Item 8. FINANCIAL STATEMENTS

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Item 8. FINANCIAL STATEMENTS

Index to Financial Statements


						Page(s)
Management’s Report on Internal Control Over Financial Reporting						61
Report of Independent Registered Public Accounting Firm						62-63
Consolidated Financial Statements:
Consolidated Statements of Operations						64
Consolidated Statements of Comprehensive Income						65
Consolidated Balance Sheets						66
Consolidated Statements of Cash Flows						67
Consolidated Statements of Shareholders’ Equity (Deficit)						68-70
Notes to Consolidated Financial Statements						71-117

Schedules are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Moody’s Corporation is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board, management and other personnel, 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.

Moody’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (2) 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 Moody’s management and directors; and (3) 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.

Management of the Company has undertaken an assessment of the design and operational effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 based on criteria established in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on the assessment performed, management has concluded that Moody’s maintained effective internal control over financial reporting as of December 31, 2019.

The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr.

President and Chief Executive Officer

/s/ MARK KAYE

Mark Kaye

Senior Vice President and Chief Financial Officer

February 21, 2020

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Moody’s Corporation:

Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Moody’s Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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, 2019 and 2018 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principles

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standard Codification (ASC) Topic 842, Leases, and its method of accounting for revenue as of January 1, 2018, due to the adoption of Accounting Standard Update (ASU) 2014-019 and all related amendments, which established ASC Topic 606, Revenue—Revenue from Contracts with Customers.

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 an opinion on the Company’s consolidated financial statements and an opinion 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Assessment of the carrying value of goodwill

As discussed in Note 11 to the consolidated financial statements, the goodwill balance as of December 31, 2019 was $3,722 million. The Company evaluates its reporting units for impairment on an annual basis, or more frequently if there are changes in the reporting structure of the Company or indicators of potential impairment. The Company has seven primary reporting units as of December 31, 2019: two within the Company’s Moody’s Investors Services segment and five within the Moody’s Analytics segment.

We identified the assessment of the carrying value of goodwill in the reporting units within the Moody’s Analytics segment as a critical audit matter on account of the significant degree of judgment required in evaluating assumptions about future operating results and the discount rates used to measure the reporting unit fair values.

The primary procedures we performed to address this critical audit matter included the following. We tested internal controls over the Company’s goodwill impairment process, including controls related to future operating results and the discount rates used to measure the reporting unit fair values. We evaluated management’s judgments relating to the assumed revenue growth rates, operating costs, and the discount rate by comparing them to available evidence. We also performed sensitivity analyses to assess the impact of alternative assumptions on management’s impairment conclusion. We compared the Company’s historical revenue and cost forecasts to actual results to assess the Company’s ability to accurately forecast. We involved a valuation professional with specialized skill and knowledge, who assisted in assessing the significant assumptions used to develop the discount rate, including the relevance and reliability of the information used.

Assessment of gross unrecognized tax benefits

As discussed in Note 18 to the consolidated financial statements, the Company has recorded uncertain tax benefits (UTPs), excluding associated interest, of $477 million as of December 31, 2019. The Company determines whether it is more-likely-than-not that a tax position will be sustained based on its technical merits as of the reporting date. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

We identified the assessment of the Company’s UTPs as a critical audit matter because complex judgment was required in evaluating the Company’s interpretation of tax law and its estimate of the ultimate resolution of the tax positions.

The primary procedures we performed to address this critical audit matter included the following. We tested internal controls over the Company’s tax process, including those related to the timely identification of UTPs, the assessment of new information related to previously identified UTPs, and the measurement of UTPs. We involved tax and valuation professionals with specialized skills and knowledge, who assisted in:

evaluating the Company’s interpretation of tax laws and judgments about the administrative practices of tax

authorities,

assessing transfer pricing studies for compliance with applicable laws and regulations,
inspecting settlement documents with applicable taxing authorities,
assessing the expiration of statutes of limitations, and
performing an assessment of the Company’s tax positions and comparing the results to the Company’s

assessment.

In addition, we evaluated the Company’s ability to accurately estimate its gross UTPs by comparing historical gross UTPs to actual results upon conclusion of tax audits or expiration of the statute of limitations.

/s/ KPMG LLP

We have served as the Company’s auditor since 2008.

New York, New York

February 21, 2020

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share data)


	Year Ended December 31,
	2019		2018		2017
Revenue	$	4,829	$	4,443	$	4,204
Expenses
Operating	1,387		1,246		1,216
Selling, general and administrative	1,167		1,080		986
Restructuring	60		49		—
Depreciation and amortization	200		192		158
Acquisition-Related Expenses	3		8		23
Loss pursuant to the divestiture of MAKS	14		—		—
Total expenses	2,831		2,575		2,383
Operating income	1,998		1,868		1,821
Non-operating (expense) income, net
Interest expense, net	(208)		(215)		(209)
Other non-operating income, net	20		19		4
Purchase Price Hedge Gain	—		—		111
CCXI Gain	—		—		60
Non-operating (expense) income, net	(188)		(196)		(34)
Income before provision for income taxes	1,810		1,672		1,787
Provision for income taxes	381		352		779
Net income	1,429		1,320		1,008
Less: Net income attributable to noncontrolling interests	7		10		7
Net income attributable to Moody’s	$	1,422	$	1,310	$	1,001
Earnings per share
Basic	$	7.51	$	6.84	$	5.24
Diluted	$	7.42	$	6.74	$	5.15
Weighted average shares outstanding
Basic	189.3		191.6		191.1
Diluted	191.6		194.4		194.2

The accompanying notes are an integral part of the consolidated financial statements

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)


	Year Ended December 31, 2019										Year Ended December 31, 2018								Year Ended December 31, 2017
	Pre-tax amounts		Tax amounts		After-tax amounts		Pre-tax amounts		Tax amounts		After-tax amounts		Pre-tax amounts		Tax amounts		After-tax amounts
Net Income					$	1,429					$	1,320					$	1,008
Other Comprehensive Income (Loss):
Foreign Currency Adjustments:
Foreign currency translation adjustments, net	$	(22)	$	(1)	$	(23)	$	(315)	$	—	$	(315)	$	225	$	—	$	225
Foreign currency translation adjustments - reclassification of losses included in net income	32		—		32		—		—		—		—		—		—
Net gains (losses) on net investment hedges	35		(9)		26		41		(7)		34		(59)		23		(36)
Net investment hedges - reclassification of gains included in net income	(3)		1		(2)		—		—		—		—		—		—
Cash Flow Hedges:
Net realized and unrealized (losses) gains on cash flow hedges	—		—		—		(1)		—		(1)		10		(4)		6
Reclassification of (gains) losses included in net income	—		—		—		—		—		—		(12)		5		(7)
Available for Sale Securities:
Net unrealized gains on available for sale securities	—		—		—		—		—		—		2		—		2
Reclassification of gains included in net income	—		—		—		—		—		—		(4)		—		(4)
Pension and Other Retirement Benefits:
Amortization of actuarial losses and prior service costs included in net income	3		(1)		2		5		(1)		4		8		(3)		5
Net actuarial (losses) gains and prior service costs	(32)		8		(24)		6		(2)		4		21		(8)		13
Total Other Comprehensive Income (Loss)	$	13	$	(2)	$	11	$	(264)	$	(10)	$	(274)	$	191	$	13	$	204
Comprehensive Income					1,440						1,046						1,212
Less: comprehensive income (loss) attributable to noncontrolling interests					11						(12)						19
Comprehensive Income Attributable to Moody’s					$	1,429					$	1,058					$	1,193

The accompanying notes are an integral part of the consolidated financial statements.

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MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share and per share data)


	December 31,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,832	$	1,685
Short-term investments	98		133
Accounts receivable, net of allowances of $43 in 2019 and $43 in 2018	1,419		1,287
Other current assets	330		282

Total current assets	3,679		3,387
Property and equipment, net	292		320
Operating lease right-of-use assets	456		—
Goodwill	3,722		3,781
Intangible assets, net	1,498		1,566
Deferred tax assets, net	229		197
Other assets	389		275
Total assets	$	10,265	$	9,526
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	773	$	696
Current portion of operating lease liabilities	89		—
Current portion of long-term debt	—		450
Deferred revenue	1,050		953

Total current liabilities	1,912		2,099
Non-current portion of deferred revenue	112		122
Long-term debt	5,581		5,226
Deferred tax liabilities, net	357		352
Uncertain tax positions	477		495
Operating lease liabilities	485		—
Other liabilities	504		576
Total liabilities	9,428		8,870
Contingencies (Note 22)
Redeemable noncontrolling interest	6		—
Shareholders’ equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding	—		—
Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding	—		—
Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at December 31, 2019 and December 31, 2018, respectively.	3		3
Capital surplus	642		601
Retained earnings	9,656		8,594
Treasury stock, at cost; 155,215,143 and 151,598,695 shares of common stock at December 31, 2019 and December 31, 2018, respectively	(9,250)		(8,313)
Accumulated other comprehensive loss	(439)		(426)
Total Moody’s shareholders’ equity	612		459
Noncontrolling interests	219		197
Total shareholders’ equity	831		656
Total liabilities, redeemable noncontrolling interest and shareholders’ equity	$	10,265	$	9,526

The accompanying notes are an integral part of the consolidated financial statements.

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)


	Year Ended December 31,
	2019		2018		2017
Cash flows from operating activities
Net income	$	1,429	$	1,320	$	1,008
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization	200		192		158
Stock-based compensation	136		130		123
Deferred income taxes	(38)		(99)		88
CCXI Gain	—		—		(60)
Purchase Price Hedge Gain	—		—		(111)


ROU Asset impairment & other non-cash restructuring/impairment charges	38		—		—
Loss pursuant to the divestiture of MAKS	14		—		—
Changes in assets and liabilities:
Accounts receivable	(134)		(136)		(148)
Other current assets	(88)		(9)		(70)
Other assets	(69)		(17)		12
Lease obligations	(16)		—		—
Accounts payable and accrued liabilities	77		(134)		(638)
Restructuring liability	—		42		(6)
Deferred revenue	76		139		73
Unrecognized tax positions and other non-current tax liabilities	8		59		63
Other liabilities	42		(26)		263
Net cash provided by operating activities	1,675		1,461		755
Cash flows from investing activities
Capital additions	(69)		(91)		(91)
Purchases of investments	(138)		(193)		(170)
Sales and maturities of investments	174		161		239
Receipts from Purchase Price Hedge	—		—		111
Cash received upon disposal of a business, net of cash transferred to purchaser	226		6		—
Cash paid for acquisitions, net of cash acquired	(162)		(289)		(3,511)
Receipts from settlements of net investment hedges	12		—		2
Payments for settlements of net investment hedges	(7)		—		—
Net cash provided by (used in) investing activities	36		(406)		(3,420)
Cash flows from financing activities
Issuance of notes	824		1,090		2,292
Repayment of notes	(950)		(800)		(300)
Issuance of commercial paper	1,317		989		1,837
Repayment of commercial paper	(1,320)		(1,120)		(1,707)
Proceeds from stock-based compensation plans	45		47		56
Repurchase of shares related to stock-based compensation	(77)		(62)		(49)
Treasury shares	(991)		(203)		(200)
Dividends	(378)		(337)		(290)
Dividends to noncontrolling interests	(3)		(5)		(3)
Payment for noncontrolling interest	(12)		—		(9)

Debt issuance costs, extinguishment costs and related fees	(18)		(11)		(27)
Net cash used in financing activities	(1,563)		(412)		1,600
Effect of exchange rate changes on cash and cash equivalents	(1)		(30)		85
Increase (decrease) in cash and cash equivalents	147		613		(980)
Cash and cash equivalents, beginning of period	1,685		1,072		2,052
Cash and cash equivalents, end of period	$	1,832	$	1,685	$	1,072

The accompanying notes are an integral part of the consolidated financial statements

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Amounts in millions, except per share data)


	Shareholders of Moody’s Corporation
	Common Stock								Treasury Stock						Accumulated Other Comprehensive Loss		Total Moody’s Shareholders’ Deficit		Non- Controlling Interests	Total Shareholders’ Equity (Deficit)
	Shares	Amount		Capital Surplus		Retained Earnings		Shares	Amount
Balance at December 31, 2016	342.9	$	3	$	477	$	6,689	(152.2)	$	(8,030)	$	(364)	$	(1,225)	$	198	$	(1,027)
Net income						1,001							1,001		7		1,008
Dividends ($1.14 per share)						(220)							(220)		(3)		(223)
Adoption of ASU 2016-16						(5)							(5)				(5)
Stock-based compensation				123									123				123
Shares issued for stock-based compensation plans at average cost, net				(67)				1.9	77				10				10

Purchase of noncontrolling interest				(4)									(4)		(1)		(5)
Treasury shares repurchased								(1.6)	(200)				(200)				(200)
Currency translation adjustment, net of net investment hedge activity (net of tax of $23 million)											176		176		13		189
Net actuarial gains and prior service cost (net of tax of $8 million)											13		13				13
Amortization of prior service costs and actuarial losses (net of tax of $3 million)											5		5				5
Net unrealized gain on available for sale securities											(1)		(1)		(1)		(2)
Net realized and unrealized gain on cash flow hedges (net of tax of $1 million)											(1)		(1)				(1)
Balance at December 31, 2017	342.9	$	3	$	529	$	7,465	(151.9)	$	(8,153)	$	(172)	$	(328)	$	213	$	(115)

The accompanying notes are an integral part of the consolidated financial statements.

(continued on next page)

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) continued

(Amounts in millions, except per share data)


	Shareholders of Moody’s Corporation
	Common Stock								Treasury Stock						Accumulated Other Comprehensive Loss		Total Moody’s Shareholders’ (Deficit) Equity		Non- Controlling Interests	Total Shareholders’ (Deficit) Equity
	Shares	Amount		Capital Surplus		Retained Earnings		Shares	Amount
Balance at December 31, 2017	342.9	$	3	$	529	$	7,465	(151.9)	$	(8,153)	$	(172)	$	(328)	$	213	$	(115)
Net income						1,310							1,310		10		1,320
Dividends ($1.76 per share)						(339)							(339)		(4)		(343)
Adoption of New Revenue Accounting Standard						156							156				156
Adoption of ASU 2016-01						2					(2)		—				—
Stock-based compensation				131									131				131
Shares issued for stock-based compensation plans at average cost, net				(59)				1.5	43				(16)				(16)
Treasury shares repurchased								(1.2)	(203)				(203)				(203)
Currency translation adjustment, net of net investment hedge activity (net of tax of $7 million)											(259)		(259)		(22)		(281)
Net actuarial gains and prior service cost (net of tax of $2 million)											4		4				4
Amortization of prior service costs and actuarial losses (net of tax of $1 million)											4		4				4
Net realized and unrealized gain on cash flow hedges (net of tax of $1 million)											(1)		(1)				(1)
Balance at December 31, 2018	342.9	$	3	$	601	$	8,594	(151.6)	$	(8,313)	$	(426)	$	459	$	197	$	656

The accompanying notes are an integral part of the consolidated financial statements.

(continued on next page)

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) continued

(Amounts in millions, except per share data)


	Shareholders of Moody’s Corporation
	Common Stock								Treasury Stock						Accumulated Other Comprehensive Loss		Total Moody’s Shareholders’ Equity		Non- Controlling Interests	Total Shareholders’ Equity
	Shares	Amount		Capital Surplus		Retained Earnings		Shares	Amount
Balance at December 31, 2018	342.9	$	3	$	601	$	8,594	(151.6)	$	(8,313)	$	(426)	$	459	$	197	$	656
Net income						1,422							1,422		7		1,429
Dividends ($2.00 per share)						(380)							(380)		(3)		(383)
Adoption of ASU 2018-02 (See Note 1)						20					(20)		—				—

Stock-based compensation				136									136				136
Shares issued for stock-based compensation plans at average cost, net				(70)				1.6	38				(32)				(32)
Purchase of noncontrolling interest				(9)									(9)		(3)		(12)
Non-controlling interest resulting from majority acquisition of Vigeo Eiris													—		17		17
Treasury shares repurchased				(16)				(5.2)	(975)				(991)				(991)
Currency translation adjustment, net of net investment hedge activity (net of tax of $9 million)											29		29		4		33
Net actuarial gains and prior service cost (net of tax of $8 million)											(24)		(24)				(24)
Amortization of prior service costs and actuarial losses (net of tax of $1 million)											2		2				2

Balance at December 31, 2019	342.9	$	3	$	642	$	9,656	(155.2)	$	(9,250)	$	(439)	$	612	$	219	$	831

The accompanying notes are an integral part of the consolidated financial statements.

