filings.toolsItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
| 1. Consolidated Financial Statements | Page Number |
| Report of Independent Registered Public Accounting Firm | 60 |
| Consolidated Balance Sheets | 62 |
| Consolidated Statements of Income | 63 |
| Consolidated Statements of Comprehensive Income | 64 |
| Consolidated Statements of Stockholders’ Equity | 65 |
| Consolidated Statements of Cash Flows | 66 |
| Notes to Consolidated Financial Statements | 68 |
| 2. Financial Statement Schedule | |
| Schedule II—Valuation and Qualifying Accounts | 117 |
| All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. | |
| 3. Exhibits Required by Item 601 of Regulation S-K | 118 |
| The information required by this Item is set forth in the Index of Exhibits that precedes the signature page of this Annual Report. |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PayPal Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of PayPal Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 listed in the index appearing under Item 15(a)(2) (collectively referred to as 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 (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of January 1, 2019.
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 Management's report on internal control over financial reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for Income Taxes
As described in Notes 1 and 16 to the consolidated financial statements, the Company's accounting for income taxes requires the reporting of liabilities for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken on tax returns. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertain tax positions related to complex tax laws which may be subject to different interpretations by the taxpayer and respective government taxing authorities. The Company’s effective income tax rate for the year ended December 31, 2019 is 18% as compared to the federal statutory rate of 21%. The difference between the effective income tax rate and the federal statutory rate is primarily the result of foreign income taxed at rates other than the federal statutory rate and stock based compensation deductions, partially offset by incremental tax expense related to the intra-group transfer of intellectual property. The Company also benefits from tax rulings concluded in several jurisdictions, most significantly Singapore and Luxembourg.
The principal considerations for our determination that performing procedures relating to accounting for income taxes is a critical audit matter are there was significant judgment by management in determining the income tax provision and other tax positions, specifically taxable income by jurisdiction taxed at rates other than the federal statutory rate and the identification of uncertain tax positions and assessment of the technical merits of those positions. This in turn led to a high level of effort, and degree of subjectivity, in performing our audit procedures and in evaluating audit evidence relating to income taxes. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures involved testing the effectiveness of controls relating to accounting for income taxes, including controls over the assessment of uncertain tax positions, and determination of foreign income taxed at rates other than the federal statutory rate. These procedures also included, among others, (1) testing the income tax provision, including taxable income by jurisdiction, (2) testing management’s process for evaluating tax rulings and compliance with related requirements in certain foreign jurisdictions such as Singapore and Luxembourg, (3) testing the identification of reserves for unrecognized tax benefits and the reasonableness of the “more likely than not” determination, which includes certain considerations including, but not limited to, jurisdictions involved, court decisions, legislative actions and guidance, and developments in tax examinations, and (4) testing the calculation of the liability for uncertain tax positions by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained for each uncertain tax position selected for testing. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s judgment and estimates, including application of foreign and domestic tax laws and regulations.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 6, 2020
We have served as the Company’s auditor since 2000.
PayPal Holdings, Inc.
CONSOLIDATED BALANCE SHEETS
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions, except par value) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 7,349 | $ | 7,575 | |||
| Short-term investments | 3,412 | 1,534 | |||||
| Accounts receivable, net | 435 | 313 | |||||
| Loans and interest receivable, net of allowances of $258 in 2019 and $172 in 2018 | 3,972 | 2,532 | |||||
| Funds receivable and customer accounts | 22,527 | 20,062 | |||||
| Prepaid expenses and other current assets | 800 | 947 | |||||
| Total current assets | 38,495 | 32,963 | |||||
| Long-term investments | 2,863 | 971 | |||||
| Property and equipment, net | 1,693 | 1,724 | |||||
| Goodwill | 6,212 | 6,284 | |||||
| Intangible assets, net | 778 | 825 | |||||
| Other assets | 1,292 | 565 | |||||
| Total assets | $ | 51,333 | $ | 43,332 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 232 | $ | 281 | |||
| Short-term debt | — | 1,998 | |||||
| Funds payable and amounts due to customers | 24,527 | 21,562 | |||||
| Accrued expenses and other current liabilities | 2,087 | 2,002 | |||||
| Income taxes payable | 73 | 61 | |||||
| Total current liabilities | 26,919 | 25,904 | |||||
| Deferred tax liability and other long-term liabilities | 2,520 | 2,042 | |||||
| Long-term debt | 4,965 | — | |||||
| Total liabilities | 34,404 | 27,946 | |||||
| Commitments and contingencies (Note 13) | |||||||
| Equity: | |||||||
| Common stock, $0.0001 par value; 4,000 shares authorized; 1,173 and 1,174 shares outstanding as of December 31, 2019 and 2018, respectively | — | — | |||||
| Preferred stock, $0.0001 par value; 100 shares authorized, unissued | — | — | |||||
| Treasury stock at cost, 105 and 91 shares as of December 31, 2019 and 2018, respectively | (6,872 | ) | (5,511 | ) | |||
| Additional paid-in-capital | 15,588 | 14,939 | |||||
| Retained earnings | 8,342 | 5,880 | |||||
| Accumulated other comprehensive income (loss) | (173 | ) | 78 | ||||
| Total PayPal Stockholders’ equity | 16,885 | 15,386 | |||||
| Noncontrolling interest | 44 | — | |||||
| Total equity | 16,929 | 15,386 | |||||
| Total liabilities and equity | $ | 51,333 | $ | 43,332 |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions, except for per share amounts) | |||||||||||
| Net revenues | $ | 17,772 | $ | 15,451 | $ | 13,094 | |||||
| Operating expenses: | |||||||||||
| Transaction expense | 6,790 | 5,581 | 4,419 | ||||||||
| Transaction and loan losses | 1,380 | 1,274 | 1,011 | ||||||||
| Customer support and operations | 1,615 | 1,407 | 1,265 | ||||||||
| Sales and marketing | 1,401 | 1,314 | 1,142 | ||||||||
| Technology and development | 2,085 | 1,831 | 1,740 | ||||||||
| General and administrative | 1,711 | 1,541 | 1,258 | ||||||||
| Restructuring and other charges | 71 | 309 | 132 | ||||||||
| Total operating expenses | 15,053 | 13,257 | 10,967 | ||||||||
| Operating income | 2,719 | 2,194 | 2,127 | ||||||||
| Other income (expense), net | 279 | 182 | 73 | ||||||||
| Income before income taxes | 2,998 | 2,376 | 2,200 | ||||||||
| Income tax expense | 539 | 319 | 405 | ||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | |||||
| Net income per share: | |||||||||||
| Basic | $ | 2.09 | $ | 1.74 | $ | 1.49 | |||||
| Diluted | $ | 2.07 | $ | 1.71 | $ | 1.47 | |||||
| Weighted average shares: | |||||||||||
| Basic | 1,174 | 1,184 | 1,203 | ||||||||
| Diluted | 1,188 | 1,203 | 1,221 |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | |||||
| Other comprehensive income (loss), net of reclassification adjustments: | |||||||||||
| Foreign currency translation adjustments (“CTA”) | (57 | ) | (68 | ) | 43 | ||||||
| Net investment hedge CTA loss | (31 | ) | — | — | |||||||
| Unrealized (losses) gains on cash flow hedges, net | (176 | ) | 293 | (242 | ) | ||||||
| Tax benefit (expense) on unrealized (losses) gains on cash flow hedges, net | 3 | (5 | ) | 4 | |||||||
| Unrealized gains (losses) on investments, net | 15 | (1 | ) | (7 | ) | ||||||
| Tax (expense) benefit on unrealized gains (losses) on investments, net | (5 | ) | 1 | 1 | |||||||
| Other comprehensive income (loss), net of tax | (251 | ) | 220 | (201 | ) | ||||||
| Comprehensive income | $ | 2,208 | $ | 2,277 | $ | 1,594 |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interest | Total Equity | ||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Balances at December 31, 2016 | 1,207 | $ | (995 | ) | $ | 13,579 | $ | 59 | $ | 2,069 | $ | — | $ | 14,712 | ||||||||||||
| Net income | — | — | — | — | 1,795 | — | 1,795 | |||||||||||||||||||
| Foreign currency translation | — | — | — | 43 | — | — | 43 | |||||||||||||||||||
| Unrealized losses on cash flow hedges, net | — | — | — | (242 | ) | — | — | (242 | ) | |||||||||||||||||
| Tax benefit on unrealized losses on cash flow hedges, net | — | — | — | 4 | — | — | 4 | |||||||||||||||||||
| Unrealized losses on investments, net | — | — | — | (7 | ) | — | — | (7 | ) | |||||||||||||||||
| Tax benefit on unrealized losses on investments, net | — | — | — | 1 | — | — | 1 | |||||||||||||||||||
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 13 | — | (21 | ) | — | — | — | (21 | ) | |||||||||||||||||
| Common stock repurchased | (20 | ) | (1,006 | ) | — | — | — | — | (1,006 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 756 | — | — | — | 756 | |||||||||||||||||||
| Income tax adjustment for intra entity transfers | — | — | — | — | (41 | ) | — | (41 | ) | |||||||||||||||||
| Balances at December 31, 2017 | 1,200 | $ | (2,001 | ) | $ | 14,314 | $ | (142 | ) | $ | 3,823 | $ | — | $ | 15,994 | |||||||||||
| Net income | — | — | — | — | 2,057 | — | 2,057 | |||||||||||||||||||
| Foreign currency translation | — | — | — | (68 | ) | — | — | (68 | ) | |||||||||||||||||
| Unrealized gains on cash flow hedges, net | — | — | — | 293 | — | — | 293 | |||||||||||||||||||
| Tax expense on unrealized gains on cash flow hedges, net | — | — | — | (5 | ) | — | — | (5 | ) | |||||||||||||||||
| Unrealized losses on investments, net | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||
| Tax benefit on unrealized losses on investments, net | — | — | — | 1 | — | — | 1 | |||||||||||||||||||
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 18 | — | (251 | ) | — | — | — | (251 | ) | |||||||||||||||||
| Common stock repurchased | (44 | ) | (3,510 | ) | (15 | ) | — | — | — | (3,525 | ) | |||||||||||||||
| Stock-based compensation | — | — | 891 | — | — | — | 891 | |||||||||||||||||||
| Balances at December 31, 2018 | 1,174 | $ | (5,511 | ) | $ | 14,939 | $ | 78 | $ | 5,880 | $ | — | $ | 15,386 | ||||||||||||
| Adoption of lease accounting standard | 3 | — | 3 | |||||||||||||||||||||||
| Net income | — | — | — | — | 2,459 | — | 2,459 | |||||||||||||||||||
| Foreign currency translation | — | — | — | (57 | ) | — | — | (57 | ) | |||||||||||||||||
| Net investment hedge CTA loss | — | — | — | (31 | ) | — | — | (31 | ) | |||||||||||||||||
| Unrealized losses on cash flow hedges, net | — | — | — | (176 | ) | — | — | (176 | ) | |||||||||||||||||
| Tax benefit on unrealized losses on cash flow hedges, net | — | — | — | 3 | — | — | 3 | |||||||||||||||||||
| Unrealized gains on investments, net | — | — | — | 15 | — | — | 15 | |||||||||||||||||||
| Tax expense on unrealized gains on investments, net | — | — | — | (5 | ) | — | — | (5 | ) | |||||||||||||||||
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 13 | — | (365 | ) | — | — | — | (365 | ) | |||||||||||||||||
| Common stock repurchased | (14 | ) | (1,361 | ) | (45 | ) | — | — | — | (1,406 | ) | |||||||||||||||
| Stock-based compensation | — | — | 1,059 | — | — | — | 1,059 | |||||||||||||||||||
| Purchase of noncontrolling interest | — | — | — | — | — | 44 | 44 | |||||||||||||||||||
| Balances at December 31, 2019 | 1,173 | $ | (6,872 | ) | $ | 15,588 | $ | (173 | ) | $ | 8,342 | $ | 44 | $ | 16,929 |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | |||||
| Adjustments: | |||||||||||
| Transaction and loan losses | 1,380 | 1,274 | 1,011 | ||||||||
| Depreciation and amortization | 912 | 776 | 805 | ||||||||
| Stock-based compensation | 1,021 | 853 | 733 | ||||||||
| Deferred income taxes | (269 | ) | (171 | ) | (1,299 | ) | |||||
| Cost basis adjustments to loans and interest receivable held for sale | — | 244 | 92 | ||||||||
| Unrealized (gains) losses on strategic investments | (207 | ) | (86 | ) | — | ||||||
| Other | (150 | ) | (86 | ) | (25 | ) | |||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (120 | ) | (59 | ) | 12 | ||||||
| Changes in loans and interest receivable held for sale, net | 4 | 1,407 | (1,308 | ) | |||||||
| Transaction loss allowance for cash losses, net | (1,079 | ) | (1,046 | ) | (817 | ) | |||||
| Funds receivable | (9 | ) | (19 | ) | — | ||||||
| Other current assets and non-current assets | (566 | ) | (93 | ) | (188 | ) | |||||
| Accounts payable | 4 | 26 | 62 | ||||||||
| Funds payable and amounts due to customers | 499 | 22 | — | ||||||||
| Income taxes payable | (40 | ) | (44 | ) | 19 | ||||||
| Other current liabilities and non-current liabilities | 722 | 428 | 1,639 | ||||||||
| Net cash provided by operating activities | 4,561 | 5,483 | 2,531 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (704 | ) | (823 | ) | (667 | ) | |||||
| Proceeds from sales of property and equipment | 17 | 3 | — | ||||||||
| Changes in principal loans receivable, net | (1,631 | ) | 3,121 | (920 | ) | ||||||
| Purchases of investments | (27,881 | ) | (22,381 | ) | (19,418 | ) | |||||
| Maturities and sales of investments | 24,878 | 21,898 | 18,448 | ||||||||
| Acquisitions, net of cash and restricted cash acquired | (70 | ) | (2,124 | ) | (323 | ) | |||||
| Funds receivable | (342 | ) | 1,146 | (1,605 | ) | ||||||
| Net cash (used in) provided by investing activities | (5,733 | ) | 840 | (4,485 | ) | ||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock | 138 | 144 | 144 | ||||||||
| Purchases of treasury stock | (1,411 | ) | (3,520 | ) | (1,006 | ) | |||||
| Tax withholdings related to net share settlements of restricted stock units and restricted stock awards | (504 | ) | (419 | ) | (166 | ) | |||||
| Borrowings under financing arrangements | 5,471 | 2,075 | 1,800 | ||||||||
| Repayments under financing arrangements | (2,516 | ) | (1,115 | ) | (980 | ) | |||||
| Funds payable and amounts due to customers | 2,510 | 1,573 | 4,292 | ||||||||
| Net cash provided by (used in) financing activities | 3,688 | (1,262 | ) | 4,084 | |||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (6 | ) | (113 | ) | 36 | ||||||
| Net change in cash, cash equivalents, and restricted cash | 2,510 | 4,948 | 2,166 | ||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 13,233 | 8,285 | 6,119 | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 15,743 | $ | 13,233 | $ | 8,285 |
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Supplemental cash flow disclosures: | |||||||||||
| Cash paid for interest | $ | 78 | $ | 69 | $ | 6 | |||||
| Cash paid for income taxes, net | $ | 665 | $ | 328 | $ | 117 | |||||
| The below table reconciles cash, cash equivalents, and restricted cash as reported in the consolidated balance sheets to the total of the same amounts shown in the consolidated statements of cash flows: | |||||||||||
| Cash and cash equivalents | $ | 7,349 | $ | 7,575 | $ | 2,883 | |||||
| Short-term investments | 7 | 16 | 15 | ||||||||
| Funds receivable and customer accounts | 8,387 | 5,642 | 5,387 | ||||||||
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 15,743 | $ | 13,233 | $ | 8,285 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Overview and Summary of Significant Accounting Policies
Overview and Organization
PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person payments through our PayPal, Venmo, and Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products, comprise our proprietary Payments Platform. The terms “we,” “our,” “us,” “the Company,” and “PayPal” mean PayPal Holdings, Inc. and, unless otherwise expressly stated or the context requires, its subsidiaries.
