

						December 31, 2020																								December 31, 2019
						Amortized Cost						Gross Unrealized Gain						Gross Unrealized Loss						Fair Value						Amortized Cost						Gross Unrealized Gain						Gross Unrealized Loss						Fair Value
						(in millions)
Municipal securities						$	10					$	—					$	—					$	10					$	15					$	—					$	—					$	15
Government and agency securities						64						—						—						64						108						—						—						108
Corporate securities						246						1						—						247						381						1						—						382
Asset-backed securities						—						—						—						—						85						1						—						86
Total						$	320					$	1					$	—					$	321					$	589					$	2					$	—					$	591

The Company’s available-for-sale investment securities held at December 31, 2020 and 2019, primarily carried a credit rating of A- or better with unrealized gains and losses recorded as a separate component of other comprehensive income (loss) on the consolidated statement of comprehensive income. The municipal securities are comprised of state tax-exempt bonds and are diversified across states and sectors. Government and agency securities include U.S. government bonds, U.S. government sponsored agency bonds and foreign government bonds. Corporate securities are comprised of commercial paper and corporate bonds. The asset-backed securities are investments in bonds which are collateralized primarily by automobile loan receivables.

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The maturity distribution based on the contractual terms of the Company’s investment securities at December 31, 2020 was as follows:

						Available-For-Sale
						Amortized Cost						Fair Value
						(in millions)
Due within 1 year						$	115					$	115
Due after 1 year through 5 years						205						206
Total						$	320					$	321

Investment income on the consolidated statement of operations primarily consists of interest income generated from cash, cash equivalents, time deposits, and realized gains and losses on the Company’s debt securities. The realized gains and losses from the sale of available-for-sale securities for 2020, 2019 and 2018 were not significant.

Held-to-Maturity Securities

The Company classifies time deposits with maturities greater than three months but less than one year as held-to-maturity. Time deposits are carried at amortized cost on the consolidated balance sheet and are intended to be held until maturity. The cost of these securities approximates fair value.

Equity Investments

Included in other assets on the consolidated balance sheet are equity investments with readily determinable fair values (“Marketable securities”) and equity investments without readily determinable fair values (“Nonmarketable securities”). Marketable securities are publicly traded companies and are measured using unadjusted quoted prices in their respective active markets. Nonmarketable securities that do not qualify for equity method accounting are measured at cost, less any impairment and adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer (“measurement alternative”).

The following table is a summary of the activity related to the Company’s equity investments:

						Balance at December 31, 2019						Purchases (Sales), net						Changes in Fair Value****1						Other****2						Balance at December 31, 2020
						(in millions)
Marketable securities						$	479					$	1					$	(5)					$	1					$	476
Nonmarketable securities						435						204						35						22						696
Total equity investments						$	914					$	205					$	30					$	23					$	1,172

1Recorded in gains (losses) on equity investments, net on the consolidated statement of operations

2Includes translational impact of currency

At December 31, 2020, the total carrying value of Nonmarketable securities included $157 million of measurement alternative investments and $539 million of equity method investments. At December 31, 2019, the total carrying value of Nonmarketable securities included $317 million of measurement alternative investments and $118 million of equity method investments. Cumulative impairments and downward fair value adjustments on measurement alternative investments were $14 million and cumulative upward fair value adjustments were $86 million as of December 31, 2020.

Note 8. Fair Value Measurements

The Company classifies its fair value measurements of financial instruments into a three-level hierarchy within the Valuation Hierarchy. Financial instruments are categorized for fair value measurement purposes as recurring or non-recurring in nature. There were no transfers made among the three levels in the Valuation Hierarchy for 2020 and 2019.

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