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MOODY’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular dollar and share amounts in millions, except per share data)

NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings and assessment services; (ii) credit, capital markets and economic research, data and analytical tools; (iii) software solutions that support financial risk management activities; (iv) quantitatively derived credit scores; (v) learning solutions and certification services; (vi) offshore financial research and analytical services (this business was divested with the sale of MAKS in the fourth quarter of 2019); and (vii) company information and business intelligence products. Moody’s reports in two reportable segments: MIS and MA.

MIS, the credit rating agency, publishes credit ratings and provides assessment services on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations which consist primarily of financial instrument pricing services in the Asia-Pacific region as well as revenue from ICRA’s non-ratings operations. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

MA provides financial intelligence and analytical tools to assist businesses in making decisions. MA’s portfolio of solutions consists of specialized research, data, software, and professional services, which are assembled to support the financial analysis and risk management activities of institutional customers worldwide.

On November 8, 2019, the Company sold the MAKS business to Equistone Partners Europe Limited, a European private equity firm. The operating results of MAKS are reported within the MA segment (and PS LOB) through the closing of the transaction in the fourth quarter.

Certain reclassifications have been made to prior period amounts to conform to the current presentation.

Adoption of New Accounting Standards

On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and has elected to apply the provisions of the New Lease Accounting Standard on the date of adoption with adjustments to the assets and liabilities on its opening balance sheet, with no cumulative-effect adjustment to the opening balance of retained earnings required. Accordingly, the Company did not restate prior year comparative periods for the impact of the New Lease Accounting Standard. The New Lease Accounting Standard requires lessees to recognize an ROU Asset and lease liability for all leases with terms of more than 12 months. The Company has elected the package of practical expedients permitted under the transition guidance within the New Lease Accounting Standard, which permits the Company not to reassess the following for any expired or existing contracts: i) whether any contracts contain leases; ii) lease classification (i.e. operating lease or finance/capital lease); and iii) initial direct costs.

The adoption of the New Lease Accounting Standard resulted in the recognition of ROU Assets and lease liabilities of approximately $518 million and $622 million, respectively, at January 1, 2019, consisting primarily of operating leases relating to office space. Pursuant to this transition adjustment, the Company also recognized approximately $150 million and approximately $125 million in additional deferred tax assets and liabilities, respectively. Compared to previous guidance, the New Lease Accounting Standard does not significantly change the method by which a lessee should recognize, measure and present expenses and cash flows arising from a lease. Refer to Note 2 for a more fulsome description of the Company’s accounting policy relating to the New Lease Accounting Standard, which includes a discussion relating to the pattern of operating lease expense recognition (both prior to and subsequent to an impairment of an ROU Asset).

In the first quarter of 2019, the Company adopted ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. Under previous GAAP, adjustments to deferred tax assets and liabilities related to a change in tax laws or rates were included in income from continuing operations, even in situations where the related items were originally recognized in OCI (commonly referred to as a “stranded tax effect”). The provisions of this ASU permit the reclassification of the stranded tax effect related to the Tax Act from AOCI to retained earnings. In the first quarter of 2019, the Company reclassified $20 million of tax benefits from AOCI to retained earnings relating to the aforementioned stranded tax effect of the Tax Act.

On January 1, 2019, the Company adopted ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”. The amendments in this ASU permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815, in addition to the currently permissible benchmark interest rates. This ASU provides the Company the ability to utilize the OIS rate based on SOFR as the benchmark interest rate on certain hedges of interest rate risk. The adoption of this ASU had no impact on the Company’s financial statements upon adoption.

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On January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (ASC Topic 606)” using the modified retrospective approach. Under the previous accounting guidance, the reduction to reported 2018 revenue, operating income and Net Income would have been a reduction of $13 million, $24 million and $19 million, respectively.

Reclassification of Previously Reported Revenue by LOB

There were certain organizational/product realignments in both MIS and MA in the first quarter of 2019. Accordingly, in MIS, revenue from REITs, which was previously classified in the SFG LOB, is now classified in the CFG LOB. In MA, revenue relating to the Bureau van Dijk FACT product (a credit assessment and origination solution), which was previously classified in RD&A, is now classified in the ERS LOB. Accordingly, 2018 and 2017 revenue by LOB was reclassified to conform with this new presentation, as follows:


MIS	As previously reported		Reclassification		As Reclassified		MA	As previously reported		Reclassification		As Reclassified
Full year 2018




CFG	$	1,334	$	45	$	1,379	RD&A	$	1,134	$	(13)	$	1,121






SFG	$	526	$	(45)	$	481	ERS	$	438	$	13	$	451

Full year 2017
CFG	$	1,393	$	55	$	1,448	RD&A	$	833	$	(7)	$	826
SFG	$	495	$	(55)	$	440	ERS	$	448	$	7	$	455

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis whereby the Company records its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net and any dividends received reduce the carrying amount of the investment. The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC. The Company consolidates its ICRA subsidiaries on a three month lag.

Cash and Cash Equivalents

Cash equivalents principally consist of investments in money market mutual funds and money market deposit accounts as well as high-grade commercial paper and certificates of deposit with maturities of three months or less when purchased.

Short-term Investments

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next 12 months. The Company’s short-term investments primarily consist of certificates of deposit and their cost approximates fair value due to the short-term nature of the instruments. Interest and dividends on these investments are recorded into income when earned.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.

Computer Software Developed or Obtained for Internal Use

The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s financial, website and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.

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Goodwill and Other Acquired Intangible Assets

Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment (i.e., MIS and MA), or one level below an operating segment (i.e., a component of an operating segment), annually as of July 31 or more frequently if impairment indicators arise in accordance with ASC Topic 350.

The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company will recognize the difference as an impairment charge.

The Company evaluates its reporting units for impairment on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments or if there are indicators of potential impairment. For the reporting units where the Company is consistently able to conclude that an impairment does not exist using only a qualitative approach, the Company’s accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition.

For purposes of assessing the recoverability of goodwill, the Company has seven primary reporting units at December 31, 2019: two within the Company’s ratings business (one for the ICRA business and one that encompasses all of Moody’s other ratings operations) and five reporting units within MA: Content, ERS, MALS, Bureau van Dijk, and Reis.

Impairment of long-lived assets and definite-lived intangible assets

Long-lived assets (including ROU Assets) and amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Under the first step of the recoverability assessment, the Company compares the estimated undiscounted future cash flows attributable to the asset or asset group to their carrying value. If the undiscounted future cash flows are greater than the carrying value, no further assessment is required. If the undiscounted future cash flows are less than the carrying value, Moody's proceeds with step two of the assessment. Under step two of this assessment, Moody's is required to determine the fair value of the asset or asset group (reduced by the estimated cost to sell the asset for assets or disposal groups held-for-sale) and recognize an impairment loss if the carrying amount exceeds its fair value.

Stock-Based Compensation

The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under stock option and restricted stock plans.

Derivative Instruments and Hedging Activities

Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values on a gross basis. The changes in the value of derivatives that qualify as fair value hedges are recorded in the same income statement line item in earnings in which the corresponding adjustment to the carrying value of the hedged item is presented. The entire change in the fair value of derivatives that qualify as cash flow hedges is recorded to OCI and such amounts are reclassified from AOCI to the same income statement line in earnings in the same period or periods during which the hedged transaction affects income. Effective with the Company’s early adoption of ASC 2017-12, the Company changed the method by which it assesses effectiveness for net investment hedges from the forward-method to the spot-method. The Company considers the spot-method an improved method of assessing hedge effectiveness, as spot rate changes relating to the hedging instrument’s notional amount perfectly offset the currency translation adjustment on the hedged net investment in the Company’s foreign subsidiaries. The entire change in the fair value of derivatives that qualify as net investment hedges is initially recorded to OCI. Those changes in fair value attributable to components included in the assessment of hedge effectiveness in a net investment hedge are recorded in the currency translation adjustment component of OCI and remain in AOCI until the period in which the hedged item affects earnings. Those changes in fair value attributable to components excluded from the assessment of hedge effectiveness in a net investment hedge are recorded to OCI and amortized to earnings using a systematic and rational method over the duration of the hedge. Any changes in the fair value of derivatives that the Company does not designate as hedging instruments under Topic 815 of the ASC are recorded in the consolidated statements of operations in the period in which they occur.

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Revenue Recognition and Costs to Obtain or Fulfill a Contract with a Customer

Revenue recognition:

Revenue is recognized when control of promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

When contracts with customers contain multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to each distinct performance obligation on a relative SSP basis. The Company determines the SSP by using the price charged for a deliverable when sold separately or uses management’s best estimate of SSP for goods or services not sold separately using estimation techniques that maximize observable data points, including: internal factors relevant to its pricing practices such as costs and margin objectives; standalone sales prices of similar products; pricing policies; percentage of the fee charged for a primary product or service relative to a related product or service; and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trends.

Sales, usage-based, value added and other taxes are excluded from revenues.

MIS Revenue

In the MIS segment, revenue arrangements with multiple elements are generally comprised of two distinct performance obligations, a rating and the related monitoring service. Revenue attributed to ratings of issued securities is generally recognized when the rating is delivered to the issuer. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of certain structured finance products, primarily CMBS, issuers can elect to pay all of the annual monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities.

MIS arrangements generally have standard contractual terms for which the stated payments are due at conclusion of the ratings process for ratings and either upfront or in arrears for monitoring services; and are signed by customers either on a per issue basis or at the beginning of the relationship with the customer. In situations when customer fees for an arrangement may be variable, the Company estimates the variable consideration at inception using the expected value method based on analysis of similar contracts in the same line of business, which is constrained based on the Company’s assessment of the realization of the adjustment amount.

The Company allocates the transaction price within arrangements that include multiple performance obligations based upon the relative SSP of each service. The SSP for both rating and monitoring services is generally based upon observable selling prices where the rating or monitoring service is sold separately to similar customers.

MA Revenue

In the MA segment, products and services offered by the Company include hosted research and data subscriptions, installed software subscriptions, perpetual installed software licenses and related maintenance, or PCS, and professional services. Subscription and PCS contracts are generally invoiced in advance of the contractual coverage period, which is principally one year, but can range from 3-5 years; while perpetual software licenses are generally invoiced upon delivery and professional services are invoiced as those services are provided. Payment terms and conditions vary by contract type, but primarily include a requirement of payment within 30 to 60 days.

Revenue from research, data and other hosted subscriptions is recognized ratably over the related subscription period as MA's performance obligation to provide access to these products is progressively fulfilled over the stated term of the contract. A large portion of these services are invoiced in the months of November, December and January.

Revenue from the sale of a software license, when considered distinct from the related software implementation services, is generally recognized at the time the product master or first copy is delivered or transferred to the customer. However, in instances where the software license (perpetual or subscription) and related implementation services are considered to be one combined performance obligation, revenue is recognized over time using cost based input methods. These methods require judgment to evaluate assumptions, including the total estimated costs to determine progress towards contract completion and to calculate the corresponding amount of revenue to recognize, which is consistent with the pattern of recognition for the software implementation services if considered to be a separate distinct performance obligation. The Company exercises judgment in determining the level of integration and interdependency between the promise to grant the software license and the promise to deliver the related implementation services. This determination influences whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the implementation services and recognized over time. PCS is generally recognized ratably over the contractual period commencing when the software license is fully delivered. Revenue from installed software subscriptions, which includes PCS, is bifurcated into a software license performance obligation and a PCS performance obligation, which follow the patterns of recognition described above.

For implementation services and other service projects within the ERS and ESA businesses for which fees are fixed, the Company determined progress towards completion is most accurately measured on a percentage-of-completion basis (input method) as this approach utilizes the most directly observable data points and is therefore used to recognize the related revenue. For implementation services where price varies based on time expended, a time-based measure of progress towards completion of the performance obligation is utilized.

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Revenue from professional services rendered within the PS LOB is generally recognized as the services are performed over time.

Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where an arrangement contains multiple performance obligations, the Company accounts for the individual performance obligations separately if they are considered distinct. Revenue is generally allocated to all performance obligations based upon the relative SSP at contract inception. For certain performance obligations, judgment is required to determine the SSP. Revenue is recognized for each performance obligation based upon the conditions for revenue recognition noted above.

In the MA segment, customers usually pay a fixed fee for the products and services based on signed contracts. However, accounting for variable consideration is applied mainly for: i) estimates for cancellation rights and price concessions and ii) T&M based services.

The Company estimates the variable consideration associated with cancellation rights and price concessions based on the expected amount to be provided to customers and reduces the amount of revenue to be recognized. T&M based contracts represent about half of MA’s service projects within the ERS and ESA businesses. The Company provides agreed upon services at a contracted daily or hourly rate. The commitment represents a series of goods and services that are substantially the same and have the same pattern of transfer to the customer. As such, if T&M services are sold with other MA products, the Company allocates the variable consideration entirely to the T&M performance obligation if the services are sold at standard pricing or at a similar discount level compared to other performance obligations in the same revenue contract. If these criteria are not met, the Company estimates variable consideration for each performance obligation upfront. Each form of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.

Costs to Obtain or Fulfill a Contract with a Customer:

Costs to obtain a contract with a customer

Costs incurred to obtain customer contracts, such as sales commissions, are deferred and recorded within other current assets and other assets when such costs are determined to be incremental to obtaining a contract, would not have been incurred otherwise and the Company expects to recover those costs. These costs are amortized to expense on a systematic basis consistent with the transfer of the products or services to the customer. Depending on the line of business to which the contract relates, this may be based upon the average economic life of the products sold or average period for which services are provided, inclusive of anticipated contract renewals. Determining the estimated economic life of the products sold requires judgment with respect to anticipated future technological changes. The Company had a balance of $159 million and $110 million in such deferred costs as of December 31, 2019 and December 31, 2018, respectively, and recognized $53 million and $38 million of related amortization during the years ended December 31, 2019 and December 31, 2018, respectively, which is included within SG&A expenses in the consolidated statement of operations. Costs incurred to obtain customer contracts are only in the MA segment.

Cost to fulfill a contract with a customer

Costs incurred to fulfill customer contracts, are deferred and recorded within other current assets and other assets when such costs relate directly to a contract, generate or enhance resources of the Company that will be used in satisfying performance obligations in the future and the Company expects to recover those costs.

The Company capitalizes work-in-process costs for in-progress MIS ratings, which is recognized consistent with the rendering of the related services to the customers, as ratings are issued. The Company had a balance of $11 million in such deferred costs as of December 31, 2019 and December 31, 2018 and recognized $42 million and $40 million of amortization of the costs during the years ended December 31, 2019 and December 31, 2018, respectively, which is included within operating expenses in the consolidated statement of operations.

In addition, within the MA segment, the Company capitalizes royalty costs related to third-party information data providers associated with hosted company information and business intelligence products. These costs are amortized to expense consistent with the recognition pattern of the related revenue over time. The Company had a balance of $40 million and $35 million in such deferred costs as of December 31, 2019 and December 31, 2018, respectively, and recognized $56 million and $54 million of related amortization during the years ended December 31, 2019 and December 31, 2018, respectively, which is included within operating expenses in the consolidated statement of operations.

Accounts Receivable Allowances

Moody’s records variable consideration in respect of estimated future adjustments to customer billings as an adjustment to revenue using the expected value method based on analysis of similar contracts in the same line of business. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Actual billing adjustments are recorded against the allowance, depending on the nature of the adjustment. Actual uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.

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Leases

The Company has operating leases, of which substantially all relate to the lease of office space. The Company’s leases which are classified as finance leases are not material to the consolidated financial statements.

The Company determines if an arrangement meets the definition of a lease at contract inception. The Company recognizes in its consolidated balance sheet a lease liability and an ROU Asset for all leases with a lease term greater than 12 months. In determining the length of the lease term, the Company utilizes judgment in assessing the likelihood of whether it is reasonably certain that it will exercise an option to extend or early-terminate a lease, if such options are provided in the lease agreement.

ROU Assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU Assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As substantially all of the Company’s leases do not provide an implicit interest rate, the Company uses its estimated secured incremental borrowing rates at the lease commencement date in determining the present value of lease payments. These secured incremental borrowing rates are attributable to the currency in which the lease is denominated.