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on important issues such as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the way laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.
Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Noncontrolling interest reported as a component of equity on our consolidated balance sheets represents the equity interests not owned by PayPal and is recorded for consolidated entities we control in which we own less than 100%. Noncontrolling interest is not presented separately on our consolidated statements of income as the amount is de minimis.
Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our consolidated statements of income and our investment balance is included in long-term investments on our consolidated balance sheets. Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our consolidated statements of income. Our investment balance is included in long-term investments on our consolidated balance sheets.
In the opinion of management, these consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the consolidated financial statements for all periods presented. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the year ended December 31, 2019.
Reclassifications
Beginning with the first quarter of 2019, we reclassified certain operating expenses within the consolidated statements of income. Prior period amounts have been reclassified to conform to this presentation. These changes have no impact on our previously reported consolidated net income for prior periods, including total operating expenses, financial position, or cash flows for any periods presented.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The classification changes related primarily to the combination of costs incurred to develop and operate our Payments Platform into a new caption entitled technology and development. This new caption includes: (a) costs incurred in operating, maintaining, and enhancing our Payments Platform, including network and infrastructure costs, which were previously classified in the customer support and operations caption, and (b) costs incurred in developing new and improving existing products, which were previously classified in the product development caption on our consolidated statements of income. In addition, we eliminated the presentation of depreciation and amortization expense as a separate financial statement caption by reclassifying these expenses into financial statement captions aligned with the internal organizations that are the primary beneficiaries of the depreciation and amortization of such assets.
The following tables present the effects of the changes on the presentation of these operating expenses to the previously reported consolidated statements of income:
| Year Ended December 31, 2018 | |||||||||||
| (In millions) | |||||||||||
| As Previously Reported (*) | Adjustments | Reclassified | |||||||||
| Transaction expense | $ | 5,581 | $ | — | $ | 5,581 | |||||
| Transaction and loan losses | 1,274 | — | 1,274 | ||||||||
| Customer support and operations | 1,482 | (75 | ) | 1,407 | |||||||
| Sales and marketing | 1,313 | 1 | 1,314 | ||||||||
| Product development | 1,071 | (1,071 | ) | — | |||||||
| Technology and development | — | 1,831 | 1,831 | ||||||||
| General and administrative | 1,451 | 90 | 1,541 | ||||||||
| Depreciation and amortization | 776 | (776 | ) | — | |||||||
| Restructuring and other charges | 309 | — | 309 | ||||||||
| Total operating expenses | $ | 13,257 | $ | — | $ | 13,257 |
(*) As reported in our 2018 Form 10-K dated February 7, 2019.
| Year Ended December 31, 2017 | |||||||||||
| (In millions) | |||||||||||
| As Previously Reported (*) | Adjustments | Reclassified | |||||||||
| Transaction expense | $ | 4,419 | $ | — | $ | 4,419 | |||||
| Transaction and loan losses | 1,011 | — | 1,011 | ||||||||
| Customer support and operations | 1,364 | (99 | ) | 1,265 | |||||||
| Sales and marketing | 1,128 | 14 | 1,142 | ||||||||
| Product development | 953 | (953 | ) | — | |||||||
| Technology and development | — | 1,740 | 1,740 | ||||||||
| General and administrative | 1,155 | 103 | 1,258 | ||||||||
| Depreciation and amortization | 805 | (805 | ) | — | |||||||
| Restructuring and other charges | 132 | — | 132 | ||||||||
| Total operating expenses | $ | 10,967 | $ | — | $ | 10,967 |
(*) As reported in our 2018 Form 10-K dated February 7, 2019.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loan losses, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and cash equivalents
Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are composed of primarily bank deposits, government and agency securities, and commercial paper.
Investments
Short-term investments include time deposits, government and agency securities, and corporate debt securities with original maturities of greater than three months but less than one year when purchased or maturities of less than one year on the reporting date. Long-term investments include government and agency securities and corporate debt securities with maturities exceeding one year, and our strategic investments. Government and agency securities and corporate debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
We elect to account for foreign currency denominated available-for-sale investments underlying funds receivable and customer accounts, short-term investments, and long-term investments under the fair value option as further discussed in “Note 9—Fair Value Measurement of Assets and Liabilities.” The changes in fair value related to initial measurement and subsequent changes in fair value are included in earnings as a component of other income (expense), net.
Our strategic investments consist of marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies. Marketable equity securities have readily determinable fair values with changes in fair value recorded in other income (expense), net. Non-marketable equity securities include investments that do not have a readily determinable fair value and equity method investments. The investments that do not have readily determinable fair value are measured at cost minus impairment, if any, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net on our consolidated statements of income. Our investments where we have the ability to exercise significant influence, but not control, over the investee are accounted for as equity method investments and our share of the investee’s results of operations is included in other income (expense), net.
We assess whether an impairment loss on our non-marketable equity securities and an other-than-temporary impairment loss on our debt securities and equity method investments has occurred due to declines in fair value or other market conditions. If any impairment is identified for non-marketable equity securities or impairment is considered other than temporary for our debt securities and equity method investments, we write down the investment to its fair value and record the corresponding charge through other income (expense), net in our consolidated statements of income. With respect to our debt securities, this assessment takes into account the severity and duration of the decline in value, our intent to sell the security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, and whether we expect to recover the entire amortized cost basis of the security (that is, whether a credit loss exists).
Loans and interest receivable, net
Loans and interest receivable, net represents merchant receivables originated under our PayPal Working Capital (“PPWC”) product and PayPal Business Loan (“PPBL”) product and international consumer loans originated under PayPal Credit product. In the U.S., we partner with independent chartered financial institutions that extend credit to the merchant using our PPWC product or PPBL product, and purchase the related receivables extended by the independent chartered financial institutions.
For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and loans in Germany through our Luxembourg banking subsidiary, and we extend working capital loans in Australia through an Australian subsidiary.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As part of our arrangements with independent chartered financial institutions in the U.S., we sell back a participation interest in the pool of merchant receivables. For these arrangements, gains or losses on the sale of the participation interest are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer. The independent chartered financial institutions have no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institutions have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of merchant receivables. All risks of loss are shared pro rata based on participation interests held among all participating stakeholders. We apply a control-oriented, financial-components approach and account for the asset transfer as a sale and derecognize the portion of the participation interest for which control has been surrendered.
Loans, advances, and interest and fees receivable are reported at their outstanding principal balances, net of any participation interest sold and pro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. We maintain the servicing rights for the entire pool of consumer and merchant receivables outstanding and receive a fee approximating the fair value for servicing the assets underlying the participation interest sold.
The terms of our consumer relationships require us to submit monthly bills to the consumer detailing loan repayment requirements. The terms also allow us to charge the consumer interest and fees in certain circumstances. Due to the relatively small dollar amount of individual loans and interest receivable, we do not require collateral on these balances.
U.S. Consumer Credit Portfolio
In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank (“Synchrony”). Following the closing of this transaction in July 2018, Synchrony became the exclusive issuer of the PayPal Credit online consumer financing program in the U.S. We no longer hold an ownership interest in the receivables generated through the program (other than charged off or designated to be charged off receivables) and thus, no longer record these receivables on our consolidated financial statements. PayPal earns a revenue share on the portfolio of consumer receivables owned by Synchrony, which includes both the sold and newly generated receivables, and it is recorded in revenue from other value added services on our consolidated financial statements. See “Note 11—Loans and Interest Receivable” for additional information related to this arrangement.
Until the transaction with Synchrony closed, we continued to work with independent chartered financial institutions to extend credit to U.S. consumers using our PayPal Credit product. We purchased the related receivables extended by independent chartered financial institutions until July 2018. As part of the arrangements we had with the independent chartered financial institutions in the U.S., we sold back a participation interest in the pool of U.S. consumer receivables outstanding under PayPal Credit consumer accounts. For these arrangements, gains or losses on the sale of the participation interest were not material as the carrying amount of the participation interest sold approximated the fair value at time of transfer.
Allowance for loans and interest receivable
The allowance for loans and interest receivable represents management’s estimate of incurred losses inherent in our loans and interest receivables. Increases to the allowance for loans receivables are reflected as a component of transaction and loan losses on our consolidated financial statements. The evaluation process to assess the adequacy of allowances is subject to numerous estimates and principle judgments.
For our consumer loans receivable, the allowance is primarily based on forecasted principal balance delinquency rates (“roll rates”). Roll rates are the percentage of balances which we estimate will migrate from one stage of delinquency to the next based on our historical experience, as well as external factors such as estimated bankruptcies and levels of unemployment. Roll rates are applied to the principal amount of our consumer receivables for each stage of delinquency, from current to 180 days past the payment due date, in order to estimate the principal loans which have incurred losses and are probable to be charged off. We charge off consumer loan receivable balances in the month in which a customer’s balance becomes 180 days past the payment due date.
In connection with our agreement to sell our U.S. consumer credit receivables to Synchrony and the designation of that portfolio as held for sale, in November 2017, we reversed the corresponding allowances against those loans and interest receivable balances. Such allowances on any newly originated U.S. consumer loans and interest receivables, held for sale were not established. Adjustments to the cost basis of this portfolio until the sale was completed, which were primarily driven by charge-offs, were recorded in restructuring and other charges in our consolidated statements of income.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For merchant loans and advances receivable, the allowance is primarily based on principal balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model. The determination of delinquency, from current to 180 days past due, for principal balances related to merchant receivables outstanding is based on the current expected or contractual repayment period of the loan or advance and interest or fixed fee as compared to the original expected or contractual repayment period.
For our PPWC product, there is a general requirement that at least 10% of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days. We calculate the repayment rate of the merchant’s future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For our PPBL product, we receive fixed periodic payments over the contractual term of the loan which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period.
The allowance for loss against interest receivable is primarily determined by applying historical average customer account roll rates to the interest receivable balance in each stage of delinquency to project the value of accounts that have incurred losses and are probable to be charged off. The allowance for fees receivable is primarily based on fee balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model. Increases to the allowance for interest receivable are reflected as a reduction of net revenues in our consolidated statements of income. Increases to the allowance for fees receivable are recognized as a reduction of deferred revenues included in other current liabilities in our consolidated balance sheets.
We charge off the receivables under our PPWC product when the repayments are 180 days past our expectation of repayments and the merchant has not made a payment in the last 60 days or when the repayments are 360 days past due regardless of whether the merchant has made a payment within the last 60 days. We charge off the receivables under our PPBL product when the repayments are 180 days past due.
Bankrupt accounts are charged off within 60 days for merchants and 90 days for consumers after receipt of notification of bankruptcy. Consumer loans receivable past the payment due date continue to accrue interest until such time as they are charged off. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.