At commencement, the Company’s initial measurement of the ROU Asset is calculated as the present value of the remaining lease payments (i.e., lease liability), with additive adjustments reflecting: initial direct costs (e.g., broker commissions) and prepaid lease payments (if any); and reduced by any lease incentives provided by the lessor if: (i) received before lease commencement or (ii) receipt of the lease incentive is contingent upon future events for which the occurrence is both probable and within the Company’s control.

Lease expense for minimum operating lease payments is recognized on a straight-line basis over the lease term. This straight-line lease expense represents a single lease cost which is comprised of both an interest accretion component relating to the lease liability and amortization of the ROU Assets. The Company records this single lease cost in operating and SG&A expenses. However, in situations where an operating lease ROU Asset has been impaired, the subsequent amortization of the ROU Asset is then recorded on a straight-line basis over the remaining lease term and is combined with accretion expense on the lease liability to result in single operating lease cost (which subsequent to impairment will no longer follow a straight-line recognition pattern).

The Company has lease agreements which include lease and non-lease components. For the Company’s office space leases, the lease components (e.g., fixed rent payments) and non-lease components (e.g., fixed common-area maintenance costs) are combined and accounted for as a single lease component.

Variable lease payments (e.g. variable common-area-maintenance costs) are only included in the initial measurement of the lease liability to the extent those payments depend on an index or a rate. Variable lease payments not included in the lease liability are recognized in net income in the period in which the obligation for those payments is incurred.

Contingencies

Moody’s is involved in legal and tax proceedings, governmental, regulatory and legislative investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, the Company records liabilities in the consolidated financial statements when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In instances when a loss is reasonably possible but uncertainties exist related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if material. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. Moody’s also discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

In view of the inherent difficulty of assessing the potential outcome of legal proceedings, governmental, regulatory and legislative investigations and inquiries, claims and litigation and similar matters and contingencies, particularly when the claimants seek large or indeterminate damages or assert novel legal theories or the matters involve a large number of parties, the Company often cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also may be unable to predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition and to accrue for and disclose such matters as and when required. However, because such matters are inherently unpredictable and unfavorable developments or resolutions can occur, the ultimate outcome of such matters, including the amount of any loss, may differ from those estimates.

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Operating Expenses

Operating expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities. Operating expenses are charged to income as incurred, except for certain costs related to software implementation services, which may be deferred until related revenue is recognized. Additionally, certain costs incurred to develop internal use software are capitalized and amortized over their estimated useful life.

Selling, General and Administrative Expenses

SG&A expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets. SG&A expenses are charged to income as incurred, except for certain expenses incurred to develop internal use software (which are capitalized and amortized over their estimated useful life) and the deferral of sales commissions in the MA segment (which are recognized in the period in which the related revenue is recognized).

Foreign Currency Translation

For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are recorded to other comprehensive income.

Comprehensive Income

Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial gains and losses and net prior service costs related to pension and other retirement plans, gains and losses on derivative instruments designated as net investment hedges or cash flow hedges and unrealized gains and losses on securities designated as ‘available-for-sale’ under ASC Topic 320 (for periods prior to January 1, 2018). Comprehensive income items, including cumulative translation adjustments of entities that are less-than-wholly-owned subsidiaries, will be reclassified to noncontrolling interests and thereby, adjusting accumulated other comprehensive income proportionately in accordance with the percentage of ownership interest of the NCI shareholder.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.

The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For UTPs, the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

On December 22, 2017, the Tax Act was signed into law, resulting in all previously undistributed foreign earnings being subject to U.S. tax. The Company has provided deferred taxes for those entities whose earnings are not considered indefinitely reinvested.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, and certain short-term investments consisting primarily of certificates of deposit and money market deposits, all of which are short-term in nature and, accordingly, approximate fair value.

The Company also invests in mutual funds, which are accounted for as equity securities with readily determinable fair values under ASC Topic 321. Beginning in the first quarter of 2018, the Company measures these investments at fair value with both realized gains and losses and unrealized holding gains and losses for these investments included in net income.

Prior to January 1, 2018, the investments in mutual funds were designated as ‘available for sale’ under Topic 320 of the ASC. Accordingly, unrealized gains and losses on these investments were recorded to other comprehensive income and were reclassified out of accumulated other comprehensive income to the statement of operations when the investment matured or was sold using a specific identification method.

Also, the Company uses derivative instruments to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets.

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Fair value is defined by the ASC 820 as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.

The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:

Level 1: quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;

Level 2: inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.

The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds, money market deposit accounts, certificates of deposits and high-grade commercial paper. Short-term investments primarily consist of certificates of deposit as of December 31, 2019 and 2018. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single entity. No customer accounted for 10% or more of accounts receivable at December 31, 2019 or 2018.

Earnings per Share of Common Stock

Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding and dilutive during the reporting period.

Pension and Other Retirement Benefits

Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market-related value of plan assets, which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.

The Company recognizes as an asset or liability in its consolidated balance sheet the funded status of its defined benefit retirement plans, measured on a plan-by-plan basis. Changes in the funded status due to actuarial gains/losses are recorded as part of other comprehensive income during the period the changes occur.

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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the use of an “expected credit loss” impairment model for most financial assets reported at amortized cost, which will require entities to estimate expected credit losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. In November 2018, the FASB issued ASU No. 2018-19 “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” which clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20, but instead should be accounted for in accordance with Topic 842, Leases.

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ASU No. 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. This ASU also sets forth new disclosure requirements relating to financial assets within its scope.

The most notable impact of this ASU to Moody's relates to the Company's processes around the assessment of its allowance for doubtful accounts on accounts receivable. The Company has updated its policies and procedures in order to implement the “expected credit loss” impairment model, which includes (1) refinement of the grouping of receivables with similar risk characteristics; and (2) processes to identify information that can be used to develop reasonable and supportable forecasts of factors that could affect the collectability of the reported amount of the receivable. The cumulative-effect adjustment to retained earnings upon adoption of this ASU is not material, and the Company does not expect the ASU to have a significant future impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company will be required to present the amortization of capitalized implementation costs in the same line item in the statement of operations as the fees associated with the hosting service (i.e. operating and SG&A expense) and classify the related payments in the statement of cash flows in the same manner as payments made for fees associated with the hosting service (i.e. cash flows from operating activities). This ASU also requires capitalization of implementation costs in the balance sheet to be consistent with the location of prepayment of fees for the hosting element (i.e. within other current assets or other assets). The Company will adopt this ASU prospectively to all implementation costs incurred after the date of adoption. The future impact to the Company's financial statements will relate to the aforementioned classification of these capitalized costs and related amortization.

In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”. This ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other postretirement plans. The ASU is effective for all entities for fiscal years beginning after December 15, 2020 on a retrospective basis to all periods presented, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 Financial Instruments”. This ASU clarifies and improves guidance related to the recently issued standards updates on credit losses, hedging, and recognition and measurement of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not anticipate that the adoption of this ASU will have a significant impact on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the general principles in Topic 740, Income Taxes, and clarifies certain aspects of the existing guidance to promote consistency among reporting entities. Certain amendments within this ASU are required to be applied on a prospective basis, while other amendments must be applied on a retrospective or modified retrospective basis. This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

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NOTE 3 REVENUES

Revenue by Category

The following table presents the Company’s revenues disaggregated by LOB:


	Year Ended December 31,
	2019		2018		2017 (1)
MIS:
Corporate finance (CFG)(3)
Investment-grade	$	379	$	271	$	335
High-yield	258		175		254
Bank loans	313		379		351
Other accounts (CFG) (2)	547		554		508
Total CFG	1,497		1,379		1,448
Structured finance (SFG)(3)
Asset-backed securities	99		107		97
RMBS	95		98		89
CMBS	81		78		87
Structured credit	148		196		165
Other accounts (SFG)	4		2		2
Total SFG	427		481		440
Financial institutions (FIG)
Banking	320		290		300
Insurance	119		114		102
Managed investments	25		25		22
Other accounts (FIG)	12		13		12
Total FIG	476		442		436
Public, project and infrastructure finance (PPIF)
Public finance / sovereign	222		185		218
Project and infrastructure	224		206		213
Total PPIF	446		391		431
Total ratings revenue	2,846		2,693		2,755
MIS Other	29		19		19
Total external revenue	2,875		2,712		2,774
Intersegment royalty	134		124		112
Total MIS	3,009		2,836		2,886
MA:
Research, data and analytics (RD&A)(4)	1,273		1,121		826
Enterprise risk solutions (ERS)(4)	522		451		455
Professional services (PS)	159		159		149
Total external revenue	1,954		1,731		1,430
Intersegment revenue	9		12		16
Total MA	1,963		1,743		1,446
Eliminations	(143)		(136)		(128)
Total MCO	$	4,829	$	4,443	$	4,204

(1)Prior period amounts have not been adjusted under the modified retrospective method of adoption for the New Revenue Accounting Standard.

(2)Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.

(3)Pursuant to certain organizational realignments in 2019, MIS now reports revenue from REITs, which was previously classified in the SFG LOB, as a component of the CFG LOB. The amounts reclassified were not material and prior year revenue by LOB has been reclassified to conform to this new presentation.

(4)Pursuant to organizational/product realignments in 2019, revenue relating to the Bureau van Dijk FACT product, a credit assessment and origination software solution, is now reported in the ERS LOB. This revenue was previously reported in the RD&A LOB. Prior year revenue by LOB has been reclassified to conform to this new presentation, and the amounts reclassified were not material.

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The following table presents the Company’s revenues disaggregated by LOB and geographic area:


	Year Ended December 31, 2019										Year Ended December 31, 2018								Year Ended December 31, 2017 (1)
	U.S.		Non-U.S.		Total		U.S.		Non-U.S.		Total		U.S.		Non-U.S.		Total
MIS:
Corporate finance(2)	$	968	$	529	$	1,497	$	894	$	485	$	1,379	$	961	$	487	$	1,448
Structured finance(2)	270		157		427		301		180		481		288		152		440
Financial institutions	200		276		476		194		248		442		186		250		436
Public, project and infrastructure finance	282		164		446		229		162		391		266		165		431
Total ratings revenue	1,720		1,126		2,846		1,618		1,075		2,693		1,701		1,054		2,755
MIS Other	1		28		29		1		18		19		1		18		19
Total MIS	1,721		1,154		2,875		1,619		1,093		2,712		1,702		1,072		2,774
MA:
Research, data and analytics (3)	558		715		1,273		481		640		1,121		424		402		826
Enterprise risk solutions (3)	201		321		522		170		281		451		167		288		455
Professional services	64		95		159		60		99		159		55		94		149
Total MA	823		1,131		1,954		711		1,020		1,731		646		784		1,430
Total MCO	$	2,544	$	2,285	$	4,829	$	2,330	$	2,113	$	4,443	$	2,348	$	1,856	$	4,204

(1)Prior period amounts have not been adjusted under the modified retrospective method of adoption for the New Revenue Accounting Standard.

(2)Pursuant to certain organizational realignments in 2019, MIS now reports revenue from REITs, which was previously classified in the SFG LOB, as a component of the CFG LOB. The amounts reclassified were not material and prior years revenue by LOB has been reclassified to conform to this new presentation.

(3)Pursuant to organizational/product realignments in 2019, revenue relating to the Bureau van Dijk FACT product, a credit assessment and origination software solution, is now reported in the ERS LOB. This revenue was previously reported in the RD&A LOB. Prior years revenue by LOB has been reclassified to conform to this new presentation, and the amounts reclassified were not material.

The following table presents the Company's reportable segment revenues disaggregated by segment and geographic region:


	Year Ended December 31,
	2019		2018		2017
MIS:
U.S.	$	1,721	$	1,619	$	1,702
Non-U.S.:
EMEA	686		669		638
Asia-Pacific	320		300		292
Americas	148		124		142
Total Non-U.S.	1,154		1,093		1,072
Total MIS	2,875		2,712		2,774
MA:
U.S.	823		711		646
Non-U.S.:
EMEA	760		708		494
Asia-Pacific	231		193		179
Americas	140		119		111
Total Non-U.S.	1,131		1,020		784
Total MA	1,954		1,731		1,430
Total MCO	$	4,829	$	4,443	$	4,204

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The tables below summarize the split between transaction and relationship revenue. In the MIS segment, excluding MIS Other, transaction revenue represents the initial rating of a new debt issuance as well as other one-time fees while relationship revenue represents the recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. In MIS Other, transaction revenue represents revenue from professional services and outsourcing engagements and relationship revenue represents subscription-based revenues. In the MA segment, relationship revenue represents subscription-based revenues and software maintenance revenue. Transaction revenue in MA represents perpetual software license fees and revenue from software implementation services, risk management advisory projects, training and certification services, and outsourced research and analytical engagements.


	Year Ended December 31,
	2019															2018												2017 (2)
	Transaction (1)			Relationship			Total			Transaction (1)			Relationship			Total			Transaction (1)			Relationship			Total
Corporate Finance	$	1,057		$	440		$	1,497		$	949		$	430		$	1,379		$	1,053		$	395		$	1,448
	71		%	29		%	100		%	69		%	31		%	100		%	73		%	27		%	100		%
Structured Finance	$	246		$	181		$	427		$	310		$	171		$	481		$	279		$	161		$	440
	58		%	42		%	100		%	64		%	36		%	100		%	63		%	37		%	100		%
Financial Institutions	$	212		$	264		$	476		$	187		$	255		$	442		$	195		$	241		$	436
	45		%	55		%	100		%	42		%	58		%	100		%	45		%	55		%	100		%
Public, Project and Infrastructure Finance	$	292		$	154		$	446		$	238		$	153		$	391		$	278		$	153		$	431
	65		%	35		%	100		%	61		%	39		%	100		%	65		%	35		%	100		%
MIS Other	$	2		$	27		$	29		$	2		$	17		$	19		$	3		$	16		$	19
	7		%	93		%	100		%	11		%	89		%	100		%	16		%	84		%	100		%
Total MIS	$	1,809		$	1,066		$	2,875		$	1,686		$	1,026		$	2,712		$	1,808		$	966		$	2,774
	63		%	37		%	100		%	62		%	38		%	100		%	65		%	35		%	100		%
Research, data and analytics	$	16		$	1,257		$	1,273		$	18		$	1,103		$	1,121		$	25		$	801		$	826
	1		%	99		%	100		%	2		%	98		%	100		%	3		%	97		%	100		%
Enterprise risk solutions	$	118		$	404		$	522		$	99		$	352		$	451		$	137		$	318		$	455
	23		%	77		%	100		%	22		%	78		%	100		%	30		%	70		%	100		%
Professional services	$	159		$	—		$	159		$	159		$	—		$	159		$	149		$	—		$	149
	100		%	—		%	100		%	100		%	—		%	100		%	100		%	—		%	100		%
Total MA	$	293		$	1,661		$	1,954		$	276		$	1,455		$	1,731		$	311		$	1,119		$	1,430
	15		%	85		%	100		%	16		%	84		%	100		%	22		%	78		%	100		%
Total Moody’s Corporation	$	2,102		$	2,727		$	4,829		$	1,962		$	2,481		$	4,443		$	2,119		$	2,085		$	4,204
	44		%	56		%	100		%	44		%	56		%	100		%	50		%	50		%	100		%

(1) Revenue from software implementation services and risk management advisory projects in MA, while classified by management as transactional revenue, is recognized over time under the New Revenue Accounting Standard (please also refer to the table below).

(2) Prior period amounts have not been adjusted under the modified retrospective method of adoption for the New Revenue Accounting Standard.

The following table presents the timing of revenue recognition:


	Year Ended December 31, 2019										Year Ended December 31, 2018
	MIS		MA		Total		MIS		MA		Total
Revenue recognized at a point in time	$	1,809	$	132	$	1,941	$	1,686	$	99	$	1,785
Revenue recognized over time	1,066		1,822		2,888		1,026		1,632		2,658
Total	$	2,875	$	1,954	$	4,829	$	2,712	$	1,731	$	4,443

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Unbilled Receivables, Deferred Revenue and Remaining Performance Obligations

Unbilled receivables

At December 31, 2019 and December 31, 2018, accounts receivable included approximately $346 million and $312 million, respectively, of unbilled receivables related to the MIS segment. Certain MIS arrangements contain contractual terms whereby the customers are billed in arrears for annual monitoring services and rating fees, requiring revenue to be accrued as an unbilled receivable as such services are provided.