Customer accounts
We hold all customer balances, both in the U.S. and internationally, as direct claims against us which are reflected on our consolidated balance sheets as a liability classified as amounts due to customers. Certain jurisdictions where PayPal operates require us to hold eligible liquid assets, as defined by applicable regulatory requirements and commercial law in these jurisdictions, equal to at least 100% of the aggregate amount of all customer balances. Therefore, we restrict the use of the assets underlying the customer balances to meet these regulatory requirements and separately classify the assets as customer accounts in our consolidated balance sheets. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers. Customer funds whereby PayPal is an agent and custodian on behalf of our customers are not reflected on our consolidated balance sheet. These funds include U.S. dollar funds which are deposited at one or more third-party financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) and are eligible for FDIC pass-through insurance (subject to applicable limits).
In June 2018, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”) agreed that PayPal’s management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to be used for European and U.S. credit activities. During the year ended December 31, 2019, an additional amount of $500 million was designated by management to fund such credit activities. As of December 31, 2019, the cumulative amount approved by management to be designated for credit activities aggregated to $2.0 billion and represented approximately 31% of European customer balances potentially available for corporate use by us at that date as determined by applying financial regulations maintained by the CSSF. On the date PayPal’s management designates the European customer balances held in our Luxembourg banking subsidiary to be used to extend credit, the balances are classified as cash and cash equivalents and no longer classified as customer accounts on our consolidated balance sheets. The remaining assets underlying the customer balances remain separately classified as customer accounts on our consolidated balance sheets. We do not commingle these customer accounts with corporate funds and maintain these assets separately in interest and non-interest bearing bank deposits, time deposits, corporate debt securities, and government and agency securities. See “Note 8—Funds Receivable and Customer Accounts and Investments” for additional information related to customer accounts.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We have generally presented changes in funds receivable and customer accounts as cash flows from investing activities in our consolidated statements of cash flows based on the nature of the activity underlying our customer accounts.
Funds receivable and funds payable
Funds receivable and funds payable arise due to the time required to initiate collection from and clear transactions through external payment networks. When customers fund their PayPal account using their bank account, credit card, debit card, or withdraw funds from their PayPal account to their bank account or through a debit card transaction, there is a clearing period before the cash is received or settled, usually one to three business days for U.S. transactions and generally up to five business days for international transactions. In addition, a portion of our customers’ funds are settled directly to their bank account. These funds are also classified as funds receivable and funds payable and arise due to the time required to initiate collection from and clear transactions through external payment networks. These funds are classified differently on our consolidated statements of cash flows as operating activities based on the nature of this activity.
Property and equipment
Property and equipment consists primarily of computer equipment, software and website development costs, land and buildings, and leasehold improvements. Property and equipment are stated at historical cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets; generally, one to three years for computer equipment and software, including capitalized software and website development costs, three years for furniture and fixtures, up to thirty years for buildings and building improvements, and the shorter of five years or the non-cancelable term of the lease for leasehold improvements.
Leases
We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other liabilities and other long-term liabilities on our consolidated balance sheets. As of December 31, 2019, we had no finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our 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. Our leases do not provide an implicit rate; we use an incremental borrowing rate for specific terms on a collateralized basis based on the information available on the commencement date in determining the present value of lease payments. The ROU asset calculation includes lease payments to be made and excludes lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases. In addition, we have elected the practical expedients related to lease classification, hindsight, and land easement. We apply a single portfolio approach to account for the ROU assets and lease liabilities.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill and intangible assets
Goodwill is tested for impairment at a minimum on an annual basis at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The fair value of the reporting unit is estimated using income and market approaches. The discounted cash flow method, a form of the income approach, uses expected future operating results and a market participant discount rate. The market approach uses comparable company prices and other relevant information generated by market transactions (either publicly traded entities or mergers and acquisitions) to develop pricing metrics to be applied to historical and expected future operating results of the reporting unit. Failure to achieve these expected results, changes in the discount rate or market pricing metrics, may cause a future impairment of goodwill at the reporting unit level. We conducted our annual impairment test of goodwill as of August 31, 2019 and 2018. We determined that no adjustment to the carrying value of goodwill of our reporting unit was required. As of December 31, 2019, we determined that no events occurred, or circumstances changed from August 31, 2019 through December 31, 2019 that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
Intangible assets consist of acquired customer-related intangible assets, marketing related intangibles, developed technology, and other intangible assets. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to eight years. No significant residual value is estimated for intangible assets.
Impairment of long-lived assets
We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate.
Allowance for transaction losses and negative customer balances
We are exposed to transaction losses due to credit card and other payment misuse as well as nonperformance of and credit losses from sellers who accept payments through PayPal. We establish an allowance for estimated losses arising from completing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery of goods or services, Automated Clearing House (“ACH”) returns, buyer protection program claims, account takeovers, and account overdrafts. This allowance represents an accumulation of the estimated amounts necessary to provide for transaction losses incurred as of the reporting date, including those which we have not yet identified. The allowance is monitored regularly and is updated based on actual data received, including actual claims data reported by our claims processors. The allowance is based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, and the mix of transaction and loss types. Additions to the allowance are reflected as a component of transaction and loan losses in our consolidated statements of income. At December 31, 2019 and 2018, the allowance for transaction losses totaled $136 million and $129 million, respectively, and was included in accrued expenses and other current liabilities in our consolidated balance sheets.
Negative customer balances occur primarily when there are insufficient funds in a customer’s PayPal account to cover charges applied for ACH returns, debit card transactions, and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of goods or services. Negative customer balances can be cured by the customer by adding funds to their account, receiving payments, or through back-up funding sources. We also utilize third-party collection agents. For negative customer balances that are not expected to be cured or otherwise collected, we provide an allowance for uncollectible accounts. The allowance is estimated based on known facts and circumstances, internal factors including our experience with similar cases, and historical trends involving collection and write-off patterns. Negative customer balances are included in other current assets, net of the allowance on our consolidated balance sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and loan losses on our consolidated statements of income. The allowance for negative customer balances was $263 million and $215 million at December 31, 2019 and 2018, respectively.
Derivative instruments
See “Note 10—Derivative Instruments” for information related to the derivative instruments.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair value of financial instruments
Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from quoted prices for identical instruments in less active markets, readily available pricing sources for comparable instruments, or models using market observable inputs. As of December 31, 2019 and 2018, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).
Concentrations of risk
Our cash, cash equivalents, accounts receivable, loans and interest receivable, funds receivable and customer accounts, and long-term notes receivable are potentially subject to concentration of credit risk. Cash, cash equivalents, and customer accounts are placed with financial institutions that management believes are of high credit quality. In addition, funds receivable are generated primarily with financial institutions which management believes are of high credit quality. We invest our cash, cash equivalents, and customer accounts primarily in highly liquid, highly rated instruments which are uninsured. From time to time, we may also have corporate deposit balances with financial services institutions which exceed the FDIC insurance limit of $250,000. As part of our cash management process, we perform periodic evaluations of the relative credit standing of these financial institutions. Our accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. Our loans and interest receivable are derived from merchant and consumer financing activities for customers located in the U.S. and internationally. Our long-term notes receivable is derived from the non-cash portion of the proceeds associated with the sale of our U.S. Consumer Credit Portfolio to Synchrony in 2018. As of December 31, 2019 and 2018, one customer accounted for 23% and 26% of net accounts receivables, respectively. No customer accounted for more than 10% of net loans receivable as of December 31, 2019 and 2018. At December 31, 2019 and 2018, one partner accounted for our long-term notes receivable balance, which represented 28% and 53%, respectively, of other assets. During the years ended December 31, 2019, 2018, and 2017, no customer accounted for more than 10% of net revenues. During the years ended December 31, 2019, 2018, and 2017, we earned approximately 14%, 17%, and 20% of revenue from customers on eBay’s Marketplaces platform. No other source of revenue represented more than 10% of our revenue.
Revenue recognition
See “Note 2—Revenue” for information related to our revenue recognition.
Advertising expense
We expense the cost of producing advertisements at the time production occurs and expense the cost of communicating advertisements in the period during which the advertising space or airtime is used as sales and marketing expense. Online advertising expenses are recognized based on the terms of the individual agreements, which are generally over the greater of the ratio of the number of impressions delivered over the total number of contracted impressions, on a pay-per-click basis, or on a straight-line basis over the term of the contract. Advertising expense totaled $399 million, $484 million, and $438 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Internal use software and website development costs
Direct costs incurred to develop software for internal use and website development costs, including those costs incurred in expanding and enhancing our Payments Platform, are capitalized and amortized generally over an estimated useful life of one to three years and are recorded as depreciation and amortization within the financial statement captions aligned with the internal organizations that are the primary beneficiaries of such assets. PayPal capitalized $314 million and $301 million of internally developed software and website development costs for the years ended December 31, 2019 and 2018, respectively. Amortization expense for these capitalized costs was $298 million, $262 million, and $262 million for the years ended December 31, 2019, 2018, and 2017, respectively. Costs related to the maintenance of internal use software and website development costs are expensed as incurred.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Defined contribution savings plans
We have a defined contribution savings plan in the U.S. which qualifies under Section 401(k) of the Internal Revenue Code (the “Code”). Our non-U.S. employees are covered by other savings plans. Expenses related to our defined contribution savings plans are recorded when services are rendered by our employees.
Stock-based compensation
We determine compensation expense associated with restricted stock units and performance based restricted stock units based on the fair value of our common stock on the date of grant. We determine compensation expense associated with stock options based on the estimated grant date fair value method using the Black-Scholes valuation model. We generally recognize compensation expense using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest. Accordingly, stock-based compensation expense for the years ended December 31, 2019, 2018, and 2017 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behavior of our employees as well as trends of actual forfeitures.
Foreign currency
Many of our foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities of our non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenues, costs, and expenses of our non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars using daily exchange rates. Gains and losses resulting from these translations are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains and losses from the remeasurement of foreign currency transactions into the functional currency are recognized as other income (expense), net in our consolidated statements of income.
Income taxes
We account for income taxes using an asset and liability approach which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. We account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred.
Other income (expense), net
Other income (expense), net includes: (i) interest income which consists of interest earned on corporate cash and cash equivalents and short-term and long-term investments, (ii) interest expense which consists of interest expenses, fees, and amortization of debt discount on our long-term debt and credit facilities, (iii) gains (losses) on strategic investments which includes changes in fair value related to our marketable equity securities and observable price changes on our non-marketable equity securities, and (iv) other, which primarily includes foreign currency exchange gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities, and fair value changes on the derivative contracts not designated as hedging instruments.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recent Accounting Guidance
In 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on the measurement of credit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments will reflect our estimate of the current expected credit losses and generally will result in the earlier recognition of allowances for credit losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality indicators by year of origination for most financing receivables for the past five years and to discuss the judgments made and methodologies used when implementing this new lifetime reserve framework. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We adopted the new guidance effective January 1, 2020. We are required to apply the provisions of this guidance as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption.
We are finalizing models, business processes and controls, and model validation testing. Based on the models developed, which incorporate forecasts of macroeconomic conditions, the overall impact of adoption of the Current Expected Credit Loss framework is estimated to be an increase in the range of approximately 65% to 85% in our allowance for loans and interest receivable as compared to the incurred loss framework applied today. The largest drivers of this increase are the change to a lifetime reserve framework at the time the asset is initially recorded and the inclusion of macro-economic factors within the model. Although the timing of the recognition of losses may result in an increase in loan losses in a given period, this increased allowance is not expected to result in a change in our economic losses. At adoption, expected credit loss reserves related to our other financing receivables, available-for-sale debt securities, and other financial instruments will not have a material impact on our consolidated financial statements. The extent of the actual impact of the adoption of this guidance at the effective date will depend on the amount and asset quality of our financial instruments, current and forecasted economic conditions at the time of adoption, and any further refinements made to our models.
In 2019, the FASB issued amended guidance for simplifying certain aspects for the accounting for income taxes. This amended guidance is intended to remove certain exceptions to the general principles in current GAAP, reduce the cost and complexity in accounting for income taxes, and improve financial statement preparers' application of income tax-related guidance. This guidance does not create new accounting requirements. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. We are evaluating the impact of and approach to adopting this amended accounting guidance on our consolidated financial statements.
Recently Adopted Accounting Guidance
In 2016, the FASB issued new accounting guidance related to accounting for leases, which requires lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. As we are not a lessor, other changes in the guidance applicable to lessors do not apply. Additionally, in 2018, the FASB issued codification and targeted improvements to this guidance effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We adopted the new guidance on January 1, 2019, using a modified retrospective basis and applied the optional practical expedients related to the transition. We recorded $498 million for the ROU assets and $516 million for the lease liabilities associated with our operating leases upon adoption. The adoption of this guidance did not have a significant impact on our consolidated statements of earnings, stockholders’ equity, and cash flows. For additional information, see “Note 6—Leases.”
There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable, and we do not believe any of these accounting pronouncements have had, or will have, a material impact on our consolidated financial statements or disclosures.
Note 2—Revenue
PayPal enables its customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our Payments Platform and from other value added services. Our revenues are classified into two categories, transaction revenues and revenues from other value added services.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Transaction Revenues
We earn transaction revenues primarily from fees charged to merchants and consumers on a transaction basis. These fees may have a fixed and variable component. The variable component is generally a percentage of the value of the payment amount and is known at the time the transaction is processed. For a portion of our transactions, the variable component of the fee is eligible for reimbursement when the underlying transaction is approved for a refund. We estimate the amount of fee refunds that will be processed during the quarter and record a provision against our net revenues. The volume of activity processed on our Payments Platform, which results in transaction revenue, is referred to as Total Payment Volume (“TPV”). We define TPV as the value of payments, net of reversals, successfully completed on our Payments Platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions. We earn additional fees on transactions where we perform a currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their debit card or bank account, and other miscellaneous fees.