In addition, for certain MA arrangements, the timing of when the Company has the unconditional right to consideration and recognizes revenue occurs prior to invoicing the customer. Consequently, at December 31, 2019 and December 31, 2018, accounts receivable included approximately $53 million and $60 million, respectively, of unbilled receivables related to the MA segment.

Deferred revenue

The Company recognizes deferred revenue when a contract requires a customer to pay consideration to the Company in advance of when revenue is recognized. This deferred revenue is relieved when the Company satisfies the related performance obligation and revenue is recognized.

Significant changes in the deferred revenue balances during the year ended December 31, 2019 are as follows:


	Year Ended December 31, 2019
	MIS		MA		Total
Balance at January 1, 2019	$	325	$	750	$	1,075
Changes in deferred revenue
Revenue recognized that was included in the deferred revenue balance at the beginning of the period	(209)		(714)		(923)
Increases due to amounts billable excluding amounts recognized as revenue during the period	202		789		991
Increases due to acquisitions during the period	3		6		9
Effect of exchange rate changes	1		9		10
Total changes in deferred revenue	(3)		90		87
Balance at December 31, 2019	$	322	$	840	$	1,162
Deferred revenue - current	$	214	$	836	$	1,050
Deferred revenue - noncurrent	$	108	$	4	$	112

For the MA segment, for the year ended December 31, 2019, the increase in the deferred revenue balance was primarily due to organic growth.

Significant changes in the deferred revenue balances during the year ended December 31, 2018 are as follows:


	Year Ended December 31, 2018
	MIS		MA		Total
Balance at January 1, 2018 (after New Revenue Accounting Standard transition adjustment)	$	334	$	612	$	946
Changes in deferred revenue
Revenue recognized that was included in the deferred revenue balance at the beginning of the period	(218)		(590)		(808)
Increases due to amounts billable excluding amounts recognized as revenue during the period	216		730		946
Increases due to acquisitions during the period	—		16		16
Effect of exchange rate changes	(7)		(18)		(25)
Total changes in deferred revenue	(9)		138		129
Balance at December 31, 2018	$	325	$	750	$	1,075
Deferred revenue—current	$	207	$	746	$	953
Deferred revenue—noncurrent	$	118	$	4	$	122

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For the MA segment, for the year ended December 31, 2018, the increase in the deferred revenue balance was primarily due to organic growth and the Reis acquisition in the fourth quarter of 2018.

Remaining performance obligations

Remaining performance obligations in the MIS segment largely reflect deferred revenue related to monitoring fees for certain structured finance products, primarily CMBS, where the issuers can elect to pay the monitoring fees for the life of the security in advance. As of December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $140 million. The Company expects to recognize into revenue approximately 20% of this balance within one year, approximately 50% of this balance between one to five years and the remaining amount thereafter. With respect to the remaining performance obligations for the MIS segment, the Company has applied a practical expedient set forth in ASC Topic 606 permitting the omission from the table above for unsatisfied performance obligations relating to contracts with an original expected length of one year or less.

Remaining performance obligations in the MA segment include both amounts recorded as deferred revenue on the balance sheet as of December 31, 2019 as well as amounts not yet invoiced to customers as of December 31, 2019 largely reflecting future revenue related to signed multi-year arrangements for hosted and installed subscription based products. As of December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $1.7 billion. The Company expects to recognize into revenue approximately 70% of this balance within one year, approximately 20% of this balance between one to two years and the remaining amount thereafter.

NOTE 4 RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:


	Year Ended December 31,
	2019	2018	2017
Basic	189.3	191.6	191.1
Dilutive effect of shares issuable under stock-based compensation plans	2.3	2.8	3.1
Diluted	191.6	194.4	194.2
Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above	0.2	0.4	0.6

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2019, 2018 and 2017.

NOTE 5 ACCELERATED SHARE REPURCHASE PROGRAM

On February 20, 2019, the Company entered into an ASR agreement with a financial institution counterparty to repurchase $500 million of its outstanding common stock. The Company paid $500 million to the counterparty and received an initial delivery of 2.2 million shares of its common stock. Final settlement of the ASR agreement was completed on April 26, 2019 and the Company received delivery of an additional 0.6 million shares of the Company’s common stock.

In total, the Company repurchased 2.8 million shares of the Company’s common stock during the term of the ASR Agreement, based on the volume-weighted average price (net of discount) of $180.33/share over the duration of the program. The initial share repurchase and final share settlement were recorded as a reduction to shareholders’ equity.

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NOTE 6 CASH EQUIVALENTS AND INVESTMENTS

The table below provides additional information on the Company’s cash equivalents and investments:


	As of December 31, 2019
	Cost		Gross Unrealized Gains		Fair Value		Balance sheet location
							Cash and cash equivalents		Short-term investments		Other assets
Certificates of deposit and money market deposit accounts (1)	$	971	$	—	$	971	$	866	$	95	$	10
Open ended mutual funds	$	3	$	—	$	3	$	—	$	3	$	—


	As of December 31, 2018
	Cost		Gross Unrealized Gains		Fair Value		Balance sheet location
							Cash and cash equivalents		Short-term investments		Other assets
Money market mutual funds	$	15	$	—	$	15	$	15	$	—	$	—
Certificates of deposit and money market deposit accounts (1)	$	1,022	$	—	$	1,022	$	904	$	116	$	2
Open ended mutual funds	$	29	$	4	$	33	$	—	$	17	$	16

(1)Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one to 12 months at December 31, 2019 and at December 31, 2018. The remaining contractual maturities for the certificates of deposits classified in other assets are 13 to 18 months at December 31, 2019 and 14 to 36 months at December 31, 2018. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.

NOTE 7 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.

Derivatives and non-derivative instruments designated as accounting hedges:

Interest Rate Swaps Designated as Fair Value Hedges

The Company has entered into interest rate swaps to convert the fixed interest rate on certain of its long-term debt to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the long-term debt, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the debt. The changes in the fair value of the swaps and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest expense, net in the Company’s consolidated statement of operations.

The following table summarizes the Company’s interest rate swaps designated as fair value hedges:


	Nature of Swap	Notional Amount As of December 31,					Floating Interest Rate
Hedged Item		2019		2018
2010 Senior Notes due 2020	Pay Floating/Receive Fixed	$	—	$	500	3-month LIBOR
2012 Senior Notes due 2022	Pay Floating/Receive Fixed	$	330	$	330	3-month LIBOR
2017 Senior Notes due 2021	Pay Floating/Receive Fixed	$	500	$	500	3-month LIBOR
2017 Senior Notes due 2023	Pay Floating/Receive Fixed	$	250	$	—	3-month LIBOR
Total		$	1,080	$	1,330

Refer to Note 19 for information on the cumulative amount of fair value hedging adjustments included in the carrying amount of the above hedged items.

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The following table summarizes the impact to the statement of operations of the Company’s interest rate swaps designated as fair value hedges:


Total amounts of financial statement line item presented in the statements of operations in which the effects of fair value hedges are recorded				Amount of Income Recognized in the Consolidated Statements of Operations
		Year Ended December 31,
		2019		2018		2017
Interest expense, net		$	(208)	$	(215)	$	(209)
Descriptions	Location on Consolidated Statements of Operations
Net interest settlements and accruals on interest rate swaps	Interest expense, net	$	3	$	(2)	$	7
Fair value changes on interest rate swaps	Interest expense, net	25		2		(9)
Fair value changes on hedged debt	Interest expense, net	$	(25)	$	(2)	$	9

Cash flow hedges

In the fourth quarter of 2018, the Company entered into and settled $250 million notional amount treasury rate locks, which were designated as cash flow hedges and used to manage the Company’s interest rate risk associated with the anticipated issuance of the 2018 Senior Notes Due 2029, which are more fully discussed in Note 19. The Company settled these treasury rate locks in December 2018 in connection with the issuance of the 2018 Senior Notes Due 2029. The loss on these treasury rate locks was recorded in comprehensive income (see tables below relating to gains and losses on cash flow and net investment hedges) and will be amortized to interest expense over the term of the 2018 Senior Notes Due 2029.

Net Investment Hedges

The Company has designated €500 million of the 2015 Senior Notes Due 2027 and €750 million of the 2019 Senior Notes due 2030 as net investment hedges. These hedges are designated as accounting hedges under the applicable sections of ASC Topic 815 and will end upon the repayment of the notes in 2027 and 2030, respectively, unless terminated early at the discretion of the Company.

The Company enters into cross-currency swaps to mitigate FX exposure related to a portion of the Company’s euro net investment in certain foreign subsidiaries against changes in euro/USD exchange rates. The following table provides information on the cross-currency swaps designated as net investment hedges under ASC Topic 815:


December 31, 2019
	Pay					Receive
Nature of Swap	Notional Amount		Weighted Average Interest Rate	Notional Amount		Weighted Average Interest Rate
Pay Fixed/Receive Fixed	€	1,079	1.43%	$	1,220	3.96%
Pay Floating/Receive Floating	931		Based on 3-month EURIBOR	1,080		Based on 3-month USD LIBOR
Total	€	2,010		$	2,300

As of December 31, 2019, these hedges will expire and the notional amounts will be settled in 2021, 2022, 2023, and 2024 for €688 million, €438 million, €442 million and €442 million of the total notional amount, respectively, unless terminated early at the discretion of the Company.


December 31, 2018
	Pay					Receive
Nature of Swap	Notional Amount		Weighted Average Interest Rate	Notional Amount		Weighted Average Interest Rate
Pay Floating/Receive Floating	€	710	Based on 3-month EURIBOR	$	830	Based on 3-month USD LIBOR
Total	€	710		$	830

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The following table provides information on the gains/(losses) on the Company’s net investment and cash flow hedges:


	Amount of Gain/(Loss) Recognized in AOCI on Derivative, net of Tax												Amount of Gain/(Loss) Reclassified from AOCI into Income, net of tax											Gain/(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
Derivative and Non-Derivative Instruments in Net Investment Hedging Relationships	Year Ended December 31,												Year Ended December 31,											Year Ended December 31,
	2019			2018		2017		(2)	2019		2018		2017		(2)	2019		(3)	2018		(3)	2017
FX forward contracts	$	4		$	—	$	1		$	2	$	—	$	—		$	—		$	—		$	—
Cross currency swaps	29			12		—			—		—		—			52			11			—
Long-term debt	(7)		(1)	22		(37)			—		—		—			—			—			—
Total net investment hedges	$	26		$	34	$	(36)		$	2	$	—	$	—		$	52		$	11		$	—
Derivatives in Cash Flow Hedging Relationships
Cross currency swap	$	—		$	2	$	6		$	—	$	—	$	8		$	—		$	—		$	—
Interest rate contracts	—			(2)		—			—		—		(1)			—			—			—
Total cash flow hedges	—			—		6			—		—		7			—			—			—
Total	$	26		$	34	$	(30)		$	2	$	—	$	7		$	52		$	11		$	—

(1)Due to the Company's adoption of ASU 2018-02 during 2019, $3 million related to the tax effect of this net investment hedge was reclassified to retained earnings. Refer to Note 1 for further details.

(2)For the year ended December 31, 2017, amount of gain or (loss) represents only the effective portion of the hedging relationship as this period was prior to the Company’s 2018 initial application of ASU 2017-12.

(3)Effective with the adoption of ASU 2017-12, the Company has elected to assess the effectiveness of its net investment hedges based on changes in spot exchange rates. Accordingly, amounts related to cross-currency swaps recognized directly into Net Income during 2018 and 2019 represent net periodic interest settlements and accruals, which are recognized in interest expense, net.

The cumulative amount of net investment hedge and cash flow hedge gains (losses) remaining in AOCI is as follows:


	Cumulative Gains/(Losses), net of tax
	December 31, 2019		December 31, 2018
Net investment hedges
Cross currency swaps	$	41	$	12
FX forwards	26		24
Long-term debt	(13)		(3)
Total net investment hedges	54		33
Cash flow hedges
Interest Rate Contract	(2)		(2)
Cross-currency swap	2		2
Total cash flow hedges	—		—
Total net gain in AOCI	$	54	$	33

Derivatives not designated as accounting hedges:

Foreign exchange forwards

The Company also enters into foreign exchange forward contracts to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through February 2020.

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The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:


	December 31, 2019						December 31, 2018
Notional Amount of Currency Pair:	Sell		Buy		Sell		Buy
Contracts to sell USD for GBP	$	235	£	178	$	310	£	241
Contracts to sell USD for Japanese Yen	$	29	¥	3,200	$	14	¥	1,600
Contracts to sell USD for Canadian dollars	$	83	C$	110	$	99	C$	130
Contracts to sell USD for Singapore dollars	$	41	S$	56	$	—	S$	—
Contracts to sell USD for Euros	$	421	€	378	$	213	€	185
Contracts to sell Euros for GBP	€	25	£	21	€	—	£	—

NOTE: € = Euro, £ = British pound, S$ = Singapore dollar, $ = U.S. dollar, ¥ = Japanese yen, C$ = Canadian dollar

Foreign Exchange Options and forward contracts relating to the acquisition of Bureau van Dijk

The Company entered into a foreign currency collar in 2017 consisting of option contracts to economically hedge the Bureau van Dijk euro denominated purchase price (as discussed further in Note 9 of the financial statements). These option contracts were not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. The foreign currency option contracts consisted of separate put and call options each in the aggregate notional amount of €2.7 billion. This collar was settled at the end of July 2017, in advance of the August 10, 2017 closing of the Bureau van Dijk acquisition.

The Company entered into foreign exchange forwards to hedge the Bureau van Dijk purchase price for the period from the settlement of the aforementioned foreign currency collar until the closing date on August 10, 2017. These forward contracts were not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. The foreign exchange contracts were to sell $2.8 billion and buy €2.4 billion and sell $41 million and buy £31 million.

The following table summarizes the impact to the consolidated statements of operations relating to the net gain (loss) on the Company’s derivatives which are not designated as hedging instruments:


		Year Ended December 31,
Derivatives Not Designated as Accounting Hedges	Location on Statement of Operations	2019		2018		2017
FX forwards	Other non-operating expense, net	$	(11)	$	(52)	$	22
FX collar relating to Bureau van Dijk acquisition	Purchase Price Hedge Gain	—		—		101
FX forwards relating to Bureau van Dijk acquisition	Purchase Price Hedge Gain	—		—		10
		$	(11)	$	(52)	$	133

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The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of derivative instruments as well as the carrying value of its non-derivative debt instruments designated and qualifying as net investment hedges:


	Derivative and Non-derivative Instruments
	Balance Sheet Location	December 31, 2019		December 31, 2018
Assets:
Derivatives designated as accounting hedges:
Cross-currency swaps designated as net investment hedges	Other assets	$	56	$	19
Interest rate swaps designated as fair value hedges	Other assets	27		8


Total derivatives designated as accounting hedges		83		27
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilities	Other current assets	9		1
Total assets		$	92	$	28
Liabilities:
Derivatives designated as accounting hedges:
Cross-currency swaps designated as net investment hedges	Other liabilities	$	—	$	3
Interest rate swaps	Other liabilities	—		5
Total derivatives designated as accounting hedges		—		8
Non-derivative instrument designated as accounting hedge:
Long-term debt designated as net investment hedge	Long-term debt	1,403		572
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilities	Accounts payable and accrued liabilities	—		8
Total liabilities		$	1,403	$	588

NOTE 8 PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:


	December 31,
	2019		2018
Office and computer equipment (3 - 10 year estimated useful life)	$	221	$	242
Office furniture and fixtures (3 - 10 year estimated useful life)	51		52
Internal-use computer software (1 - 10 year estimated useful life)	619		574
Leasehold improvements and building (1 - 21 year estimated useful life)	240		242
Total property and equipment, at cost	1,131		1,110
Less: accumulated depreciation and amortization	(839)		(790)
Total property and equipment, net	$	292	$	320

Depreciation and amortization expense related to the above assets was $97 million, $90 million, and $97 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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NOTE 9 ACQUISITIONS

The following is a discussion of material acquisitions completed by the Company. The business combinations described below are accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. Goodwill typically results through expected synergies from combining operations of an acquiree and an acquirer, anticipated new customer acquisition and products, as well as from intangible assets that do not qualify for separate recognition.

Reis

On October 15, 2018, a subsidiary of the Company acquired 100% of Reis, Inc., a provider of commercial real estate market information and analytical tools to real estate professionals. The cash payment of $278 million was funded with cash on hand. The acquisition further expands Moody’s Analytics’ network of data and analytics providers in the commercial real estate space.

Shown below is the final purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:


(Amounts in millions)
Current assets			$	32
Property and equipment			4
Intangible assets:
Customer relationships (14 year weighted average life)	$	77
Database (5 year weighted average life)	13
Product technology (7 year weighted average life)	10
Trade name (10 year weighted average life)	4
Total intangible assets (12 year weighted average life)			104
Goodwill			183
Deferred tax assets			13
Liabilities:
Deferred revenue	$	(14)
Accounts payable and accrued liabilities	(20)
Deferred tax liabilities	(24)
Total liabilities			(58)
Net assets acquired			$	278

Current assets in the table above include acquired cash of $24 million. Additionally, current assets include accounts receivable of approximately $6 million.

Goodwill

The goodwill recognized as a result of this acquisition includes, among other things, the value of combining the complementary product portfolios of the Company and Reis, which is expected to extend the Company’s reach to new and evolving market segments as well as cost savings synergies, expected new customer acquisitions and products.

Goodwill, which has been assigned to the MA segment, is not deductible for tax purposes.

Reis is a separate reporting unit for the purposes of the Company’s annual goodwill impairment assessment.

Transaction costs

Transaction costs directly related to the Reis acquisition were not material.

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Bureau van Dijk

On August 10, 2017, a subsidiary of the Company acquired 100% of Yellow Maple I B.V., an indirect parent company of Bureau van Dijk Electronic Publishing B.V., a global provider of business intelligence and company information products. The cash payment of $3,542 million was funded with a combination of cash on hand, primarily offshore, and new debt financing.

Shown below is the final purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:


(Amounts in millions)
Current assets			$	158
Property and equipment			4
Intangible assets:
Customer relationships (23 year weighted average life)	$	999
Product technology (12 year weighted average life)	259
Trade name (18 year weighted average life)	82
Database (10 year weighted average life)	13
Total intangible assets (21 year weighted average life)			1,353
Goodwill			2,615
Other assets			6
Liabilities:
Deferred revenue	(101)
Accounts payable and accrued liabilities	(44)
Deferred tax liabilities, net	(330)
Other liabilities	$	(119)
Total liabilities			(594)
Net assets acquired			$	3,542

Current assets in the table above include acquired cash of $36 million. Additionally, current assets include accounts receivable of approximately $88 million (net of an allowance for uncollectible accounts of $4 million).

The acquired deferred revenue balance of approximately $154 million was reduced by $53 million as part of acquisition accounting to establish the fair value of deferred revenue. This reduced reported revenue by $53 million over the remaining contractual period of in-progress customer arrangements assumed as of the acquisition date, and resulted in approximately $17 million and $36 million less in reported revenue in the years ended December 31, 2018 and 2017, respectively.

Goodwill

The goodwill recognized as a result of this acquisition includes, among other things, the value of combining the complementary product portfolios of the Company and Bureau van Dijk, which is expected to extend the Company’s reach to new and evolving market segments as well as cost savings synergies, expected new customer acquisitions and products.

Goodwill, which has been assigned to the MA segment, is not deductible for tax purposes.

Bureau van Dijk is a separate reporting unit for purposes of the Company’s annual goodwill impairment assessment.

Other Liabilities Assumed

In connection with the acquisition, the Company assumed liabilities relating to UTPs as well as deferred tax liabilities which relate to acquired intangible assets. UTPs are included in other liabilities in the table above.

Supplementary Unaudited Pro Forma Information

Supplemental information on an unaudited pro forma basis is presented below for the year ended December 31, 2017 as if the acquisition of Bureau van Dijk occurred on January 1, 2016. The pro forma financial information is presented for comparative purposes only and is based on certain estimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of future results of operations or the results that would have been reported if the acquisition had been completed at January 1, 2016. The unaudited pro forma information includes amortization of acquired intangible assets based on the purchase price allocation and an estimate of useful lives reflected above, and incremental financing costs resulting from the acquisition, net of income tax, which was estimated using the weighted average statutory tax rates in effect in the jurisdiction for which the pro forma adjustment relates.

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(Amounts in millions)	For the year ended December 31, 2017
Pro forma Revenue	$	4,415
Pro forma Net Income attributable to Moody’s	$	1,012

The unaudited pro forma results do not include any anticipated cost savings or other effects of the planned integration of Bureau van Dijk. Accordingly, the pro forma results above are not necessarily indicative of the results that would have been reported if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future. The Bureau van Dijk results included in the table above have been converted to U.S. GAAP from IFRS as issued by the IASB and have been translated to USD at rates in effect for the periods presented. In addition, a corresponding pro forma adjustment was included to add back the approximate $36 million reduction to reported revenue for the period from August 10, 2017 to December 31, 2017 relating to the deferred revenue adjustment required as part of acquisition accounting as of the actual August 10, 2017 acquisition date.

Other Acquisitions and Strategic Initiatives

Below is a discussion of acquisitions and other strategic initiatives executed by the Company during the years ended December 31, 2019, 2018 and 2017. The purchase prices for these acquisitions were not material and the near term impact to the Company's financial statements is not expected to be material.

The following strategic initiatives operate in the MIS reportable segment:

In October 2019, the Company acquired a minority stake in SynTao Green Finance (STFG), a provider of ESG data and analytics based in and serving China.

In July 2019, the Company acquired a majority stake in Four Twenty Seven, Inc., a provider of data, intelligence, and analysis related to physical climate risks. Four Twenty Seven Climate Solutions revenue is reported in the MIS Other LOB. In connection with this transaction, Moody's recognized a Redeemable Non-controlling Interest for the portion of Four Twenty Seven which the Company does not own. This Redeemable Non-controlling interest was not material.

In April 2019, the Company acquired a majority stake in Vigeo Eiris, a provider of Environmental, Social and Governance (ESG) research, data and assessments. The acquisition furthers Moody’s objective of promoting global standards for ESG for use by market participants. Vigeo Eiris' revenue will be reported in the MIS Other LOB.

The following strategic initiatives operate in the MA reportable segment:

In October 2019, the Company acquired the ABS Suite business, which includes a software platform used by issuers and trustees for the administration of asset-backed and mortgage-backed securities programs. ABS Suite revenue is reported in the RD&A LOB.

In July 2019, the Company acquired RiskFirst, a company providing risk analytic solutions for the asset management and pension fund communities. RiskFirst revenue is reported in the ERS LOB.

In August 2018, the Company acquired 100% of Omega Performance, a provider of online credit training. Revenue for Omega Performance is reported in the PS LOB.

In February 2017, a subsidiary of the Company acquired the structured finance data and analytics business of SCDM Financial. Revenue for SCDM is reported in the RD&A LOB.

The following strategic initiative is a corporate initiative:

In June 2019, the Company formed a joint venture with Team 8, a cybersecurity think tank and company creation platform, to establish a global standard for evaluating and assessing cyber risk for enterprises.

NOTE 10. DIVESTITURE

On November 8, 2019, the Company completed the sale of MAKS to Equistone Partners Europe Limited (Equistone), a European private equity firm for $226 million in net cash proceeds. The final cash consideration received will be subject to customary post-closing completion adjustments.

This divestiture resulted in a loss of $14 million, which included $32 million of currency translation losses reclassified from AOCI to the statement of operations. Additionally, in connection with this divestiture, the Company has recorded a $43 million liability for certain indemnification provisions.

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NOTE 11 GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

The following table summarizes the activity in goodwill:


	Year Ended December 31, 2019
	MIS										MA								Consolidated
	Gross goodwill		Accumulated impairment charge		Net goodwill		Gross goodwill		Accumulated impairment charge		Net goodwill		Gross goodwill		Accumulated impairment charge		Net goodwill
Balance at beginning of year	$	258	$	—	$	258	$	3,535	$	(12)	$	3,523	$	3,793	$	(12)	$	3,781
Additions/ adjustments (1)	53		—		53		61		—		61		114		—		114
Foreign currency translation adjustments	4		—		4		(14)		—		(14)		(10)		—		(10)
Divestiture of MAKS (See Note 10)	—		—		—		(163)		—		(163)		(163)		—		(163)
Ending balance	$	315	$	—	$	315	$	3,419	$	(12)	$	3,407	$	3,734	$	(12)	$	3,722


	Year Ended December 31, 2018
	MIS										MA								Consolidated
	Gross goodwill		Accumulated impairment charge		Net goodwill		Gross goodwill		Accumulated impairment charge		Net goodwill		Gross goodwill		Accumulated impairment charge		Net goodwill
Balance at beginning of year	$	285	$	—	$	285	$	3,480	$	(12)	$	3,468	$	3,765	$	(12)	$	3,753
Additions/ adjustments (2)	—		—		—		211		—		211		211		—		211
Foreign currency translation adjustments	(27)		—		(27)		(156)		—		(156)		(183)		—		(183)
Ending balance	$	258	$	—	$	258	$	3,535	$	(12)	$	3,523	$	3,793	$	(12)	$	3,781

(1) The 2019 additions/adjustments for the MIS segment in the table above relate to the acquisitions of Vigeo Eiris and Four Twenty Seven. The 2019 additions/adjustments for the MA segment in the table above relate to the acquisitions of RiskFirst and ABS Suite.

(2) The 2018 additions/adjustments for the MA segment in the table above primarily relate to the acquisitions of Reis and Omega Performance.

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Acquired intangible assets and related amortization consisted of:


	December 31,
	2019		2018
Customer relationships	$	1,325	$	1,368
Accumulated amortization	(235)		(214)
Net customer relationships	1,090		1,154
Trade secrets	30		30
Accumulated amortization	(29)		(28)
Net trade secrets	1		2
Software/product technology	372		353
Accumulated amortization	(131)		(102)
Net software/product technology	241		251
Trade names	150		155
Accumulated amortization	(30)		(34)
Net trade names	120		121
Other (1)	80		70
Accumulated amortization	(34)		(32)
Net other	46		38
Total	$	1,498	$	1,566

(1)Other intangible assets primarily consist of databases, covenants not to compete, and acquired ratings methodologies and models.

Amortization expense relating to acquired intangible assets is as follows:


	Year Ended December 31,
	2019		2018		2017
Amortization expense	$	103	$	102	$	61

Estimated future annual amortization expense for intangible assets subject to amortization is as follows:


Year Ending December 31,
2020	$	99
2021	99
2022	99
2023	96
2024	94
Thereafter	1,011
Total estimated future amortization	$	1,498

Matters concerning the ICRA reporting unit

On August 29, 2019, the board of directors of ICRA terminated the employment of ICRA's CEO and on September 28, 2019, the shareholders of ICRA voted to remove the former CEO from his position on ICRA's board of directors. ICRA has reported that the Securities and Exchange Board of India (SEBI) issued an adjudication order dated December 26, 2019 imposing a penalty of INR 25 lakh (approximately $35,000) on ICRA in connection with credit ratings assigned to one of ICRA’s customers and the customer’s subsidiaries. ICRA has further reported that: (i) it is appealing that order; and (ii) it has received a related "show cause" notice from SEBI asking ICRA to demonstrate why the penalty imposed should not be increased. In addition, ICRA has disclosed that it is addressing anonymous allegations that were forwarded to ICRA by SEBI, as well as certain additional allegations made during the course of the ongoing internal examination into those anonymous allegations. As of the date of this annual report on Form 10-K, the Company is unable to estimate the financial impact, if any, that may result from a potential unfavorable conclusion of these matters or any other ICRA inquiry. An unfavorable resolution of such matters may negatively impact ICRA’s future operating results, which could result in an impairment of goodwill and amortizable intangible assets in future quarters.

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NOTE 12 RESTRUCTURING

On October 26, 2018, the chief executive officer of Moody’s approved a restructuring program (the “2018 Restructuring Program”) that the Company currently estimates will result in annualized savings of approximately $60 million per year, a portion of which benefited 2019. The 2018 Restructuring Program, the scope of which was expanded in the second quarter of 2019, is now estimated to result in total pre-tax charges of $105 to $110 million. The 2018 Restructuring Program includes relocation of certain functions from high-cost to lower-cost jurisdictions, a reduction of staff, including from recent acquisitions and pursuant to a review of the business criticality of certain positions, and the rationalization and exit of certain real estate leases due to consolidation of various business activities. The exit from certain leased office space began in the fourth quarter of 2018 and will entail approximately $50 million of the charges to either terminate or sublease the affected real estate leases. The 2018 Restructuring Program is also anticipated to represent approximately $60 million of personnel-related restructuring charges, an amount that includes severance and related costs primarily determined under the Company’s existing severance plans. Cash outlays associated with the employee termination cost component of the 2018 Restructuring Program are anticipated to be approximately $60 million, which will be paid through 2021.

Total expenses included in the accompanying consolidated statements of operations relating to the aforementioned restructuring plan is as follows:


	Year Ended December 31,
	2019		2018		2017

2018 Restructuring Program	$	60	$	49	$	—

Changes to the restructuring liability were as follows:


2018 Restructuring Program:	Employee Termination Costs		Contract Termination Costs		Total Restructuring Liability (2)








Balance as of December 31, 2017	$	—	$	—	$	—



Cost incurred and adjustments	33		12		45
Cash payments and adjustments	(3)		—		(3)
Balance as of December 31, 2018	$	30	$	12	$	42
Adoption of New Lease Accounting Standard (1)	—		(11)		(11)
Cost incurred and adjustments	26		5		31
Cash payments and adjustments	(35)		(3)		(38)
Balance as of December 31, 2019	$	21	$	3	$	24



Cumulative expense incurred to date	$	59	$	50

(1)Upon the adoption of the New Lease Accounting Standard, the Company recorded a reclassification of $11 million of liabilities in the first quarter of 2019 for costs associated with certain real estate leases which were exited in previous years, as a reduction of the ROU Asset capitalized upon adoption.

(2)The liability excludes $4 million of non-cash acceleration of amortization of leasehold improvements relating to the rationalization and exit of certain real estate leases as well as $25 million of ROU Asset impairment charges for the year ended December 31, 2019. The fair value of the impaired ROU Assets was determined by utilizing the present value of the estimated future cash flows attributable to the assets. The fair value of those ROU assets subsequent to the impairment was $18 million, and is categorized as Level 3 within the ASC Topic 820 fair value hierarchy.

As of December 31, 2019, a majority of the remaining $24 million restructuring liability is expected to be paid out through 2021.

NOTE 13 FAIR VALUE

The table below presents information about items which are carried at fair value on a recurring basis at December 31, 2019 and 2018:


		Fair value Measurement as of December 31, 2019
	Description	Balance		Level 1		Level 2
Assets:
	Derivatives (1)	$	92	$	—	$	92

	Open ended mutual funds	3		3		—
	Total	$	95	$	3	$	92

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		Fair Value Measurement as of December 31, 2018
	Description	Balance		Level 1		Level 2
Assets:
	Derivatives (1)	$	28	$	—	$	28
	Money market mutual funds	15		15		—
	Open ended mutual funds	33		33		—
	Total	$	76	$	48	$	28
Liabilities:
	Derivatives (1)	$	16	$	—	$	16
	Total	$	16	$	—	$	16

(1)Represents FX forwards on certain assets and liabilities as well as interest rate swaps and cross-currency swaps as more fully described in Note 7 to the consolidated financial statements.

The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts, mutual funds, and money market mutual funds:

Derivatives:

In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.

Open ended mutual funds and money market mutual funds:

The mutual funds in the table above are deemed to be equity securities with readily determinable fair values with changes in the fair value recognized through net income under ASC Topic 321. The fair value of these instruments is determined using Level 1 inputs as defined in the ASC Topic 820.