Our contracts with our customers are usually open-ended and can be terminated by either party without a termination penalty after the notice period has lapsed. Therefore, our contracts are defined at the transaction level and do not extend beyond the service already provided. Our contracts generally renew automatically without significant material rights. Some of our contracts include tiered pricing, based primarily on volume. The fee charged per transaction is adjusted up or down if the volume processed for a specified period is different from prior period defined volumes. We have concluded that this volume-based pricing approach does not constitute a future material right since the discount is within a range typically offered to a class of customers with similar volume. We do not have any capitalized contract costs, and do not carry any material contract balances.
Our service comprises a single performance obligation to complete payments on our Payments Platform for our customers. Using our risk assessment tools, we perform a transaction risk assessment on individual transactions to determine whether a transaction should be authorized for completion on our Payments Platform. When we authorize a transaction, we become obligated to our customer to complete the payment transaction.
We recognize fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments on our Payments Platform. We bear primary responsibility for the fulfillment of the payment service, contract directly with our customers, control the product specifications, and define the value proposal from our services. Further, we have full discretion in determining the fee charged to our customers, which is independent of the costs we incur in instances where we may utilize payment processors or other financial institutions to perform services on our behalf. We therefore bear full margin risk when completing a payment transaction. These fees paid to payment processors and other financial institutions are recognized as transaction expense. We are also responsible for providing customer support.
We provide merchants and consumers with protection programs on most transactions completed on our Payments Platform, except for transactions using our gateway products or where our customer agreements specifically do not provide for protections. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our buyer protection program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our seller protection programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs do not provide a separate service to our customers and we estimate and record associated costs in transaction and loan losses during the period the payment transaction is completed.
Revenues from Other Value Added Services
We earn revenues from other value added services, which is comprised primarily of revenue earned through partnerships, subscription fees, gateway fees, and other services that we provide to our merchants and consumers. These contracts typically have one performance obligation which is provided and recognized over the term of the contract. The transaction price is generally fixed and known at the end of each reporting period; however, for some agreements, it may be necessary to estimate the transaction price using the expected value method. In our partnership agreement with Synchrony, in addition to the revenue share we earn, we also recognized revenue for transition servicing activities which we performed on their behalf through the second quarter of 2019 using a relative selling price determined through the adjusted market assessment approach. We record revenue earned in revenues from other value added services on a net basis when we are considered the agent with respect to processing transactions.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We also earn revenues from interest and fees earned primarily on our credit portfolio of loans receivable and interest earned on certain PayPal customer account balances. Interest and fees earned on the credit portfolio of loans receivable are computed and recognized based on the effective interest method and are presented net of any required reserves and amortization of deferred origination costs.
Disaggregation of Revenue
We determine operating segments based on how our Chief Operating Decision Maker (“CODM”) manages the business, makes operating decisions around the allocation of resources, and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. We operate in one segment and have one reportable segment. Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors are most appropriately depicted through our primary geographical markets and type of revenue categories (i.e., transaction revenues and other value added services.) Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.
The following table presents our revenue disaggregated by primary geographical market and category:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Primary geographical markets | |||||||||||
| United States (“U.S.”) | $ | 9,417 | $ | 8,324 | $ | 7,084 | |||||
| United Kingdom (“U.K.”) | 1,872 | 1,658 | 1,402 | ||||||||
| Other countries(1) | 6,483 | 5,469 | 4,608 | ||||||||
| Total revenues(2) | $ | 17,772 | $ | 15,451 | $ | 13,094 | |||||
| Revenue category | |||||||||||
| Transaction revenues | $ | 16,099 | $ | 13,709 | $ | 11,501 | |||||
| Other value added services | 1,673 | 1,742 | 1,593 | ||||||||
| Total revenues(2) | $ | 17,772 | $ | 15,451 | $ | 13,094 |
(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include $1.1 billion, $1.2 billion and $1.3 billion for the years ended December 31, 2019, 2018, and 2017, respectively, which do not represent revenues recognized in the scope of Accounting Standards Codification Topic 606, Revenue from contracts with customers. Such revenues relate to interest, fees, and gains earned on loan and interest receivables, net and held for sale portfolio, as well as hedging gains or losses and interest earned on certain PayPal customer balances.
Net revenues are attributed to the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Net revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.
Note 3—Net Income Per Share
Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions, except per share amounts) | |||||||||||
| Numerator: | |||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | |||||
| Denominator: | |||||||||||
| Weighted average shares of common stock—basic | 1,174 | 1,184 | 1,203 | ||||||||
| Dilutive effect of equity incentive awards | 14 | 19 | 18 | ||||||||
| Weighted average shares of common stock—diluted | 1,188 | 1,203 | 1,221 | ||||||||
| Net income per share: | |||||||||||
| Basic | $ | 2.09 | $ | 1.74 | $ | 1.49 | |||||
| Diluted | $ | 2.07 | $ | 1.71 | $ | 1.47 | |||||
| Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive | 2 | 1 | 2 |
Note 4—Business Combinations
There were no acquisitions accounted for as business combinations or divestitures completed in 2019.
Acquisitions Completed in 2018
During the year ended December 31, 2018, we completed four acquisitions reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $2.7 billion.
Hyperwallet
We completed the acquisition of HWLT Holdings Inc. (“Hyperwallet”) in November 2018 by acquiring all outstanding shares for a total purchase price of approximately $400 million, consisting of cash consideration. We acquired Hyperwallet to enhance our payout capabilities and improve our ability to provide an integrated suite of payment solutions to e-commerce platforms and marketplaces around the world. The allocation of purchase consideration resulted in approximately $100 million of customer-related intangible assets, approximately $30 million of developed technology intangible assets, and approximately $2 million of marketing related intangible assets with estimated useful lives ranging from 3 to 7 years, funds receivable and customer accounts of $412 million, funds payable and amounts due to customers of $412 million, net liabilities of approximately $32 million, and goodwill of approximately $300 million, which is attributable to the workforce of Hyperwallet and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes.
iZettle
We completed the acquisition of iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all outstanding shares for a total purchase price of $2.2 billion, consisting of cash consideration paid of approximately $2.1 billion (net of cash acquired of $103 million) and restricted shares of PayPal with a fair value of approximately $22 million. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
| (In millions) | |||
| Goodwill | $ | 1,600 | |
| Customer lists and user base | 426 | ||
| Marketing related | 102 | ||
| Developed technology | 121 | ||
| All other | 1 | ||
| Total intangibles | $ | 650 | |
| Cash | 103 | ||
| Funds receivable and customer accounts | 47 | ||
| Funds payable and amounts due to customers | (47 | ) | |
| Deferred tax liabilities, net | (116 | ) | |
| Other net liabilities | (55 | ) | |
| Total purchase consideration | $ | 2,182 |
The intangible assets acquired consist primarily of merchant relationships, trade name/trademarks, developed technology, and existing acquirer relationships with estimated useful lives ranging from 3 to 7 years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is attributable to the workforce of iZettle and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes.
Simility
We completed the acquisition of Simility, Inc. (“Simility”) in July 2018 by acquiring all outstanding shares for a total purchase price of $107 million, consisting of cash consideration. We acquired Simility to enhance our ability to deliver fraud prevention and risk management solutions to merchants globally. The allocation of purchase consideration resulted in approximately $18 million of developed technology intangible assets with an estimated useful life of 3 years, net assets of approximately $10 million, and goodwill of approximately $79 million, which is attributable to the workforce of Simility and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes.
Other Acquisitions
In May 2018, we completed an acquisition which was accounted for as a business combination. The total purchase price for this acquisition was $16 million, consisting of cash consideration. The allocation of purchase consideration resulted in approximately $13 million of developed technology intangible assets with an estimated useful life of 2 years, net liabilities of $1 million, and goodwill of approximately $4 million, which is attributable to the workforce of the acquired company and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes.
Acquisitions Completed in 2017
During 2017, we completed two acquisitions, reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $420 million.
TIO Networks Corp.
We completed the acquisition of TIO Networks Corp. (“TIO”) in July 2017 by acquiring all the outstanding shares of TIO for $2.64 per share in cash. We acquired TIO to expand our scale of operations, complement our product portfolio, and to help accelerate our entry into bill payments. The total purchase price of $238 million consisted of cash consideration. The allocation of purchase consideration resulted in approximately $66 million of technology and customer-related intangible assets with an estimated useful life of 1 to 5 years, net assets of approximately $6 million, and goodwill of approximately $166 million, which is attributable to the workforce of TIO and the synergies expected to arise from the acquisition. We do not expect that all of the goodwill will be deductible for income tax purposes.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In November 2017, we suspended the operations of TIO to protect customer data as part of an ongoing investigation of security vulnerabilities of the TIO platform. In March 2018, our management decided to wind down TIO’s operations. Refer to “Note 5**—Goodwill and Intangible Assets” and “Note 13—**Commitments and Contingencies—Litigation and Regulatory Matters” for further details.
Swift Financial Corporation
We completed the acquisition of Swift Financial Corporation (“Swift”) in September 2017 by acquiring all the outstanding shares of Swift for a total purchase price of $182 million. We acquired Swift to enable us to enhance our underwriting capabilities and strengthen our business financing offerings, helping us to deepen relationships with our existing merchants and expand services to new merchants. The allocation of purchase consideration resulted in approximately $44 million of technology and customer-related intangible assets with an estimated useful life of 1 to 3 years, $169 million of merchant receivables, net liabilities of approximately $129 million, and goodwill of approximately $98 million, which is attributable to the workforce of Swift and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The gross contractual merchant receivables acquired were approximately $213 million. Management estimates that the cash collected will approximate the contractual amounts of merchant receivables.
Note 5—Goodwill and Intangible Assets
Goodwill
The following table presents goodwill balances and adjustments to those balances for the years ended December 31, 2019 and 2018:
| December 31, 2017 | Goodwill Acquired | Adjustments | December 31, 2018 | Goodwill Acquired | Adjustments | December 31, 2019 | |||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||
| Total goodwill | $ | 4,339 | $ | 1,981 | $ | (36 | ) | $ | 6,284 | $ | — | $ | (72 | ) | $ | 6,212 |
The adjustments to goodwill during 2019 pertained to foreign currency translation adjustments. The goodwill acquired during 2018 was associated with the four acquisitions that we completed in 2018. The adjustments to goodwill during 2018 pertain to foreign currency translation adjustments and measurement period adjustments related to our acquisition of Swift and TIO completed in the third quarter of 2017.
Intangible Assets
The components of identifiable intangible assets are as follows:
| December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life (Years) | ||||||||||||||||||||
| (In millions, except years) | |||||||||||||||||||||||||||
| Intangible assets: | |||||||||||||||||||||||||||
| Customer lists and user base | $ | 1,114 | $ | (700 | ) | $ | 414 | 7 | $ | 1,134 | $ | (623 | ) | $ | 511 | 7 | |||||||||||
| Marketing related | 294 | (239 | ) | 55 | 3 | 301 | (207 | ) | 94 | 3 | |||||||||||||||||
| Developed technology | 445 | (343 | ) | 102 | 3 | 453 | (269 | ) | 184 | 3 | |||||||||||||||||
| All other | 436 | (229 | ) | 207 | 7 | 245 | (209 | ) | 36 | 5 | |||||||||||||||||
| Intangible assets, net | $ | 2,289 | $ | (1,511 | ) | $ | 778 | $ | 2,133 | $ | (1,308 | ) | $ | 825 |
All identifiable intangible assets are subject to amortization and no significant residual value is estimated for the intangible assets. Amortization expense for intangible assets was $211 million, $149 million, and $126 million for the years ended December 31, 2019, 2018, and 2017, respectively. We test intangible assets for recoverability when changes in circumstances indicate that the carrying value of an asset group may not be recoverable.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In the fourth quarter of 2019, we completed the acquisition of a 70 percent equity interest in Guofubao Information Technology Co. (GoPay), Ltd. (“GoPay”), a holder of payment business licenses in China. This transaction was accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired is concentrated in the form of licenses. We recorded $190 million of other intangible assets with a weighted average useful life of 7 years.
As a result of the suspension of TIO’s operations announced in November 2017, we performed a test for recoverability of the customer-related intangible assets acquired in connection with our acquisition of TIO in July 2017. The test involved comparing the intangible assets’ carrying values to their future net undiscounted cash flows that we expected would be generated by these intangible assets. Based on the results of this test, we recorded an impairment charge of approximately $30 million in sales and marketing in our consolidated statements of income for 2017, which was measured as the excess of carrying value over the estimated fair value of the assets. The calculation of the estimated fair value of these customer-related intangible assets is based on the income approach utilizing a discounted cash flow methodology. Following recognition of the impairment charge, we amortized the adjusted carrying amount of those assets over their remaining useful life. We also determined that the suspension of TIO’s operations did not indicate that the fair value of the reporting unit to which the TIO goodwill was assigned would be below its carrying amount.
Expected future intangible asset amortization as of December 31, 2019 is as follows:
| Fiscal years: | (In millions) | ||
| 2020 | $ | 213 | |
| 2021 | 161 | ||
| 2022 | 99 | ||
| 2023 | 99 | ||
| 2024 | 98 | ||
| Thereafter | 108 | ||
| $ | 778 |
Note 6—Leases
PayPal enters into various leases, which are primarily real estate operating leases. We use these properties for executive and administrative offices, data centers, product development offices, and customer service and operations centers. Our leases have remaining lease terms of less than one year to eleven years. Many leases include one or more renewal or termination options. These options are not included in our determination of the lease term at commencement unless it is reasonably certain the Company will exercise the option. When we reach a decision to exercise a lease renewal or termination option, we recognize the associated impact to the ROU asset and lease liability.