NOTE 14. OTHER BALANCE SHEET INFORMATION

The following tables contain additional detail related to certain balance sheet captions:


	December 31,
	2019		2018
Other current assets:
Prepaid taxes	$	79	$	100
Prepaid expenses	71		67
Capitalized costs to obtain and fulfill sales contracts	91		77
Other	89		38
Total other current assets	$	330	$	282


	December 31,
	2019		2018
Other assets:
Investments in non-consolidated affiliates	$	117	$	105
Deposits for real-estate leases	13		14
Indemnification assets related to acquisitions	16		16
Mutual funds and fixed deposits	10		18
Costs to obtain sales contracts	119		79
Cross currency and interest rate swaps	83		27
Other	31		16
Total other assets	$	389	$	275

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	December 31,
	2019		2018
Accounts payable and accrued liabilities:
Salaries and benefits	$	152	$	113
Incentive compensation	208		155
Customer credits, advanced payments and advanced billings	28		20
Dividends	7		7
Professional service fees	43		48
Interest accrued on debt	63		71
Accounts payable	38		30
Income taxes	73		71
Pension and other retirement employee benefits	7		6
Accrued royalties	25		25
Foreign exchange forwards on certain assets and liabilities	—		8
Restructuring liability	21		35
Other	108		107
Total accounts payable and accrued liabilities	$	773	$	696


	December 31,
	2019		2018
Other liabilities:
Pension and other retirement employee benefits	$	299	$	249
Deferred rent -– non-current portion (1)	—		94
Interest accrued on UTPs	82		70
MAKS indemnification provisions (See Note 10)	43		—
Income tax liability – non-current portion	51		125
Cross currency and interest rate swaps	—		8
Restructuring liability	3		7
Other	26		23
Total other liabilities	$	504	$	576

(1) Pursuant to the adoption of the New Lease Accounting Standard, deferred rent relating to operating leases was reclassified to operating lease ROU Asset.

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NOTE 15 COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table provides details about the reclassifications out of AOCI:


	Year Ended December 31,							Location in the consolidated statement of operations
	2019		2018		2017
Currency translation adjustment losses
Sale of foreign subsidiaries (see Note 10)	$	(32)	$	—	$	—	Loss pursuant to the divestiture of MAKS
Total currency translation adjustment losses	(32)		—		—
Gains on cash flow hedges
Cross-currency swap	—		—		13		Other non-operating income (expense), net
Interest rate contract	—		—		(1)		Interest expense, net
Total before income taxes	—		—		12
Income tax effect of item above	—		—		(5)		Provision for income taxes
Total net gains on cash flow hedges	—		—		7
Gains on net investment hedges
FX forwards	3		—		—		Other non-operating income (expense), net
Income tax effect of item above	(1)		—		—		Provision for income taxes
Total net gains on net investment hedges	2		—		—
Gains on available for sale securities
Gains on available for sale securities	—		—		2		Other non-operating income (expense), net
Income tax effect of item above	—		—		—		Provision for income taxes
Total gains on available for sale securities	—		—		2
Pension and other retirement benefits
Amortization of actuarial losses and prior service costs included in net income	(2)		(3)		(5)		Operating expense
Amortization of actuarial losses and prior service costs included in net income	(1)		(2)		(3)		SG&A expense
Total before income taxes	(3)		(5)		(8)
Income tax effect of item above	1		1		3		Provision for income taxes
Total pension and other retirement benefits	(2)		(4)		(5)
Total (losses) gains included in Net Income attributable to reclassifications out of AOCI	$	(32)	$	(4)	$	4

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The following table shows changes in AOCI by component (net of tax):


	Year Ended December 31, 2019
	Pension and Other Retirement Benefits		Gains / (Losses) on Cash Flow Hedges		Foreign Currency Translation Adjustments		Net Investment Hedges		Total
Balance December 31, 2018	$	(53)	$	—	$	(406)	$	33	$	(426)
Other comprehensive income/(loss) before reclassifications	(24)		—		(27)		26		(25)
Amounts reclassified from AOCI	2		—		32		(2)		32
Adoption of ASU 2018-02 (See Note 1)	(17)		—		—		(3)		(20)
Other comprehensive income/(loss)	(39)		—		5		21		(13)
Balance December 31, 2019	$	(92)	$	—	$	(401)	$	54	$	(439)


	Year Ended December 31, 2018
	Pension and Other Retirement Benefits		Gains / (Losses) on Cash Flow Hedges		Foreign Currency Translation Adjustments		Net Investment Hedges		Gains on Available for Sale Securities		Total
Balance December 31, 2017	$	(61)	$	1	$	(113)	$	(1)	$	2	$	(172)
Adoption of ASU 2016-01	—		—		—		—		(2)		(2)
Other comprehensive income/(loss) before reclassifications	4		(1)		(293)		34		—		(256)
Amounts reclassified from AOCI	4		—		—		—		—		4
Other comprehensive income/(loss)	8		(1)		(293)		34		(2)		(254)
Balance December 31, 2018	$	(53)	$	—	$	(406)	$	33	$	—	$	(426)


	Year Ended December 31, 2017
	Pension and Other Retirement Benefits		Gains / (Losses) on Cash Flow Hedges		Foreign Currency Translation Adjustments		Net Investment Hedges		Gains on Available for Sale Securities		Total
Balance December 31, 2016	$	(79)	$	2	$	(325)	$	35	$	3	$	(364)
Other comprehensive income/(loss) before reclassifications	13		6		212		(36)		1		196
Amounts reclassified from AOCI	5		(7)		—		—		(2)		(4)
Other comprehensive income/(loss)	18		(1)		212		(36)		(1)		192
Balance December 31, 2017	$	(61)	$	1	$	(113)	$	(1)	$	2	$	(172)

NOTE 16 PENSION AND OTHER RETIREMENT BENEFITS

U.S. Plans

Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans ("DBPPs"). The DBPPs provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody’s funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”.

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Through 2007, substantially all U.S. employees were eligible to participate in the Company’s DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008 and new hires in the U.S. instead will receive a retirement contribution in similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s Retirement Plans and Other Retirement Plans continue to accrue benefits based on existing plan benefit formulas.

Following is a summary of changes in benefit obligations and fair value of plan assets for the Retirement Plans for the years ended December 31:


	Pension Plans						Other Retirement Plans
	2019		2018		2019		2018
Change in benefit obligation:
Benefit obligation, beginning of the period	$	(508)	$	(518)	$	(32)	$	(31)
Service cost	(17)		(19)		(3)		(3)
Interest cost	(21)		(17)		(1)		(1)
Plan participants’ contributions	—		—		(1)		(1)
Benefits paid	21		11		1		1
Actuarial loss	(3)		—		—		—
Assumption changes	(61)		35		(6)		3
Benefit obligation, end of the period	$	(589)	$	(508)	$	(42)	$	(32)
Change in plan assets:
Fair value of plan assets, beginning of the period	$	348	$	357	$	—	$	—
Actual return on plan assets	60		(18)		—		—
Benefits paid	(21)		(11)		(1)		(1)
Employer contributions	8		20		—		—
Plan participants’ contributions	—		—		1		1
Fair value of plan assets, end of the period	$	395	$	348	$	—	$	—
Funded Status of the plans	$	(194)	$	(160)	$	(42)	$	(32)
Amounts recorded on the consolidated balance sheets:
Pension and retirement benefits liability – current	$	(6)	$	(5)	$	(1)	$	(1)
Pension and retirement benefits liability – non current	(188)		(155)		(41)		(31)
Net amount recognized	$	(194)	$	(160)	$	(42)	$	(32)
Accumulated benefit obligation, end of the period	$	(529)	$	(458)

The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:


	December 31,
	2019		2018
Aggregate projected benefit obligation	$	589	$	508
Aggregate accumulated benefit obligation	$	529	$	458
Aggregate fair value of plan assets	$	395	$	348

The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company’s Retirement Plans as of December 31:


	Pension Plans						Other Retirement Plans
	2019		2018		2019		2018
Net actuarial losses	$	(116)	$	(96)	$	(6)	$	—
Net prior service costs	4		4		—		—
Total recognized in AOCI – pretax	$	(112)	$	(92)	$	(6)	$	—

The following table summarizes the estimated pre-tax net actuarial losses for the Company’s Retirement Plans that will be amortized from AOCI and recognized as components of net periodic expense during the next fiscal year:


	Pension Plans		Other Retirement Plans
Net actuarial losses	$	7	$	—
Total to be recognized as components of net periodic expense	$	7	$	—

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Net periodic benefit expenses recognized for the Retirement Plans for years ended December 31:


	Pension Plans										Other Retirement Plans
	2019		2018		2017		2019		2018		2017
Components of net periodic expense
Service cost	$	17	$	19	$	18	$	3	$	3	$	2
Interest cost	21		17		19		1		1		1
Expected return on plan assets	(20)		(15)		(17)		—		—		—
Amortization of net actuarial loss from earlier periods	4		6		9		—		—		—
Net periodic expense	$	22	$	27	$	29	$	4	$	4	$	3

The following table summarizes the pre-tax amounts recorded in OCI related to the Company’s Retirement Plans for the years ended December 31:


	Pension Plans										Other Retirement Plans
	2019		2018		2017		2019		2018		2017
Amortization of net actuarial losses	$	4	$	6	$	9	$	—	$	—	$	—
Net actuarial (loss)/gain arising during the period	(24)		2		21		(6)		3		1
Total recognized in OCI – pre-tax	$	(20)	$	8	$	30	$	(6)	$	3	$	1

ADDITIONAL INFORMATION:

Assumptions—Retirement Plans

Weighted-average assumptions used to determine benefit obligations at December 31:


	Pension Plans						Other Retirement Plans
	2019		2018		2019		2018
Discount rate	3.04	%	4.07	%	3.05	%	4.10	%
Rate of compensation increase	3.64	%	3.69	%	—		—

Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:


	Pension Plans										Other Retirement Plans
	2019		2018		2017		2019		2018		2017
Discount rate	4.07	%	3.46	%	3.89	%	4.10	%	3.45	%	3.85	%
Expected return on plan assets	5.65	%	4.50	%	5.40	%	—		—		—
Rate of compensation increase	3.69	%	3.71	%	3.72	%	—		—		—

The expected rate of return on plan assets represents the Company’s best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio, net of plan paid expenses. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation. For 2019, the expected rate of return used in calculating the net periodic benefit costs was 5.65%. For 2020, the Company’s expected rate of return assumption is 4.45% to reflect the Company’s current view of long-term capital market outlook. In addition, the Company has updated its mortality assumption by adopting the newly released mortality improvement scale MP-2019 to accompany the Pri2012 mortality tables to reflect the latest information regarding future mortality expectations by the Society of Actuaries. Additionally, the assumed healthcare cost trend rate assumption is not material to the valuation of the other retirement plans.

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Plan Assets

Moody’s investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long-term within a prudent level of risk. The Company works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward looking views of inflation and capital market returns, are also considered. Risk management practices include monitoring plan asset performance, diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets. The Company’s Asset Management Committee is responsible for overseeing the investment activities of the plan, which includes selecting acceptable asset classes, defining allowable ranges of holdings by asset class and by individual investment managers, defining acceptable securities within each asset class, and establishing investment performance expectations. Ongoing monitoring of the plan includes reviews of investment performance and managers on a regular basis, annual liability measurements, and periodic asset/liability studies.

The Company’s investment policy uses risk-controlled investment strategies by increasing the plan’s asset allocation to fixed income securities and specifying ranges of acceptable target allocation by asset class based on different levels of the plan’s accounting funded status. In addition, the investment policy also requires the investment-grade fixed income assets be rebalanced between shorter and longer duration bonds as the interest rate environment changes. This investment policy is designed to help protect the plan’s funded status and to limit volatility of the Company’s contributions. Based on the policy, the Company’s current target asset allocation is approximately 49% (range of 44% to 54%) in equity securities, 45% (range of 40% to 50%) in fixed income securities and 6% (range of 3% to 9%) in other investments and the plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds, which are expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. The plan also invests in other fixed income investments such as debts rated below investment grade, emerging market debt, and convertible securities. The plan’s other investment, which is made through a private real estate debt fund, is expected to provide additional diversification benefits and absolute return enhancement to the plan assets.

Fair value of the assets in the Company’s funded pension plan by asset category at December 31, 2019 and 2018 are as follows:


	Fair Value Measurement as of December 31, 2019
Asset Category	Balance		Level 1		Level 2		Measured using NAV practical expedient (1)		% of total assets
Cash and cash equivalent	$	2	$	—	$	2	$	—	1	%
Common/collective trust funds—equity securities
U.S. large-cap	140		—		140		—		35	%
U.S. small and mid-cap	21		—		21		—		5	%
Emerging markets	29		—		29		—		7	%
Total equity investments	190		—		190		—		48	%
Emerging markets bond fund	15		—		—		15		4	%
Common/collective trust funds—fixed income securities
Intermediate-term investment grade U.S. government/ corporate bonds	119		—		119		—		30	%
Mutual funds
U.S. Treasury Inflation-Protected Securities (TIPs)	22		22		—		—		6	%
Convertible securities	12		12		—		—		3	%
Private investment fund—high yield securities	12		—		—		12		3	%
Total fixed-income investments	180		34		119		27		46	%
Other investment—private real estate fund	23		—		—		23		6	%
Total Assets	$	395	$	34	$	311	$	50	100	%

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	Fair Value Measurement as of December 31, 2018
Asset Category	Balance		Level 1		Level 2		Measured using NAV practical expedient (1)		% of total assets
Cash and cash equivalent	$	1	$	—	$	1	$	—	—	%
Common/collective trust funds—equity securities
U.S. large-cap	122		—		122		—		35	%
U.S. small and mid-cap	16		—		16		—		5	%
Emerging markets	23		—		23		—		7	%
Total equity investments	161		—		161		—		47	%
Emerging markets bond fund	13		—		—		13		4	%
Common/collective trust funds—fixed income securities
Intermediate-term investment grade U.S. government/ corporate bonds	109		—		109		—		31	%
U.S. Treasury Inflation-Protected Securities (TIPs)	21		21		—		—		6	%
Private investment fund—convertible securities	11		—		—		11		3	%
Private investment fund—high yield securities	11		—		—		11		3	%
Total fixed-income investments	165		21		109		35		47	%
Other investment—private real estate debt fund	21		—		—		21		6	%
Total Assets	$	348	$	21	$	271	$	56	100	%

(1)Investments are measured using the net asset value per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit a reconciliation of the fair value hierarchy to the value of the total plan assets.

Cash and cash equivalents are primarily comprised of investments in money market mutual funds. In determining fair value, Level 1 investments are valued based on quoted market prices in active markets. Investments in common/collective trust funds are valued using the NAV per unit in each fund. The NAV is based on the value of the underlying investments owned by each trust, minus its liabilities, and then divided by the number of shares outstanding. Common/collective trust funds are categorized in Level 2 to the extent that they are considered to have a readily determinable fair value. Investments for which fair value is estimated by using the NAV per share (or its equivalent) as a practical expedient are not categorized in the fair value hierarchy.

Except for the Company’s U.S. funded pension plan, all of Moody’s Retirement Plans are unfunded and therefore have no plan assets.

Cash Flows

The Company did not contribute to its U.S. funded pension plan during 2019, but contributed $16 million to this plan during the year ended December 31, 2018. The Company made payments of $8 million and $5 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2019 and 2018, respectively. The Company anticipates making payments of $99 million to its funded U.S. pension plan and $6 million related to its unfunded U.S. pension plans during the year ended December 31, 2020.

Estimated Future Benefits Payable

Estimated future benefits payments for the Retirement Plans are as follows as of year ended December 31, 2019:


Year Ending December 31,	Pension Plans		Other Retirement Plans
2020	$	16	$	1
2021	17		1
2022	47		1
2023	27		2
2024	23		2
2025 - 2029	$	146	$	12

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Defined Contribution Plans

Moody’s has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions, equal to 50% of employee contribution up to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company’s EPS (i.e. profit sharing contribution). The Company did not make this profit sharing contribution in 2019. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with U.S. defined contribution plans were $43 million, $27 million and $43 million in the years ended December 31, 2019, 2018, and 2017, respectively.

Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $1 million during each of the years ended December 31, 2019, 2018 and 2017, respectively, for the Company’s common shares held by the Moody’s Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 411,100 and 435,500 shares of Moody’s common stock at December 31, 2019 and 2018, respectively.

Non-U.S. Plans

Certain of the Company’s non-U.S. operations provide pension benefits to their employees. The non-U.S. defined benefit pension plans are immaterial. For defined contribution plans, company contributions are primarily determined as a percentage of employees’ eligible compensation. Moody’s also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company’s diluted EPS. The Company did not make this profit sharing contribution in 2019. Expenses related to these defined contribution plans for the years ended December 31, 2019, 2018 and 2017 were $25 million, $26 million and $24 million, respectively.

NOTE 17 STOCK-BASED COMPENSATION PLANS

Under the 1998 Plan, 33 million shares of the Company’s common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 50.6 million shares, of which not more than 14.0 million shares are available for grants of awards other than stock options. The Stock Plans also provide for the granting of restricted stock. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Additionally, the vesting period is three years for certain performance-based restricted stock that contain a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant.