While a majority of lease payments are based on the stated rate in the lease, some lease payments are subject to annual changes based on the Consumer Price Index or another referenced index. While lease liabilities are not re-measured as a result of changes to the relevant index, such changes to these indices are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. All of PayPal’s variable lease payments are based on an index or rate.
The short-term lease exemption has been adopted for all leases with a duration of less than 12 months.
PayPal’s lease portfolio contains a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of lease expense were as follows:
| December 31, 2019 | ||||
| (In millions, except weighted average figures) | ||||
| Lease expense | ||||
| Operating lease expense | $ | 136 | ||
| Sublease income | (6 | ) | ||
| Total lease expense | $ | 130 | ||
| Other information: | ||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||
| Operating cash flows from operating leases | $ | 131 | ||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 598 | (1) | |
| Operating leases: | ||||
| Operating lease right-of-use assets | $ | 479 | ||
| Other current lease liabilities | 104 | |||
| Operating lease liabilities | 403 | |||
| Total operating lease liabilities | $ | 507 | ||
| Weighted-average remaining lease term | 5.8 years | |||
| Weighted-average discount rate | 5 | % |
(1) Includes opening balance additions of $498 million for operating leases as a result of the adoption of the new lease accounting guidance effective January 1, 2019.
Future minimum lease payments for our operating leases as of December 31, 2019 were as follows:
| Operating Leases | |||
| Fiscal years: | (In millions) | ||
| 2020 | $ | 125 | |
| 2021 | 111 | ||
| 2022 | 77 | ||
| 2023 | 58 | ||
| 2024 | 51 | ||
| Thereafter | 163 | ||
| Total | $ | 585 | |
| Less: present value discount | (78 | ) | |
| Lease liability | $ | 507 |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future minimum lease payments for our operating leases as of December 31, 2018, prior to the adoption of new lease accounting guidance as described in “Note 1—Overview and Summary of Significant Accounting Policies,” were as follows:
| Operating Leases | |||
| Fiscal years: | (In millions) | ||
| 2019 | $ | 124 | |
| 2020 | 111 | ||
| 2021 | 96 | ||
| 2022 | 81 | ||
| 2023 | 63 | ||
| Thereafter | 189 | ||
| Total minimum lease payments | $ | 664 |
Operating lease amounts include minimum lease payments under our non-cancelable operating leases primarily for office and data center facilities. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases. We recognize rent expense under such agreements on a straight-line basis. Rent expense for the years ended December 31, 2019, 2018, and 2017 totaled $130 million, $94 million, and $69 million, respectively.
As of December 31, 2019, we also have additional operating leases that have not yet commenced, primarily for real estate and data centers, with minimum lease payments aggregating to $189 million. These operating leases will commence between fiscal years 2020 and 2021 with lease terms of one year to ten years.
Note 7—Other Financial Statement Details
Property and Equipment, Net
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| Property and equipment, net: | |||||||
| Computer equipment and software | $ | 2,804 | $ | 2,664 | |||
| Internal use software and website development costs | 2,471 | 2,149 | |||||
| Land and buildings | 430 | 408 | |||||
| Leasehold improvements | 460 | 420 | |||||
| Furniture and fixtures | 171 | 147 | |||||
| Development in progress and other | 80 | 119 | |||||
| Total property and equipment, gross | 6,416 | 5,907 | |||||
| Accumulated depreciation | (4,723 | ) | (4,183 | ) | |||
| Total property and equipment, net | $ | 1,693 | $ | 1,724 |
Depreciation expense was $701 million in 2019, $627 million in 2018, and $649 million in 2017.
The net change in purchases of property and equipment included in accounts payable was $42 million in 2019, $10 million in 2018, and not material in 2017.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographical Information
The following table summarizes long-lived assets based on geography, which consist of property and equipment, net and operating lease right-of-use assets:
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| Long-lived assets: | |||||||
| U.S. | $ | 1,862 | $ | 1,566 | |||
| Other countries | 310 | 158 | |||||
| Total long-lived assets | $ | 2,172 | $ | 1,724 |
Long-lived assets attributed to the U.S. and other countries are based upon the country in which the asset is located or owned.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2019:
| Unrealized Gains (Losses) on Cash Flow Hedges | Unrealized Gains (Losses) on Investments | Foreign Currency Translation Adjustment (“CTA”) | Net Investment Hedge CTA Gain (Loss) | Estimated Tax (Expense) Benefit | Total | ||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Beginning balance | $ | 182 | $ | (13 | ) | $ | (93 | ) | $ | — | $ | 2 | $ | 78 | |||||||||
| Other comprehensive income (loss) before reclassifications | 62 | 14 | (57 | ) | (31 | ) | (2 | ) | (14 | ) | |||||||||||||
| Less: Amount of gain (loss) reclassified from AOCI | 238 | (1 | ) | — | — | — | 237 | ||||||||||||||||
| Net current period other comprehensive income (loss) | (176 | ) | 15 | (57 | ) | (31 | ) | (2 | ) | (251 | ) | ||||||||||||
| Ending balance | $ | 6 | $ | 2 | $ | (150 | ) | $ | (31 | ) | $ | — | $ | (173 | ) |
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2018:
| Unrealized Gains (Losses) on Cash Flow Hedges | Unrealized Gains (Losses) on Investments | Foreign CTA | Estimated Tax (Expense) Benefit | Total | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Beginning balance | $ | (111 | ) | $ | (12 | ) | $ | (25 | ) | $ | 6 | $ | (142 | ) | |||||
| Other comprehensive income (loss) before reclassifications | 263 | (1 | ) | (68 | ) | (4 | ) | 190 | |||||||||||
| Less: Amount of gain (loss) reclassified from AOCI | (30 | ) | — | — | — | (30 | ) | ||||||||||||
| Net current period other comprehensive income (loss) | 293 | (1 | ) | (68 | ) | (4 | ) | 220 | |||||||||||
| Ending balance | $ | 182 | $ | (13 | ) | $ | (93 | ) | $ | 2 | $ | 78 |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2017:
| Unrealized Gains (Losses) on Cash Flow Hedges | Unrealized Gains (Losses) on Investments | Foreign CTA | Estimated Tax (Expense) Benefit | Total | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Beginning balance | $ | 131 | $ | (5 | ) | $ | (68 | ) | $ | 1 | $ | 59 | |||||||
| Other comprehensive income (loss) before reclassifications | (225 | ) | (16 | ) | 43 | 5 | (193 | ) | |||||||||||
| Less: Amount of gain (loss) reclassified from AOCI | 17 | (9 | ) | — | — | 8 | |||||||||||||
| Net current period other comprehensive income (loss) | (242 | ) | (7 | ) | 43 | 5 | (201 | ) | |||||||||||
| Ending balance | $ | (111 | ) | $ | (12 | ) | $ | (25 | ) | $ | 6 | $ | (142 | ) |
The following table provides details about reclassifications out of AOCI for the periods presented below:
| Details about AOCI Components | Amount of Gains (Losses) Reclassified from AOCI | Affected Line Item in the Statements of Income | ||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| (In millions) | ||||||||||||||
| Gains (losses) on cash flow hedges**—**foreign exchange contracts | $ | 238 | $ | (30 | ) | $ | 17 | Net revenues | ||||||
| Unrealized losses on investments | (1 | ) | — | (9 | ) | Other income (expense), net | ||||||||
| $ | 237 | $ | (30 | ) | $ | 8 | Income before income taxes | |||||||
| — | — | — | Income tax expense | |||||||||||
| Total reclassifications for the period | $ | 237 | $ | (30 | ) | $ | 8 | Net income |
Other Income (Expense), Net
The following table reconciles the components of other income (expense), net for the periods presented below:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Interest income | $ | 197 | $ | 168 | $ | 85 | |||||
| Interest expense | (115 | ) | (77 | ) | (7 | ) | |||||
| Gains (losses) on strategic investments, net | 208 | 87 | — | ||||||||
| Other | (11 | ) | 4 | (5 | ) | ||||||
| Other income (expense), net | $ | 279 | $ | 182 | $ | 73 |
Refer to “Note 1**—**Overview and Summary of Significant Accounting Policies” for details on the composition of these balances.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 8—Funds Receivable and Customer Accounts and Investments
The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Funds receivable and customer accounts: | |||||||
| Cash and cash equivalents | $ | 8,387 | $ | 5,642 | |||
| Time deposits | 514 | 389 | |||||
| Available-for-sale debt securities | 10,190 | 10,940 | |||||
| Funds receivable | 3,436 | 3,091 | |||||
| Total funds receivable and customer accounts | $ | 22,527 | $ | 20,062 | |||
| Short-term investments: | |||||||
| Time deposits | $ | 614 | $ | 774 | |||
| Available-for-sale debt securities | 2,734 | 685 | |||||
| Restricted cash | 64 | 75 | |||||
| Total short-term investments | $ | 3,412 | $ | 1,534 | |||
| Long-term investments: | |||||||
| Available-for-sale debt securities | $ | 1,025 | $ | 676 | |||
| Restricted cash | — | 2 | |||||
| Strategic investments | 1,838 | 293 | |||||
| Total long-term investments | $ | 2,863 | $ | 971 |
As of December 31, 2019 and 2018, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows:
| December 31, 2019 | |||||||||||||||
| Gross Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| (In millions) | |||||||||||||||
| Funds receivable and customer accounts: | |||||||||||||||
| U.S. government and agency securities | $ | 4,996 | $ | — | $ | — | $ | 4,996 | |||||||
| Foreign government and agency securities | 1,392 | — | — | 1,392 | |||||||||||
| Corporate debt securities | 2,112 | — | — | 2,112 | |||||||||||
| Short-term investments: | |||||||||||||||
| Foreign government and agency securities | 533 | — | — | 533 | |||||||||||
| Corporate debt securities | 1,955 | — | — | 1,955 | |||||||||||
| Long-term investments: | |||||||||||||||
| U.S. government and agency securities | 140 | — | — | 140 | |||||||||||
| Foreign government and agency securities | 207 | — | — | 207 | |||||||||||
| Corporate debt securities | 676 | 2 | — | 678 | |||||||||||
| Total available-for-sale debt securities(1) | $ | 12,011 | $ | 2 | $ | — | $ | 12,013 |
(1) Excludes foreign currency denominated available-for-sale debt securities accounted for under the fair value option. Refer to “Note 9—Fair Value Measurement of Assets and Liabilities.”
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| December 31, 2018 | |||||||||||||||
| Gross Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| (In millions) | |||||||||||||||
| Funds receivable and customer accounts: | |||||||||||||||
| U.S. government and agency securities | $ | 6,945 | $ | 2 | $ | — | $ | 6,947 | |||||||
| Foreign government and agency securities | 772 | — | (1 | ) | 771 | ||||||||||
| Corporate debt securities | 883 | — | — | 883 | |||||||||||
| Short-term investments: | |||||||||||||||
| Corporate debt securities | 393 | — | (3 | ) | 390 | ||||||||||
| Long-term investments: | |||||||||||||||
| Foreign government and agency securities | 38 | — | — | 38 | |||||||||||
| Corporate debt securities | 639 | — | (11 | ) | 628 | ||||||||||
| Total available-for-sale debt securities(1) | $ | 9,670 | $ | 2 | $ | (15 | ) | $ | 9,657 |
(1) Excludes foreign currency denominated available-for-sale debt securities accounted for under the fair value option. Refer to “Note 9—Fair Value Measurement of Assets and Liabilities.”
As of December 31, 2019 and 2018, the gross unrealized losses and estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments by length of time those individual securities have been in a continuous loss position was as follows:
| December 31, 2019 | |||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||
| Fair Value | Gross Unrealized Losses**(1)** | Fair Value | Gross Unrealized Losses**(1)** | Fair Value | Gross Unrealized Losses**(1)** | ||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Funds receivable and customer accounts: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | 2,452 | $ | — | $ | — | $ | — | $ | 2,452 | $ | — | |||||||||||
| Foreign government and agency securities | 563 | — | 30 | — | 593 | — | |||||||||||||||||
| Corporate debt securities | 825 | — | — | — | 825 | — | |||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Foreign government and agency securities | 115 | — | — | — | 115 | — | |||||||||||||||||
| Corporate debt securities | 424 | — | — | — | 424 | — | |||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| U.S. government and agency securities | 100 | — | — | — | 100 | — | |||||||||||||||||
| Foreign government and agency securities | 75 | — | — | — | 75 | — | |||||||||||||||||
| Corporate debt securities | 27 | — | 44 | — | 71 | — | |||||||||||||||||
| Total available-for-sale debt securities | $ | 4,581 | $ | — | $ | 74 | $ | — | $ | 4,655 | $ | — |
(1) — Denotes gross unrealized loss or fair value of less than $1 million in a given position.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| December 31, 2018 | |||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||
| Fair Value | Gross Unrealized Losses**(1)** | Fair Value | Gross Unrealized Losses**(1)** | Fair Value | Gross Unrealized Losses**(1)** | ||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Funds receivable and customer accounts: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | 2,419 | $ | — | $ | 18 | $ | — | $ | 2,437 | $ | — | |||||||||||
| Foreign government and agency securities | 295 | — | 49 | (1 | ) | 344 | (1 | ) | |||||||||||||||
| Corporate debt securities | 281 | — | 7 | — | 288 | — | |||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Corporate debt securities | 57 | — | 333 | (3 | ) | 390 | (3 | ) | |||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Foreign government and agency securities | 10 | — | 28 | — | 38 | — | |||||||||||||||||
| Corporate debt securities | 94 | (2 | ) | 534 | (9 | ) | 628 | (11 | ) | ||||||||||||||
| Total available-for-sale debt securities | $ | 3,156 | $ | (2 | ) | $ | 969 | $ | (13 | ) | $ | 4,125 | $ | (15 | ) |
(1) — Denotes gross unrealized loss or fair value of less than $1 million in a given position.
We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the available-for-sale debt securities. We neither intend nor anticipate the need to sell the securities before recovery. We will continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether an other-than-temporary impairment exists. Amounts reclassified to earnings from unrealized gains and losses were not material for the year ended December 31, 2019 and 2018.
Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows:
| December 31, 2019 | |||||||
| Amortized Cost | Fair Value | ||||||
| (In millions) | |||||||
| One year or less | $ | 9,966 | $ | 9,966 | |||
| After one year through five years | 2,041 | 2,043 | |||||
| After five years through ten years | 4 | 4 | |||||
| Total | $ | 12,011 | $ | 12,013 |
Strategic Investments
Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies. Our marketable equity securities have readily determinable fair values and are recorded as long-term investments on our consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), net. Marketable equity securities totaled $1.3 billion as of December 31, 2019. We had no such securities as of December 31, 2018.
Non-marketable equity securities are recorded in long-term investments on our consolidated balance sheets. As of December 31, 2019, we had $27 million of non-marketable equity securities where we have the ability to exercise significant influence, but not control, over the investee and account for these equity securities using the equity method of accounting. The remaining non-marketable equity securities do not have a readily determinable fair value and we measure these equity investments using the Measurement Alternative. All gains and losses on these investments, realized and unrealized, and our share of earnings or losses from investments accounted for using the equity method are recognized in other income (expense), net on our consolidated statements of income. The carrying value of our non-marketable equity securities totaled $524 million and $293 million as of December 31, 2019 and 2018, respectively.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Measurement Alternative Adjustments
The adjustments to the carrying value of our non-marketable equity securities accounted for under the Measurement Alternative in the year ended December 31, 2019 and 2018 were as follows:
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| Carrying amount, beginning of period | $ | 293 | $ | 88 | |||
| Adjustments related to non-marketable equity securities: | |||||||
| Net additions(1) | 60 | 119 | |||||
| Gross unrealized gains | 144 | 91 | |||||
| Gross unrealized losses and impairments | — | (5 | ) | ||||
| Carrying amount, end of period | $ | 497 | $ | 293 |
(1) Net additions includes additions from purchases and reductions due to sales of securities and reclassifications when Measurement Alternative no longer applies.
Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative held at December 31, 2019 were approximately $230 million and $5 million, respectively. Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative held at December 31, 2018 were approximately $91 million and $5 million, respectively.
Gains (losses) on marketable and non-marketable equity securities, excluding those accounted for using the equity method
Net unrealized gains recognized in the year ended December 31, 2019 and 2018 related to marketable and non-marketable equity securities, excluding those accounted for using the equity method, held at December 31, 2019 and 2018 were approximately $203 million and $86 million, respectively.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 9—Fair Value Measurement of Assets and Liabilities
Financial Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018:
| Balances at December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||
| (In millions) | ||||||||||||
| Assets: | ||||||||||||
| Cash and cash equivalents(1) | $ | 2,835 | $ | — | $ | 2,835 | ||||||
| Short-term investments(2): | ||||||||||||
| Foreign government and agency securities | 757 | — | 757 | |||||||||
| Corporate debt securities | 1,977 | — | 1,977 | |||||||||
| Total short-term investments | $ | 2,734 | $ | — | $ | 2,734 | ||||||
| Funds receivable and customer accounts(3): | ||||||||||||
| Cash and cash equivalents | 683 | — | 683 | |||||||||
| U.S. government and agency securities | 4,996 | — | 4,996 | |||||||||
| Foreign government and agency securities | 2,653 | — | 2,653 | |||||||||
| Corporate debt securities | 2,541 | — | 2,541 | |||||||||
| Total funds receivable and customer accounts | $ | 10,873 | $ | — | $ | 10,873 | ||||||
| Derivatives | 135 | — | 135 | |||||||||
| Long-term investments(4): | ||||||||||||
| U.S. government and agency securities | 140 | — | 140 | |||||||||
| Foreign government and agency securities | 207 | — | 207 | |||||||||
| Corporate debt securities | 678 | — | 678 | |||||||||
| Marketable equity securities | 1,314 | 1,314 | — | |||||||||
| Total long-term investments | $ | 2,339 | $ | 1,314 | $ | 1,025 | ||||||
| Total financial assets | $ | 18,916 | $ | 1,314 | $ | 17,602 | ||||||
| Liabilities: | ||||||||||||
| Derivatives | $ | 122 | $ | — | $ | 122 |
(1) Excludes cash of $4.5 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $64 million and time deposits of $614 million not measured and recorded at fair value.
(3) Excludes cash, time deposits, and funds receivable of $11.7 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes non-marketable equity securities of $524 million measured using the Measurement Alternative or equity method accounting.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Balances at December 31, 2018 | Significant Other Observable Inputs (Level 2) | |||||||
| (In millions) | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents(1) | $ | 3,678 | $ | 3,678 | ||||
| Short-term investments(2): | ||||||||
| Foreign government and agency securities | 235 | 235 | ||||||
| Corporate debt securities | 450 | 450 | ||||||
| Total short-term investments | $ | 685 | $ | 685 | ||||
| Funds receivable and customer accounts(3): | ||||||||
| Cash and cash equivalents | 605 | 605 | ||||||
| U.S. government and agency securities | 6,946 | 6,946 | ||||||
| Foreign government and agency securities | 2,434 | 2,434 | ||||||
| Corporate debt securities | 1,560 | 1,560 | ||||||
| Total funds receivable and customer accounts | $ | 11,545 | $ | 11,545 | ||||
| Derivatives | 320 | 320 | ||||||
| Long-term investments(2),(4): | ||||||||
| Foreign government and agency securities | 48 | 48 | ||||||
| Corporate debt securities | 628 | 628 | ||||||
| Total long-term investments | $ | 676 | $ | 676 | ||||
| Total financial assets | $ | 16,904 | $ | 16,904 | ||||
| Liabilities: | ||||||||
| Derivatives | $ | 67 | $ | 67 |
(1) Excludes cash of $3.9 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $77 million and time deposits of $774 million not measured and recorded at fair value.
(3) Excludes cash, time deposits, and funds receivable of $8.5 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes non-marketable equity investments of $293 million measured using the Measurement Alternative.
Our marketable equity securities are valued using quoted prices for identical assets in active markets (Level 1). All other financial assets and liabilities are valued using quoted prices for identical instruments in less active markets, readily available pricing sources for comparable instruments, or models using market observable inputs (Level 2).
A majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as currency rates, interest rate yield curves, option volatility, and equity prices. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months.
We did not have any transfers of financial instruments between valuation levels during the years ended December 31, 2019 and 2018. As of December 31, 2019, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We elect to account for foreign currency denominated available-for-sale debt securities under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the consolidated statements of income to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the corresponding foreign exchange gains and losses relating to customer liabilities. The following table summarizes the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments and long-term investments under the fair value option as of December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Funds receivable and customer accounts | $ | 1,690 | $ | 2,339 | |||
| Short-term investments | $ | 246 | $ | 295 | |||
| Long-term investments | $ | — | $ | 10 |
The following table summarizes the gains (losses) from fair value changes recognized in other income (expense), net related to the available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments under the fair value option for the years ended December 31, 2019 and 2018:
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| Funds receivable and customer accounts | $ | (43 | ) | $ | (117 | ) | |
| Short-term investments | $ | (8 | ) | $ | (15 | ) |
Financial Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
The following tables summarizes our financial assets and liabilities held as of December 31, 2019 and 2018 for which a non-recurring fair value measurement was recorded during the year ended December 31, 2019 and 2018:
| Year Ended December 31, 2019 | Significant Other Observable Inputs (Level 2) | ||||||
| (In millions) | |||||||
| Non-marketable equity investments measured using the Measurement Alternative(1) | $ | 303 | 303 |
(1) Excludes non-marketable equity investments of $194 million accounted for under the Measurement Alternative for which no observable price changes occurred during the year ended December 31, 2019.
| Year Ended December 31, 2018 | Significant Other Observable Inputs (Level 2) | ||||||
| (In millions) | |||||||
| Non-marketable equity investments measured using the Measurement Alternative(1) | $ | 116 | 116 |
(1) Excludes non-marketable equity investments of $177 million accounted for under the Measurement Alternative for which no observable price changes occurred during the year ended December 31, 2018.
We measured these non-marketable equity investments accounted for under the Measurement Alternative at cost minus impairment, if any, adjusted for observable price changes in orderly transactions for an identical or a similar investment in the same issuer.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Financial Assets and Liabilities Not Measured and Recorded at Fair Value
Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, certain customer accounts, notes receivable, and short-term debt are carried at amortized cost, which approximates their fair value. Our long-term debt carried at amortized cost had a carrying value and fair value of approximately $5.0 billion as of December 31, 2019. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1; restricted cash, time deposits, certain customer accounts, short-term debt, and long-term debt would be classified as Level 2; and the remaining financial instruments would be classified as Level 3 in the fair value hierarchy.
Note 10—Derivative Instruments
Summary of Derivative Instruments
Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. We do not use any derivative instruments for trading or speculative purposes.
Cash Flow Hedges
We transact business in various foreign currencies and have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues denominated in foreign currencies. The objective of the foreign currency exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same we conclude the hedge will be perfectly effective. We did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We report cash flows arising from derivative instruments consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as cash flow hedges are classified in cash flows from operating activities on our consolidated statements of cash flows.
As of December 31, 2019, we estimate that $18 million of net derivative gains related to our cash flow hedges included in AOCI are expected to be reclassified into earnings within the next 12 months. During the years ended December 31, 2019, 2018, and 2017, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction. If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report the derivative’s gain or loss in AOCI until the forecasted transaction affects earnings, at which point we also reclassify it into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedges and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates.
Net Investment Hedge
We use a forward foreign currency exchange contract to reduce the foreign currency risk related to our investment in a foreign subsidiary. This derivative is designated as a net investment hedge and accordingly, the derivative's gain and loss is recorded in AOCI as part of foreign currency translation. The accumulated gains and losses associated with this instrument will remain in AOCI until the foreign subsidiary is sold or substantially liquidated, at which point they will be reclassified into earnings. We did not exclude any component of the changes in fair value of the derivative instrument from the assessment of hedge effectiveness. The cash flow associated with the derivative designated as a net investment hedge is classified in cash flows from investing activities on our consolidated statements of cash flows.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During the year ended December 31, 2019, we recognized $31 million in unrealized loss on our foreign currency exchange contract designated as a net investment hedge within the foreign currency translation section of other comprehensive income. During the year ended December 31, 2018, we did not have a net investment hedge. Additionally, we have not reclassified any gains or losses from AOCI into earnings during any of the periods presented.
Foreign Currency Exchange Contracts Not Designated As Hedging Instruments
We have a foreign currency exposure management program whereby we use foreign currency exchange contracts to offset the foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. The gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities are recorded in other income (expense), net, which is offset by the gains and losses on these foreign exchange contracts. The cash flows associated with our non-designated derivatives that hedge foreign currency denominated monetary assets and liabilities are classified in cash flows from operating activities on our consolidated statements of cash flows.