The Company maintains the Directors’ Plan for its Board, which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors’ Plan provides that options are exercisable not later than ten years from the grant date. The vesting period is determined by the Board at the date of the grant and is generally one year for both options and restricted stock. Under the Directors’ Plan, 1.7 million shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors’ Plan.

Presented below is a summary of the stock-based compensation expense and associated tax benefit in the accompanying Consolidated Statements of Operations:


	Year Ended December 31,
	2019		2018		2017
Stock-based compensation expense	$	136	$	130	$	123
Tax benefit	$	29	$	32	$	13	'(1)

(1)The 2017 Amount includes a decrease in deferred tax assets resulting from a future reduction in the U.S. federal corporate income tax rate in accordance with the Tax Act.

The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted below. The expected dividend yield is derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of historical weekly stock prices of the Company as well as implied volatility from Moody’s traded options. The risk-free interest rate is based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected holding period was determined by examining historical and projected post-vesting exercise behavior activity.

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The following weighted average assumptions were used for options granted:


	Year Ended December 31,
	2019			2018			2017
Expected dividend yield	1.14		%	1.05		%	1.34		%
Expected stock volatility	24		%	26		%	27		%
Risk-free interest rate	2.56		%	2.82		%	2.19		%
Expected holding period -in years	6.2			6.2			6.5
Grant date fair value	$	43.29		$	45.73		$	30.00

A summary of option activity as of December 31, 2019 and changes during the year then ended is presented below:


Options	Shares	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, December 31, 2018	2.2	$	69.86
Granted	0.2	175.30
Exercised	(0.8)	44.59
Outstanding, December 31, 2019	1.6	93.51		5.2 years	$	227
Vested and expected to vest, December 31, 2019	1.5	92.14		5.1 years	$	224
Exercisable, December 31, 2019	1.1	$	71.64	4.0 years	$	176

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody’s closing stock price on the last trading day of the year ended December 31, 2019 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2019. This amount varies based on the fair value of Moody’s stock. As of December 31, 2019, there was $6 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes information relating to stock option exercises:


	Year Ended December 31,
	2019	2018	2017
Proceeds from stock option exercises	36	38	49
Aggregate intrinsic value	114	99	88
Tax benefit realized upon exercise	27	24	31

A summary of nonvested restricted stock activity for the year ended December 31, 2019 is presented below:


Nonvested Restricted Stock	Shares	Weighted Average Grant Date Fair Value Per Share
Balance, December 31, 2018	2.0	$	123.13
Granted	0.8	174.07
Vested	(0.9)	113.21
Forfeited	(0.1)	144.18
Balance, December 31, 2019	1.8	$	124.63

As of December 31, 2019, there was $147 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 2.4 years.

The following table summarizes information relating to the vesting of restricted stock awards:


	Year Ended December 31,
	2019	2018	2017
Fair value of shares vested	156	151	111
Tax benefit realized upon vesting	36	35	35

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A summary of performance-based restricted stock activity for the year ended December 31, 2019 is presented below:


Performance-based restricted stock	Shares	Weighted Average Grant Date Fair Value Per Share
Balance, December 31, 2018	0.7	$	103.74
Granted	0.1	169.68
Vested	(0.3)	76.68
Balance, December 31, 2019	0.5	$	134.35

The following table summarizes information relating to the vesting of the Company’s performance-based restricted stock awards:


	Year Ended December 31,
	2019	2018	2017
Fair value of shares vested	47	23	20
Tax benefit realized upon vesting	11	6	7

As of December 31, 2019, there was $24 million of total unrecognized compensation expense related to this plan. The expense is expected to be recognized over a weighted average period of 1.8 years.

The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans.

In addition, the Company also sponsors the ESPP. Under the ESPP, 6 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at a discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in 2019, 2018, and 2017 resulting in the ESPP qualifying for non-compensatory status under Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2019, 2018, and 2017. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect from one percent to ten percent of compensation, subject to the annual federal limit.

NOTE 18 INCOME TAXES

Components of the Company’s income tax provision are as follows:


	Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	179	$	168	$	454
State and Local	59		50		30
Non-U.S.	181		233		207
Total current	419		451		691
Deferred:
Federal	(19)		(59)		156
State and Local	(3)		(2)		17
Non-U.S.	(16)		(38)		(85)
Total deferred	(38)		(99)		88
Total provision for income taxes	$	381	$	352	$	779

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A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes is as follows:


	Year Ended December 31,
	2019			2018			2017
U.S. statutory tax rate	21.0		%	21.0		%	35.0		%
State and local taxes, net of federal tax benefit	2.2		%	2.2		%	1.9		%
Benefit of foreign operations	(0.1)		%	1.8		%	(9.9)		%


U.S. Tax Act impact	—		%	(2.8)		%	17.0		%
Other	(2.1)		%	(1.1)		%	(0.4)		%
Effective tax rate	21.0		%	21.1		%	43.6		%
Income tax paid	$	458		$	442		$	366

The source of income before provision for income taxes is as follows:


	Year Ended December 31,
	2019		2018		2017
U.S.	$	1,039	$	936	$	1,099
Non-U.S.	771		736		688
Income before provision for income taxes	$	1,810	$	1,672	$	1,787

The components of deferred tax assets and liabilities are as follows:


	December 31,
	2019		2018
Deferred tax assets:
Account receivable allowances	$	6	$	6
Accumulated depreciation and amortization	1		1
Stock-based compensation	46		46
Accrued compensation and benefits	89		75
Operating lease liabilities	136		—
Deferred rent	—		22
Deferred revenue	37		41
Net operating loss	13		16
Restructuring	4		5
Uncertain tax positions	94		81
Self-insured related reserves	8		8

Other	13		14
Total deferred tax assets	447		315
Deferred tax liabilities:
Accumulated depreciation and amortization of intangible assets and capitalized software	(389)		(395)
ROU Assets	(107)		—
Capital gains	(23)		(24)
Self-insured related income	(8)		(8)
Stock based compensation	(2)		(2)
New revenue accounting standard - ASC 606	(12)		(19)

Unrealized gain on net investment hedges - OCI	(22)		(10)
Other liabilities	(3)		(7)
Total deferred tax liabilities	(566)		(465)
Net deferred tax liabilities	(119)		(150)
Valuation allowance	(9)		(5)
Total net deferred tax liabilities	$	(128)	$	(155)

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On December 22, 2017, the Tax Act was signed into law, which resulted in significant changes to U.S. corporate tax laws. The Tax Act includes a mandatory one-time deemed repatriation tax (“transition tax”) on previously untaxed accumulated earnings of foreign subsidiaries and beginning in 2018 reduces the statutory federal corporate income tax rate from 35% to 21%. Due to the complexities of the Tax Act, the SEC issued guidance requiring that companies provide a reasonable estimate of the impact of the Tax Act to the extent such reasonable estimate has been determined. Accordingly, as of December 31, 2017, the Company recorded a provisional estimate for the transition tax of $247 million. In September, 2018, the Company filed its 2017 federal income tax return and revised its determination of the transition tax to $236 million, a reduction of $11 million from the estimate at December 31, 2017. The reduction was primarily due to proposed regulations issued by the Internal Revenue Service and the finalization of earnings and profits calculations. A portion of the transition tax will be payable over eight years, starting in 2018, and will not accrue interest. The above revised determination of transition tax may be impacted by a number of additional considerations, including but not limited to the issuance of additional regulations.

As a result of the Tax Act, all previously net undistributed foreign earnings have now been subject to U.S. tax. The Company regularly evaluates which entities it will indefinitely reinvest earnings. The Company has provided deferred taxes for those entities whose earnings are not considered indefinitely reinvested.

The Company has recorded reductions in its income tax provision of approximately $44 million, or 242 BPS, for the full-year of 2019, and approximately $38 million, or 223 BPS, for the full-year of 2018, relating to Excess Tax Benefits on stock-based compensation.

The Company had valuation allowances of $9 million and $5 million at December 31, 2019 and 2018, respectively, related to foreign net operating losses for which realization is uncertain.

As of December 31, 2019, the Company had $477 million of UTPs of which $422 million represents the amount that, if recognized, would impact the effective tax rate in future periods. The increase in UTPs primarily resulted from the additional reserves established for non-U.S. tax exposures and an adjustment to the transition tax under U.S. tax reform. In 2018, the Company has recorded a deferred tax asset in the amount of $48 million for potential transition tax benefits if certain non-U.S. UTPs are not sustained. Due to additional UTPs recorded in 2019, the Company increased deferred assets to $50 million.

A reconciliation of the beginning and ending amount of UTPs is as follows:


	Year Ended December 31,
	2019		2018		2017
Balance as of January 1	$	495	$	389	$	200
Additions for tax positions related to the current year	35		80		86
Additions for tax positions of prior years	22		89		120
Reductions for tax positions of prior years	(2)		(13)		(4)
Settlements with taxing authorities	(1)		(2)		(2)
Lapse of statute of limitations	(44)		(48)		(11)
Reclassification to indemnification liability related to MAKS divestiture	(28)		—		—
Balance as of December 31	$	477	$	495	$	389

The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. During the years ended December 31, 2019 and 2018, the Company incurred a net interest expense of $28 million and $15 million respectively, related to UTPs. As of December 31, 2019 and 2018, the amount of accrued interest recorded in the Company’s consolidated balance sheets related to UTPs was $82 million and $70 million, respectively.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for 2013 and 2015 through 2017 remain open to examination. The Company’s New York State tax returns for 2011 through 2014 are currently under examination and the Company’s New York City tax return for 2014 is currently under examination. The Company’s U.K. tax return for 2012 is currently under examination and its returns for 2013 through 2017 remain open to examination.

For current ongoing audits related to open tax years, the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.

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NOTE 19 INDEBTEDNESS

The following table summarizes total indebtedness:


	December 31, 2019
	Principal Amount		Fair Value of Interest Rate Swaps(1)		Unamortized (Discount) Premium		Unamortized Debt Issuance Costs		Carrying Value
Notes Payable:
4.50% 2012 Senior Notes, due 2022	$	500	$	9	$	(1)	$	(1)	$	507
4.875% 2013 Senior Notes, due 2024	500		—		(1)		(2)		497
5.25% 2014 Senior Notes (30-Year), due 2044	600		—		4		(5)		599
1.75% 2015 Senior Notes, due 2027	561		—		—		(3)		558
2.75% 2017 Senior Notes, due 2021	500		11		(1)		(2)		508
2.625% 2017 Senior Notes, due 2023	500		7		(1)		(2)		504
3.25% 2017 Senior Notes, due 2028	500		—		(4)		(3)		493
3.25% 2018 Senior Notes, due 2021	300		—		—		(1)		299
4.25% 2018 Senior Notes, due 2029	400		—		(3)		(3)		394
4.875% 2018 Senior Notes, due 2048	400		—		(7)		(4)		389
0.950% 2019 Senior Notes, due 2030	842		—		(3)		(6)		833
Total long-term debt	$	5,603	$	27	$	(17)	$	(32)	$	5,581


	December 31, 2018
	Principal Amount		Fair Value of Interest Rate Swaps (1)		Unamortized (Discount) Premium		Unamortized Debt Issuance Costs		Carrying Value
Notes Payable:
5.50% 2010 Senior Notes, due 2020	$	500	$	(4)	$	(1)	$	(1)	$	494
4.50% 2012 Senior Notes, due 2022	500		2		(2)		(1)		499
4.875% 2013 Senior Notes, due 2024	500		—		(1)		(2)		497
2.75% 2014 Senior Notes (5-Year), due 2019	450		—		—		—		450
5.25% 2014 Senior Notes (30-Year), due 2044	600		—		3		(5)		598
1.75% 2015 Senior Notes, due 2027	572		—		—		(3)		569
2.75% 2017 Senior Notes, due 2021	500		4		(1)		(2)		501
2.625% 2017 Senior Notes, due 2023	500		—		(1)		(3)		496
3.25% 2017 Senior Notes, due 2028	500		—		(5)		(4)		491
3.25% 2018 Senior Notes, due 2021	300		—		—		(2)		298
4.25% 2018 Senior Notes, due 2029	400		—		(3)		(3)		394
4.875% 2018 Senior Notes, due 2048	400		—		(7)		(4)		389
Total debt	$	5,722	$	2	$	(18)	$	(30)	$	5,676
Current portion									(450)
Total long-term debt									$	5,226

(1)The Company has entered into interest rate swaps on the 2010 Senior Notes, the 2012 Senior Notes, the 2014 Senior Notes (5-Year), the 2017 Senior Notes due 2021 and the 2017 Senior Notes due 2023 which are more fully discussed in Note 7 above. These amounts represent the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged debt.

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Credit Facility

The following summarizes information relating to the Company's revolving credit facility:


					December 31, 2019						December 31, 2018
	Issue Date	Capacity		Maturity	Drawn		Undrawn		Drawn		Undrawn
2018 Credit Facility	November 14, 2018	$	1,000	November 13, 2023	$	—	$	1,000	$	—	$	1,000

Interest on borrowings under the facility may range from 0 BPS to 22.5 BPS per annum for Alternate Base Rate loans (as defined in the 2018 Facility agreement) or payable at rates that are based on the London InterBank Offered Rate (“LIBOR”) plus a premium that can range from 80.5 BPS to 122.5 BPS depending on the Company’s index debt ratings, as set forth in the 2018 Facility agreement. The Company also pays quarterly facility fees, regardless of borrowing activity under the facility. The quarterly fees for the 2018 Facility can range from 7 BPS of the facility amount to 15 BPS, depending on the Company’s index debt ratings. The 2018 Facility contains certain customary covenants including a financial covenant that requires the Company to maintain a total debt to EBITDA ratio of (i) not more than 4 to 1 at the end of any fiscal quarter or (ii) not more than 4.5 to 1 as of the end of the first three consecutive quarters immediately following any acquisition with consideration in excess of $500 million, subject to certain conditions as set forth in the 2018 Facility agreement.

Commercial Paper

On August 3, 2016, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Borrowings under the CP Program are backstopped by the 2018 Facility. Amounts under the CP Program may be re-borrowed. The maturity of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par, or alternatively, sold at par and bear interest at rates that will vary based upon market conditions. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods. As of December 31, 2019, the Company has no CP borrowings outstanding.

Notes Payable

The Company may prepay certain of its senior notes, in whole or in part, but may incur a Make-Whole Amount penalty.

During 2019, the Company fully repaid $500 million of the 2010 Senior Notes and $450 million of the 2014 Senior Notes (5-year) along with a Make-Whole Amount of approximately $12 million. Additionally, in 2019, the Company issued the €750 million 2019 Senior Notes, due 2030. The 2019 Senior Notes were designated as net investment hedges as more fully discussed in Note 7.

At December 31, 2019, the Company was in compliance with all covenants contained within all of the debt agreements. All the debt agreements contain cross default provisions which state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of December 31, 2019, there were no such cross defaults.

The repayment schedule for the Company’s borrowings is as follows:


Year Ending December 31,	2012 Senior Notes due 2022		2013 Senior Notes due 2024		2014 Senior Notes (30-year) due 2044		2015 Senior Notes due 2027		2017 Senior Notes due 2021		2017 Senior Notes due 2023		2017 Senior Notes due 2028		2018 Senior Notes due 2021		2018 Senior Notes due 2029		2018 Senior Notes due 2048		2019 Senior Notes due 2030		Total
2020	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2021	—		—		—		—		500		—		—		300		—		—		—		800
2022	500		—		—		—		—		—		—		—		—		—		—		500
2023	—		—		—		—		—		500		—		—		—		—		—		500
2024	—		500		—		—		—		—		—		—		—		—		—		500
Thereafter	—		—		600		561		—		—		500		—		400		400		842		3,303
Total	500		500		600		561		500		500		500		300		400		400		842		5,603

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INTEREST EXPENSE, NET

The following table summarizes the components of interest as presented in the consolidated statements of operations:


	Year Ended December 31,
	2019		2018		2017
Income	$	17	$	15	$	16
Expense on borrowings	(176)		(197)		(190)
Expense on UTPs and other tax related liabilities	(28)		(15)		(16)
Net periodic pension costs—interest component (1)	(22)		(19)		(20)
Capitalized	1		1		1
Total	$	(208)	$	(215)	$	(209)
Interest paid (2)	$	167	$	183	$	158

(2)Interest paid includes net settlements on interest rate swaps more fully discussed in Note 7.