Fair Value of Derivative Contracts
The fair value of our outstanding derivative instruments as of December 31, 2019 and 2018 was as follows:
| Balance Sheet Location | As of December 31, | ||||||||
| 2019 | 2018 | ||||||||
| Derivative Assets: | (In millions) | ||||||||
| Foreign currency exchange contracts designated as hedging instruments | Other current assets | $ | 45 | $ | 170 | ||||
| Foreign currency exchange contracts designated as hedging instruments | Other assets (non-current) | 1 | 11 | ||||||
| Foreign currency exchange contracts not designated as hedging instruments | Other current assets | 89 | 139 | ||||||
| Total derivative assets | $ | 135 | $ | 320 | |||||
| Derivative Liabilities: | |||||||||
| Foreign currency exchange contracts designated as hedging instruments | Other current liabilities | $ | 58 | $ | 3 | ||||
| Foreign currency exchange contracts designated as hedging instruments | Other long-term liabilities | 13 | — | ||||||
| Foreign currency exchange contracts not designated as hedging instruments | Other current liabilities | 51 | 64 | ||||||
| Total derivative liabilities | $ | 122 | $ | 67 |
Master Netting Agreements - Rights of Setoff
Under master netting agreements with respective counterparties to our foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our consolidated balance sheets. Rights of setoff associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities by $92 million as of December 31, 2019 and $45 million as of December 31, 2018. We have entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We posted $12 million in cash collateral related to our derivative liabilities as of December 31, 2019 and no cash collateral as of December 31, 2018, which is recognized in other current assets on our consolidated balance sheets, and is related to the right to reclaim cash collateral. We received $39 million and $195 million in counterparty cash collateral related to our derivative assets as of December 31, 2019 and 2018, respectively, which is recognized in other current liabilities on our consolidated balance sheets and is related to the obligation to return cash collateral. We received no counterparty non-cash collateral as of December 31, 2019 and $6 million as of December 31, 2018 in the form of debt securities.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effect of Derivative Contracts on Consolidated Statements of Income
The following table provides the location in the consolidated statements of income and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Net revenues | |||||||||||
| Total amounts presented in the consolidated statements of income in which the effects of cash flow hedges are recorded | $ | 17,772 | $ | 15,451 | $ | 13,094 | |||||
| Gains (losses) on foreign exchange contracts designated as cash flow hedges reclassified from AOCI | $ | 238 | $ | (30 | ) | $ | 17 |
The following table provides the location in the consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Gains (losses) on foreign exchange contracts recognized in other income (expense), net | $ | 24 | $ | 38 | $ | (54 | ) | ||||
| Gains (losses) on foreign exchange contracts recognized in net revenues | — | 7 | — | ||||||||
| Total gains (losses) recognized from foreign exchange contracts not designated as hedging instruments | $ | 24 | $ | 45 | $ | (54 | ) |
Notional Amounts of Derivative Contracts
Derivative transactions are measured in terms of the notional amount; however, this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged but is used only as the underlying basis on which the value of foreign currency exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| Foreign exchange contracts designated as hedging instruments | $ | 4,550 | $ | 3,831 | |||
| Foreign exchange contracts not designated as hedging instruments | 17,131 | 10,703 | |||||
| Total | $ | 21,681 | $ | 14,534 |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11—Loans and Interest Receivable
We offer credit products to consumers and certain small and medium-sized merchants. We work with independent chartered financial institutions that extend credit to the consumer or merchant using our credit products in the U.S. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and working capital loans in Germany through our Luxembourg banking subsidiary, and extend working capital loans in Australia through an Australian subsidiary. Prior to July 2018, we purchased receivables related to credit extended to U.S. consumers by independent chartered financial institutions and were responsible for servicing functions related to that portfolio. Following the completion of the sale of our U.S. consumer credit receivables portfolio to Synchrony in July 2018, we no longer purchased receivables related to the U.S. consumer loans, but remained responsible for the servicing functions related to the sold portfolio through a transition period which ended in the second quarter of 2019. We purchase receivables related to credit extended to U.S. merchants by an independent chartered financial institution and are responsible for servicing functions related to that portfolio. During the year ended December 31, 2019 and 2018, we purchased approximately $4.7 billion and $8.1 billion in credit receivables, respectively. The credit receivables purchased during the year ended December 31, 2018 included purchases associated with our U.S. consumer credit receivables portfolio, which was designated as held for sale in November 2017 until the completion of the sale to Synchrony in July 2018.
In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony. Historically, this portfolio was reported as outstanding principal balances, net of any participation interest sold and pro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. Upon approval by our Board of Directors to sell these receivables, the portfolio was reclassified as held for sale and recorded at the lower of cost or fair value, determined on an aggregate basis. For the year ended December 31, 2017, due to the designation as held for sale, the associated allowance for this portfolio was reversed, resulting in an increase of approximately $39 million in revenue from other value added services and a decrease of approximately $283 million in transaction and loan losses on our consolidated statements of income. In July 2018, we completed the sale of this portfolio to Synchrony, approximately at par, for total consideration of $6.9 billion, which includes cash consideration of $6.5 billion and a long-term note receivable in the amount of $426 million, which was recorded at its present value at the time of the completion of the sale in the amount of $261 million in other assets on our consolidated balance sheets. This amount is subject to accretion over the term of the arrangement, and is not reflected as a cash item on our consolidated statements of cash flows. The purchase price was subject to post-closing true-up and certain other adjustments under the terms of the purchase agreement. During the year ended December 31, 2018, additional expenses incurred due to this transaction resulted in a net loss of approximately $40 million recorded in restructuring and other expenses on our consolidated statements of income, and during the year ended December 31, 2019, we recorded a gain of $7 million representing an adjustment to the consideration exchanged in the sale. PayPal also earns a revenue share on the portfolio of consumer receivables owned by Synchrony, which includes both the sold and newly generated receivables. The transaction was accounted for as a true sale based on our determination that it met all the necessary criteria for such accounting, including legal isolation for transferred assets, ability of the transferee to pledge or exchange the transferred assets without constraint, and the transfer of control. We also concluded that our continuing involvement in the revenue share arrangement does not invalidate this determination.
Consumer Receivables
We offer credit products to consumers who choose PayPal Credit at checkout. As of December 31, 2019 and 2018, the outstanding balance of consumer receivables, which primarily consisted of loans and interest receivable due from international consumer accounts, was $1.3 billion and $704 million, respectively.
We closely monitor credit quality for our consumer receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history with PayPal Credit products as well as other measures. We use delinquency status and trends to assist in making new and ongoing credit decisions, to adjust our models, to plan our collection practices and strategies, and in our determination of our allowance for consumer loans and interest receivable.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consumer Receivables Delinquency and Allowance
The following tables present the delinquency status of the principal amount of consumer loans and interest receivable. The amounts shown below are based on the number of days past the billing date to the consumer. Current represents balances that are within 30 days of the billing date.
| December 31, 2019 | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||
| Current | 30 - 59 Days | 60 - 89 Days | 90 - 180 Days | Total Past 30 days | Total | |||||||||||||||||
| $ | 1,242 | $ | 37 | $ | 15 | $ | 28 | $ | 80 | $ | 1,322 | |||||||||||
| 93.9 | % | 2.8 | % | 1.1 | % | 2.2 | % | 6.1 | % | 100 | % |
| December 31, 2018 | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||
| Current | 30 - 59 Days | 60 - 89 Days | 90 - 180 Days | Total Past 30 days | Total | |||||||||||||||||
| $ | 668 | $ | 18 | $ | 6 | $ | 12 | $ | 36 | $ | 704 | |||||||||||
| 94.9 | % | 2.5 | % | 0.9 | % | 1.7 | % | 5.1 | % | 100 | % |
We charge off consumer loan receivable balances in the month in which a customer’s balance becomes 180 days past the payment due date. Bankrupt accounts are charged off within 90 days after receipt of notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until they are charged off. We record an allowance for loss against the interest receivable.
The following table summarizes the activity in the allowance for consumer loans and interest receivable for the years ended December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | ||||||||||||||||||
| Consumer Loans Receivable | Interest Receivable | Total Allowance | Consumer Loans Receivable | Interest Receivable | Total Allowance**(1)** | ||||||||||||||
| (In millions) | |||||||||||||||||||
| Beginning Balance | $ | 27 | $ | 3 | $ | 30 | $ | 57 | $ | 6 | $ | 63 | |||||||
| Provisions | 34 | 11 | 45 | 53 | 8 | 61 | |||||||||||||
| Charge-offs | (43 | ) | (6 | ) | (49 | ) | (104 | ) | (11 | ) | (115 | ) | |||||||
| Recoveries(2) | 31 | — | 31 | 21 | — | 21 | |||||||||||||
| Ending Balance | $ | 49 | $ | 8 | $ | 57 | $ | 27 | $ | 3 | $ | 30 |
(1) Beginning balance includes approximately $50 million of U.S. consumer credit receivables that were fully reserved and have been charged off as of December 31, 2018.
(2) The recoveries were primarily related to fully charged off U.S. consumer receivables not subject to the sale to Synchrony.
The tables above exclude receivables from other consumer credit products of $92 million and $96 million at December 31, 2019 and 2018, respectively, and allowances of $10 million and $12 million at December 31, 2019 and 2018, respectively.
The provision for loan losses relating to our consumer loans receivable portfolio is recognized in transaction and loan losses. The provision for interest receivable due to interest earned on our consumer loans receivable portfolio is recognized in net revenues from other value added services as a reduction to revenue. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.
Merchant Receivables
We offer business financing solutions to certain small and medium-sized merchants through our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products. As of December 31, 2019 and 2018, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $2.8 billion and $1.9 billion, respectively, net of the participation interest sold to an independent chartered financial institution of $124 million and $84 million, respectively. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information on this participation arrangement.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Through our PPWC product, a merchant can borrow a certain percentage of their annual payment volume processed by PayPal and is charged a fixed fee for the loan or advance, which targets an annual percentage rate based on the overall credit assessment of the merchant. Loans and advances are repaid through a fixed percentage of the merchant’s future payment volume that PayPal processes. Through our PPBL product, we provide merchants with access to short-term business financing for a fixed fee based on an evaluation of both the applying business as well as the business owner. PPBL repayments are collected by periodic payments until the balance has been satisfied.
The interest or fee is fixed at the time the loan or advance is extended and recognized as deferred revenues included in accrued expenses and other current liabilities on our consolidated balance sheets. The fixed interest or fee is amortized to revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period based on the merchant’s payment processing history with PayPal, where available. For PPWC, there is a general requirement that at least 10% of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days. We calculate the repayment rate of the merchant’s future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For PPBL, we receive fixed periodic payments over the contractual term of the loan which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period.
We closely monitor credit quality for our merchant loans and advances that we extend or purchase so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a business financing loan or advance, we use, among other indicators, risk models developed internally which utilize information obtained from multiple data sources, both external and internal data to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount, and the related interest or fee. Primary drivers of the models include the merchant’s annual payment volume, payment processing history with PayPal, and prior repayment history with the PayPal products where available, elements sourced from consumer credit bureau and business credit bureau reports, and other information obtained during the application process. We use delinquency status and trends to assist in making ongoing credit decisions, to adjust our internal models, to plan our collection practices and strategies, and in our determination of our allowance for these loans and advances.
Merchant Receivables Delinquency and Allowance
The following tables present our estimate of the principal amount of merchant loans, advances, and interest and fees receivable past their original expected or contractual repayment period.
| December 31, 2019 | ||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Within Original Expected Repayment Period | 30 - 59 Days Greater | 60 - 89 Days Greater | 90 - 180 Days Greater | 180+ Days | Total Past Original Expected Repayment Period | Total | ||||||||||||||||||||
| $ | 2,523 | $ | 115 | $ | 61 | $ | 100 | $ | 17 | $ | 293 | $ | 2,816 | |||||||||||||
| 89.6 | % | 4.1 | % | 2.1 | % | 3.6 | % | 0.6 | % | 10.4 | % | 100 | % |
| December 31, 2018**(1)** | ||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Within Original Expected Repayment Period | 30 - 59 Days Greater | 60 - 89 Days Greater | 90 - 180 Days Greater | 180+ Days | Total Past Original Expected Repayment Period | Total | ||||||||||||||||||||
| $ | 1,706 | $ | 66 | $ | 32 | $ | 57 | $ | 13 | $ | 168 | $ | 1,874 | |||||||||||||
| 91.0 | % | 3.6 | % | 1.7 | % | 3.0 | % | 0.7 | % | 9.0 | % | 100 | % |
(1) Excludes $30 million of loan receivables related to iZettle merchant receivables.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the activity in the allowance for merchant loans, advances, and interest and fees receivable, for the years ended December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | ||||||||||||||||||
| Merchant Loans and Advances | Interest & Fees Receivable | Total Allowance | Merchant Loans and Advances | Interest & Fees Receivable | Total Allowance | ||||||||||||||
| (In millions) | |||||||||||||||||||
| Beginning Balance | $ | 115 | $ | 15 | $ | 130 | $ | 52 | $ | 7 | $ | 59 | |||||||
| Provisions | 240 | 26 | 266 | 162 | 20 | 182 | |||||||||||||
| Charge-offs | (201 | ) | (21 | ) | (222 | ) | (109 | ) | (12 | ) | (121 | ) | |||||||
| Recoveries | 17 | — | 17 | 10 | — | 10 | |||||||||||||
| Ending Balance | $ | 171 | $ | 20 | $ | 191 | $ | 115 | $ | 15 | $ | 130 |
For merchant loans and advances, the determination of delinquency, from current to 180 days past due, is based on the current expected or contractual repayment period of the loan or advance and fixed interest or fee payment as compared to the original expected or contractual repayment period. We charge off the receivables outstanding under our PPBL product when the repayments are 180 days past due. We charge off the receivables outstanding under our PPWC product when the repayments are 180 days past our expectation of repayments and the merchant has not made a payment in the last 60 days or when the repayments are 360 days past due regardless of whether the merchant has made a payment within the last 60 days. Bankrupt accounts are charged off within 60 days of receiving notification of bankruptcy. The provision for loan losses is recognized in transaction and loan losses, and the provision for interest and fees receivable is recognized as a reduction of deferred revenues included in accrued expenses and other current liabilities on our consolidated balance sheets. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.
Note 12—Debt
Long-term Debt
On September 26, 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $5.0 billion (collectively referred to as the “Notes”). The Notes are senior unsecured obligations. Interest is payable in arrears semiannually (payable March 26 and September 26 for the Notes due in 2022 and payable April 1 and October 1 for the remaining Notes). We may redeem the Notes in whole at any time or in part from time to time, prior to maturity, at the redemption price. Upon the occurrence of both a change of control and a downgrade of the Notes below an investment grade rating, we will be required to offer to repurchase each series of Notes at a price equal to 101% of the then outstanding principal amount, plus accrued and unpaid interest. The Notes are subject to covenants including limitations on our ability to create liens on our assets, enter into sale and leaseback transactions, and merge or consolidate with another entity, in each case subject to certain exceptions, limitations, and qualifications. Proceeds from the issuance of these Notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2019, we had an outstanding aggregate principal amount of $5.0 billion related to the Notes. The following table summarizes the Notes:
| Balance at December 31, 2019 | |||||||
| Maturities | Amount | Effective Interest Rate | |||||
| (in millions) | |||||||
| Fixed-rate 2.200% notes | 9/26/2022 | $ | 1,000 | 2.39% | |||
| Fixed-rate 2.400% notes | 10/1/2024 | 1,250 | 2.52% | ||||
| Fixed-rate 2.650% notes | 10/1/2026 | 1,250 | 2.78% | ||||
| Fixed-rate 2.850% notes | 10/1/2029 | 1,500 | 2.96% | ||||
| Total term debt | 5,000 | ||||||
| Unamortized premium (discount) and issuance costs, net | (35 | ) | |||||
| Total carrying amount of term debt | $ | 4,965 |
The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and amortization of the debt discount. The interest expense recorded for the Notes, including amortization of the debt discount and debt issuance costs, was $35 million for the year ended December 31, 2019.