The Company’s debt is recorded at its carrying amount, which represents the issuance amount plus or minus any issuance premium or discount, except for the 2010 Senior Notes, the 2012 Senior Notes, the 2017 Senior Notes due 2021 and the 2017 Senior Notes due 2023, which are recorded at the carrying amount adjusted for the fair value of an interest rate swap used to hedge the fair value of the note.

The fair value and carrying value of the Company’s debt as of December 31, 2019 and 2018 are as follows:


	December 31, 2019						December 31, 2018
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
5.50% 2010 Senior Notes, due 2020	$	—	$	—	$	494	$	518
4.50% 2012 Senior Notes, due 2022	507		531		499		514
4.875% 2013 Senior Notes, due 2024	497		551		497		522
2.75% 2014 Senior Notes (5-Year), due 2019	—		—		450		450
5.25% 2014 Senior Notes (30-Year), due 2044	599		757		598		638
1.75% 2015 Senior Notes, due 2027	558		604		569		585
2.75% 2017 Senior Notes, due 2021	508		507		501		490
2.625% 2017 Senior Notes, due 2023	504		507		496		477
3.25% 2017 Senior Notes, due 2028	493		523		491		473
3.25% 2018 Senior Notes, due 2021	299		306		298		299
4.25% 2018 Senior Notes, due 2029	394		453		394		407
4.875% 2018 Senior Notes, due 2048	389		492		389		410
0.950% 2019 Senior Notes, due 2030	833		847		—		—
Total	$	5,581	$	6,078	$	5,676	$	5,783

The fair value of the Company’s debt is estimated based on quoted market prices for similar instruments. Accordingly, the inputs used to estimate the fair value of the Company’s long-term debt are classified as Level 2 inputs within the fair value hierarchy.

NOTE 20 CAPITAL STOCK

Authorized Capital Stock

The total number of shares of all classes of stock that the Company has authority to issue under its Restated Certificate of Incorporation is 1.02 billion shares with a par value of $0.01, of which 1.0 billion are shares of common stock, 10.0 million are shares of preferred stock and 10.0 million are shares of series common stock. The preferred stock and series common stock can be issued with varying terms, as determined by the Board.

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Share Repurchase Program

The Company implemented a systematic share repurchase program in the third quarter of 2005 through an SEC Rule 10b5-1 program. Moody’s may also purchase opportunistically when conditions warrant. As a result, Moody’s share repurchase activity will continue to vary from quarter to quarter. The table below summarizes the Company’s remaining authority under its share repurchase program as of December 31, 2019:


Date Authorized	Amount Authorized		Remaining Authority
October 22, 2018	$	1,000	$	334
December 16, 2019	$	1,000	1,000
Total Remaining Authority			$	1,334

During 2019, Moody’s repurchased 5.2 million shares of its common stock under its share repurchase program and issued a net 1.6 million shares under employee stock-based compensation plans. The net amount includes shares withheld for employee payroll taxes.

During 2019, the Company entered into an ASR with a financial institution counterparty to repurchase $500 million of its outstanding common stock. Refer to Note 5 for further details.

Dividends

The Company’s cash dividends were:


	Dividends Per Share
	Year ended December 31,
	2019						2018						2017
	Declared		Paid		Declared		Paid		Declared		Paid
First quarter	$	0.50	$	0.50	$	0.44	$	0.44	$	—	$	0.38
Second quarter	0.50		0.50		0.44		0.44		0.38		0.38
Third quarter	0.50		0.50		0.44		0.44		0.38		0.38
Fourth quarter	0.50		0.50		0.44		0.44		0.38		0.38
Total	$	2.00	$	2.00	$	1.76	$	1.76	$	1.14	$	1.52

On February 11, 2020, the Board approved the declaration of a quarterly dividend of $0.56 per share of Moody’s common stock, payable on March 18, 2020 to shareholders of record at the close of business on February 25, 2020. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board.

NOTE 21 LEASE COMMITMENTS

The Company has operating leases, substantially all of which relate to the lease of office space. The Company's leases which are classified as finance leases are not material to the consolidated financial statements. Certain of the Company's leases include options to renew, with renewal terms that can extend the lease from one to 20 years at the Company's discretion.

The following table presents the components of the Company’s lease cost:


	Year Ended December 31, 2019

Operating lease cost	$	97

Sublease income	(2)
Variable lease cost	17
Total lease cost	$	112

During the second quarter of 2019, the Company recorded $25 million of ROU Asset impairment charges related to the exit of certain real estate leases. The impairment charges were recorded within Restructuring expense on the consolidated statement of operations. Refer to Note 12 for further details.

The following tables present other information related to the Company’s operating leases:


	Year Ended December 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	106
Right-of-use assets obtained in exchange for new operating lease liabilities	$	41

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	December 31, 2019
Weighted-average remaining lease term	6.8 years
Weighted-average discount rate applied to operating leases	3.6	%

The following table presents a maturity analysis of the future minimum lease payments included within the Company’s operating lease liabilities at December 31, 2019:


Year Ending December 31,	Operating Leases
2020	$	107
2021	103
2022	91
2023	85
2024	79
Thereafter	183
Total lease payments (undiscounted)	648
Less: Interest	74
Present value of lease liabilities:	$	574
Lease liabilities - current	$	89
Lease liabilities - noncurrent	$	485

The minimum rent for operating leases at December 31, 2018 is as follows:


Year Ending December 31,	Operating Leases
2019	$	106
2020	102
2021	96
2022	84
2023	81
Thereafter	247
Total minimum lease payments	$	716

NOTE 22 CONTINGENCIES

Given the nature of their activities, Moody’s and its subsidiaries are subject to legal and tax proceedings, governmental, regulatory and legislative investigations, subpoenas and other inquiries, and claims and litigation by governmental and private parties that are based on ratings assigned by MIS or that are otherwise incidental to the Company’s business. Moody’s and MIS also are subject to periodic reviews, inspections, examinations and investigations by regulators in the U.S. and other jurisdictions, any of which may result in claims, legal proceedings, assessments, fines, penalties or restrictions on business activities. Moody’s also is subject to ongoing tax audits as addressed in Note 18 to the consolidated financial statements.

In May 2013, the Company and five subsidiaries (collectively, the “Company Defendants”) were served with a complaint filed by a former employee (“Plaintiff”) in New York Supreme Court (the “Court”) on behalf of New York State (the “State”) and New York City (the “City”) asserting purported claims under the New York False Claims Act (“NYFCA”). Both the State and the City were given an opportunity to intervene as plaintiffs in the action but declined to do so. In August 2013, Plaintiff filed an Amended Complaint adding Marsh & McLennan Companies, Inc. as a defendant. Plaintiff’s central allegation against the Company Defendants is that their treatment of the Company’s wholly-owned captive insurance subsidiary, Moody’s Assurance Company, Inc. (“MAC”), in their State and City tax filings between 2002 and 2014 was contrary to the State and City tax codes. Plaintiff also asserts a cause of action for retaliation under the NYFCA and alleges that his employment was improperly terminated after he reported his concerns regarding MAC’s tax treatment internally. Plaintiff alleges that the Company underpaid State and City taxes by more than $120 million (which the Company believes is unsupported as a matter of fact and law), and requests statutory damages of triple that amount, as well as unspecified damages related to the retaliation claim. In December 2016, the Court issued a decision largely denying the Company Defendants’ motion to dismiss. The Company Defendants appealed, and in August 2018, the Appellate Division of the New York Supreme Court upheld the Court’s decision. In October 2019, the Company Defendants reached an agreement with the State, the City and the Plaintiff to settle all claims asserted against the Company Defendants for $15.5 million. Pursuant to the settlement, the parties filed a stipulation discontinuing the action in December 2019.

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Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, the Company records liabilities in the consolidated financial statements when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In instances when a loss is reasonably possible but uncertainties exist related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if material. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. Moody’s also discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

NOTE 23 SEGMENT INFORMATION

The Company is organized into two operating segments: MIS and MA and accordingly, the Company reports in two reportable segments: MIS and MA.

The MIS segment consists of five LOBs. The CFG, SFG, FIG and PPIF LOBs generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other LOB primarily consists of financial instruments pricing services in the Asia-Pacific region as well as ICRA non-ratings revenue.

The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three LOBs—RD&A, ERS and PS.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products and is generally based on comparable market transactions. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services.

Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and legal. Such costs and corporate expenses that exclusively benefit one segment are fully charged to that segment. For overhead and corporate expenses that benefit both segments, in years prior to 2019, the Company generally allocated costs ratably based on each segment’s share of total revenue.

Beginning in 2019, the Company refined its methodology such that costs allocated to each segment based on the segment’s share of 2018 actual revenue comprise a “Baseline Pool” that will remain fixed over time. In subsequent periods, incremental overhead costs (or reductions thereof) will be allocated to each segment based on the prevailing shares of total revenue represented by each segment. The Company believes that this allocation method will better align the amount of overhead costs consumed by each segment and contribute stability to each segment’s costs over time. The impact of this refined methodology would not have resulted in a material change to previously reported segment results.

“Eliminations” in the following table represent intersegment revenue/expense. Moody’s does not report the Company’s assets by reportable segment, as this metric is not used by the chief operating decision maker to allocate resources to the segments. Consequently, it is not practical to show assets by reportable segment.

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Financial Information by Segment

The table below shows revenue, Adjusted Operating Income and operating income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment. Refer to Note 3 for further details on the components of the Company’s revenue.


	Year Ended December 31,
	2019														2018
	MIS		MA		Eliminations		Consolidated		MIS		MA		Eliminations		Consolidated
Revenue	$	3,009	$	1,963	$	(143)	$	4,829	$	2,836	$	1,743	$	(136)	$	4,443
Total Expense	1,376		1,598		(143)		2,831		1,276		1,435		(136)		2,575
Operating income	1,633		365		—		1,998		1,560		308		—		1,868
Add:
Restructuring	31		29		—		60		32		17		—		49
Depreciation and amortization	71		129		—		200		65		127		—		192
Acquisition-Related Expenses	—		3		—		3		—		8		—		8
Loss pursuant to the divestiture of MAKS	—		14		—		14		—		—		—		—
Captive insurance company settlement	10		6		—		16		—		—		—		—
Adjusted Operating Income	$	1,745	$	546	$	—	$	2,291	$	1,657	$	460	$	—	$	2,117


	Year Ended December 31, 2017
	MIS(1)		MA(1)		Eliminations		Consolidated(1)
Revenue	$	2,886	$	1,446	$	(128)	$	4,204
Total Expense	1,314		1,197		(128)		2,383
Operating Income	1,572		249		—		1,821
Add:
Depreciation and amortization	74		84		—		158
Acquisition-Related Expenses	—		23		—		23
Adjusted Operating income	$	1,646	$	356	$	—	$	2,002

(1)The Company adopted ASU No. 2017-07 in the first quarter of 2018, whereby all components of pension expense except for the service cost component are required to be presented in non-operating (expense) income, net. The service cost component continues to be reported as an operating expense. Segment results for 2017 have been restated to reflect this reclassification. Accordingly, operating and SG&A expenses for MIS and MA were reduced by $8 million and $4 million, respectively, for the year ended December 31, 2017.

The cumulative restructuring charges related to the 2018 Restructuring Program, as more fully discussed in Note 12, for the MIS and MA reportable segments are $63 million and $46 million, respectively.

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CONSOLIDATED REVENUE AND LONG-LIVED ASSETS INFORMATION BY GEOGRAPHIC AREA


	Year Ended December 31,
	2019		2018		2017
Revenue:
U.S.	$	2,544	$	2,330	$	2,348
Non-U.S.:
EMEA	1,446		1,377		1,132
Asia-Pacific	551		493		471
Americas	288		243		253
Total Non-U.S.	2,285		2,113		1,856
Total	$	4,829	$	4,443	$	4,204
Long-lived assets at December 31:
U.S.	$	1,290	$	982	$	673
Non-U.S.	4,678		4,685		5,037
Total	$	5,968	$	5,667	$	5,710

NOTE 24 VALUATION AND QUALIFYING ACCOUNTS

Accounts receivable allowances primarily represent adjustments to customer billings that are estimated when the related revenue is recognized and also represents an estimate for uncollectible accounts. The valuation allowance on deferred tax assets relates to foreign net operating tax losses for which realization is uncertain. Below is a summary of activity:


Year Ended December 31,	Balance at Beginning of the Year		Charged to costs and expenses		Deductions (1)		Balance at End of the Year
2019
Accounts receivable allowance	$	(43)	$	(11)	$	11	$	(43)
Deferred tax assets—valuation allowance	$	(5)	$	(4)	$	—	$	(9)
2018
Accounts receivable allowance	$	(37)	$	(18)	$	12	$	(43)
Deferred tax assets—valuation allowance	$	(6)	$	—	$	1	$	(5)
2017
Accounts receivable allowance	$	(26)	$	(20)	$	9	$	(37)
Deferred tax assets—valuation allowance	$	(3)	$	(3)	$	—	$	(6)

(1)Reflects write-off of uncollectible accounts receivable or expiration of foreign net operating tax losses.

NOTE 25 OTHER NON-OPERATING (EXPENSE) INCOME, NET

The following table summarizes the components of other non-operating (expense) income, net as presented in the consolidated statements of operations:


	Year Ended December 31,
	2019		2018		2017
FX loss	$	(18)	$	(11)	$	(17)
Net periodic pension costs—other components (1)	18		10		8
Income from investments in non-consolidated affiliates	13		14		13
Other	7		6		—
Total	$	20	$	19	$	4

116 MOODY'S 2019 10-K

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NOTE 26 RELATED PARTY TRANSACTIONS

Moody’s Corporation made a grant of $12 million to The Moody’s Foundation during the year ended December 31, 2017. The Company did not make any grants to the Foundation in the years ended December 31, 2018 and 2019. The Foundation carries out philanthropic activities primarily in the areas of education and health and human services. Certain members of Moody’s senior management are on the board of the Foundation.

NOTE 27 QUARTERLY FINANCIAL DATA (UNAUDITED)


	Three Months Ended
(amounts in millions, except EPS)	March 31		June 30		September 30		December 31
2019
Revenue	$	1,142	$	1,214	$	1,240	$	1,233
Operating income	$	462	$	483	$	549	$	504
Net income attributable to Moody’s	$	373	$	310	$	380	$	359
EPS:
Basic	$	1.96	$	1.64	$	2.01	$	1.91
Diluted	$	1.93	$	1.62	$	1.99	$	1.88
2018
Revenue	$	1,127	$	1,175	$	1,081	$	1,060
Operating income	$	491	$	534	$	467	$	376
Net income attributable to Moody’s	$	373	$	376	$	310	$	251
EPS:
Basic	$	1.95	$	1.96	$	1.62	$	1.31
Diluted	$	1.92	$	1.94	$	1.59	$	1.29

Basic and diluted EPS are computed for each of the periods presented. The number of weighted average shares outstanding changes as common shares are issued pursuant to employee stock-based compensation plans and for other purposes or as shares are repurchased. Therefore, the sum of basic and diluted EPS for each of the four quarters may not equal the full year basic and diluted EPS.

Net Income attributable to Moody’s in the three months ended June 30, 2019 includes a charge of $53 million ($41 million net of tax) relating to the 2018 Restructuring Program.

Net Income attributable to Moody’s in the three months ended September 30, 2018 includes a $65 million net benefit related to the net impact of U.S. tax reform and a $64 million charge related to an increase to non-U.S. UTPs. Net Income attributable to Moody’s in the three months ended December 31, 2018 includes a charge of $49 million ($37 million net of tax) relating to the 2018 Restructuring Program.

NOTE 28 SUBSEQUENT EVENTS

On February 11, 2020, the Board approved the declaration of a quarterly dividend of $0.56 per share for Moody’s common stock, payable March 18, 2020 to shareholders of record at the close of business on February 25, 2020.

On February 13, 2020, the Company completed the acquisition of Regulatory Data Corporation (RDC), a provider of anti-money laundering and know-your-customer data and due diligence services, for $700 million. Due to the close proximity of the completion of the acquisition to the filing of this Form 10-K, the Company is unable to provide a preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed in the transaction. The Company will disclose a preliminary purchase price allocation in its Form 10-Q for the period ending March 31, 2020.

MOODY'S 2019 10-K 117

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