Credit Facilities
Five**-Year Revolving Credit Facility**
On September 11, 2019, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $5.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $500 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time. Loans borrowed under the Credit Agreement are available in U.S. dollar, Euro, British Pound, Canadian dollar, and Australian dollar, and in each case subject to the sub-limits and other limitations provided in the Credit Agreement. We may also, subject to the agreement of the applicable lenders and satisfaction of specified conditions, increase the commitments under the revolving credit facility by up to $2.0 billion. Subject to specific conditions, we may designate one or more of our subsidiaries as additional borrowers under the Credit Agreement, provided PayPal Holdings, Inc. guarantees all borrowings and other obligations of any such subsidiaries under the Credit Agreement. As of December 31, 2019, no subsidiaries were designated as additional borrowers. Funds borrowed under the Credit Agreement may be used for working capital, capital expenditures, acquisitions, and other purposes not in contravention with the Credit Agreement.
We are obligated to pay interest on loans under the Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the Credit Agreement bear interest at either (i) the applicable eurocurrency rate plus a margin (based on our public debt ratings) ranging from 0.875 percent to 1.375 percent, (ii) the applicable overnight rate plus a margin (based on our public debt ratings) ranging from 0.875 percent to 1.375 percent, or (iii) a formula based on the prime rate, the federal funds effective rate, or London Interbank Offered Rate (“LIBOR”) plus a margin (based on our public debt ratings) ranging from zero percent to 0.375 percent. The Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2024, unless the commitments are terminated earlier. The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.
As of December 31, 2019, no borrowings or letters of credit were outstanding under the Credit Agreement. Accordingly, at December 31, 2019, $5.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions to borrowing.
Upon our entry into the Credit Agreement, the credit agreement that we entered into in the third quarter of 2015 providing for an unsecured $2.0 billion, five-year revolving credit facility was terminated.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
364**-Day Revolving Credit Facility**
On September 11, 2019, we entered into a 364-Day credit agreement (“364-Day Credit Agreement”) that provides for an unsecured $1.0 billion 364-Day revolving credit facility. Subject to specific conditions, we may designate one or more of our subsidiaries as additional borrowers under the 364-Day Credit Agreement, provided that PayPal Holdings, Inc. guarantees all borrowings and other obligations of any such subsidiaries under the 364-Day Credit Agreement. As of December 31, 2019, no subsidiaries were designated as additional borrowers. Funds borrowed under the 364-Day Credit Agreement may be used for working capital, capital expenditures, acquisitions, and other purposes not in contravention with the 364-Credit Agreement.
We are obligated to pay interest on loans under the 364-Day Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the 364-Day Credit Agreement bear interest at either (i) LIBOR plus a margin (based on our debt ratings) ranging from 0.875 percent to 1.375 percent or (ii) a formula based on the agent bank’s prime rate, the New York Federal Reserve Bank rate (the greater of the federal funds effective rate and the overnight bank funding rate), or LIBOR plus a margin (based on our public debt ratings) ranging from zero percent to 0.375 percent. The 364-Day Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2020, unless the commitments are terminated earlier. The 364-Day Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including a financial covenant), events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.
As of December 31, 2019, no borrowings were outstanding under the 364-Day Credit Agreement. Accordingly, at December 31, 2019, $1.0 billion of borrowing capacity was available for the purposes permitted by the 364-Day Credit Agreement, subject to customary conditions to borrowing.
Amended Credit Agreement
In the fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”), which amended and restated in its entirety the previous agreement entered into in 2017. The Amended Credit Agreement provided for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which was available in up to four separate borrowings until April 6, 2019. We were obligated to pay interest on loans under the Amended Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Borrowings and other amounts payable under the Amended Credit Agreement were guaranteed by PayPal, Inc. Funds borrowed under the Amended Credit Agreement were available to be used to repurchase equity securities from shareholders, to repay intercompany debt, and for other general corporate purposes of the Company and our subsidiaries.
As of December 31, 2018, $2.0 billion was outstanding under the Amended Credit Agreement. The borrowings outstanding as of December 31, 2018 bore interest at one-month LIBOR plus a margin of 1.125% resulting in a weighted average interest rate of 3.34%. On April 5, 2019, the Company drew down an additional $500 million under the Amended Credit Agreement. On September 26, 2019, the Amended Credit Agreement was terminated and we repaid $2.5 billion of borrowings outstanding under that agreement. The total interest expense and fees we recorded related to the Amended Credit Agreement were $69 million and $72 million for the year ended December 31, 2019 and 2018, respectively.
Other Available Facilities
We also maintain committed and uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately $230 million in the aggregate. This available credit, a portion of which is guaranteed by PayPal Holdings, Inc., includes facilities where we can withdraw and utilize the funds at our discretion for general corporate purposes, capital expenditures, and acquisitions. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of December 31, 2019, substantially all of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future Principal Payments
As of December 31, 2019, the future principal payments associated with our long term debt were as follows (in millions):
| 2020 | $ | — | |
| 2021 | — | ||
| 2022 | 1,000 | ||
| 2023 | — | ||
| 2024 | 1,250 | ||
| Thereafter | 2,750 | ||
| Total | $ | 5,000 |
Note 13—Commitments and Contingencies
Commitments
As of December 31, 2019 and 2018, approximately $3.1 billion and $1.8 billion, respectively, of unused credit was available to PayPal Credit account holders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all our PayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination based on, among other things, account usage and customer creditworthiness.
Litigation and Regulatory Matters
Overview
We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 13, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the year ended December 31, 2019. Except as otherwise noted for the proceedings described in this Note 13, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Regulatory Proceedings
We are required to comply with U.S. economic and trade sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). We have self-reported to OFAC certain transactions that were inadvertently processed but subsequently identified as possible violations of U.S. economic and trade sanctions. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009 and 2013, prior to the implementation of our real-time transaction scanning program. Subsequently, we have self-reported additional transactions as possible violations, and we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.
On March 28, 2016, we received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) as part of its investigation to determine whether we, through our Venmo service, have been or are engaged in deceptive or unfair practices in violation of the Federal Trade Commission Act. The CID requested the production of documents and answers to written questions related to our Venmo service. We have cooperated with the FTC in connection with the CID. On February 27, 2018, we entered into a Consent Order with the FTC in which we settled potential allegations arising from our Venmo services between 2013 and 2017. The Consent Order does not contain a monetary penalty, but requires PayPal to make various changes to Venmo’s disclosures and business practices. The FTC approved the final Consent Order on May 24, 2018. As required by the Consent Order, we are working with the FTC making changes necessary to comply with the Consent Order. Any failure to comply with the Consent Order may increase the possibility of additional adverse consequences, including litigation, additional regulatory actions, injunctions, or monetary penalties, or require further changes to our business practices, significant management time, or the diversion of significant operational resources, all of which could result in a material loss or otherwise harm our business.
As previously disclosed, PayPal Australia Pty Limited (“PPAU”) self-reported a potential violation to the Australian Transaction Reports and Analysis Centre (“AUSTRAC”) on May 22, 2019 with respect to the reporting of international funds transfer instructions under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (“AML/CTF Act”). On September 23, 2019, PPAU received a notice from AUSTRAC requiring that PPAU appoint an external auditor (a partner of a firm which is not our independent auditor) to review certain aspects of PPAU’s compliance with its obligations under the AML/CTF Act. The external auditor was appointed on November 1, 2019, and PPAU is continuing to cooperate with AUSTRAC and the appointed external auditor in this matter. As required by AUSTRAC’s notice, PPAU issued an interim report to AUSTRAC on December 31, 2019. The external auditor is currently due to issue a final report at the end of February 2020, subject to any approved changes. We cannot estimate the potential impact, if any, on our business or financial statements at this time. An adverse outcome arising from the external auditor’s review and any associated proceeding or matter initiated by AUSTRAC, however, could result in injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Legal Proceedings
In November 2017, we announced that we had suspended the operations of TIO Networks (“TIO”) as part of an ongoing investigation of security vulnerabilities of the TIO platform. On December 1, 2017, we announced that we had identified evidence of unauthorized access to TIO’s network, including locations that stored personal information of some of TIO’s customers and customers of TIO billers and the potential compromise of personally identifiable information for approximately 1.6 million customers. We have received a number of governmental inquiries, including from state attorneys general, and we may be subject to additional governmental inquiries and investigations in the future. In addition, on December 6, 2017, a putative class action lawsuit captioned Sgarlata v. PayPal Holdings, Inc., et al., Case No. 3:17-cv-06956-EMC was filed in the U.S. District Court for the Northern District of California (the “Court”) against the Company, its Chief Executive Officer, its Chief Financial Officer, and Hamed Shahbazi, the former chief executive officer of TIO, (the “Defendants”) alleging violations of federal securities laws. The initial compliant alleged that Defendants made false or misleading statements or failed to disclose that TIO’s data security program was inadequate to safeguard the personally identifiable information of its users, those vulnerabilities threatened continued operation of TIO’s platform, the Company’s revenues derived from TIO services were thus unsustainable, and consequently, the Company overstated the benefits of the TIO acquisition, and, as a result, the Company’s public statements were materially false and misleading at all relevant times. The plaintiff who initiated the lawsuit sought to represent a class of shareholders who acquired shares of the Company’s common stock between February 14, 2017 through December 1, 2017 and sought damages and attorneys’ fees, among other relief. On March 16, 2018, the Court appointed two new plaintiffs, not the original plaintiff who filed the case, as interim co-lead plaintiffs in the case and appointed two law firms as interim co-lead counsel. On June 13, 2018, the interim co-lead plaintiffs filed a first amended complaint, which named TIO Networks ULC, TIO Networks USA, Inc., and John Kunze (the Company’s Vice President, Global Consumer Products and Xoom) as additional defendants. The first amended complaint was purportedly brought on behalf of all persons other than the Defendants who acquired the Company’s securities between November 10, 2017 and December 1, 2017. The amended complaint alleged that the Company’s and TIO’s November 10, 2017 announcement of the suspension of TIO’s operations was false and misleading because the announcement only disclosed security vulnerabilities on TIO’s platform, rather than an actual security breach that Defendants were allegedly aware of at the time of the announcement. Defendants’ filed their motion to dismiss the first amended complaint on July 13, 2018 and the Court granted the motion, without prejudice, on December 13, 2018. Plaintiffs filed a second amended complaint on January 14, 2019. The second amended complaint alleges substantially the same theory of liability as the first amended complaint, but no longer names Hamed Shabazi as a defendant. The remaining Defendants filed their motion to dismiss the second amended complaint on March 15, 2019, and a hearing was held on July 16, 2019. The court granted Defendant’s motion to dismiss with prejudice on September 18, 2019; plaintiffs have filed a notice of appeal. We may be subject to additional litigation relating to TIO’s data security platform or the suspension of TIO’s operations in the future. See “Note 4—Business Combinations” and “Note 5—Goodwill and Intangible Assets” to our consolidated financial statements for additional disclosure relating to the suspension of operations of TIO.
General Matters
Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions, particularly in cases where we are introducing new products or services in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements on unfavorable terms or make substantial payments to settle claims or to satisfy damages awarded by courts.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules, or policies, that our practices, prices, rules, policies, or customer/user agreements violate applicable law, or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies, or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that tend to reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our business and customers and may lead to increased costs and decreased transaction volume and revenue. Further, the number and significance of these disputes and inquiries are increasing as we have grown larger, our business has expanded in scope (both in terms of the range of products and services that we offer and our geographical operations), and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, settlement payments, damage awards (including statutory damages for certain causes of action in certain jurisdictions), fines, penalties, injunctive relief, or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources, or otherwise harm our business.
Indemnification Provisions
In 2015, PayPal became an independent publicly traded company through the pro rata distribution by eBay Inc. (“eBay”) of 100% of the outstanding common stock of PayPal to eBay stockholders (which we refer to as the “separation” or the “distribution”). We entered into a separation and distribution agreement, a tax matters agreement, an operating agreement, and various other agreements with eBay to govern the separation of the two companies in 2015 and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations for both eBay and us. Disputes between eBay and us have arisen and others may arise in the future, and an adverse outcome in such matters could materially and adversely impact our business, results of operations, and financial condition. In addition, the indemnity rights we have against eBay under the agreements may not be sufficient to protect us, and our indemnity obligations to eBay may be significant.
In the ordinary course of business, we include limited indemnification provisions in certain of our agreements with parties with whom we have commercial relationships. Under these contracts, we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by any third party with respect to our domain names, trademarks, logos, and other branding elements to the extent that such marks are related to the subject agreement. We have provided an indemnity for other types of third-party claims, which are indemnities mainly related to intellectual property rights, confidentiality, willful misconduct, data privacy obligations, and certain breach of contract claims. We have also provided an indemnity to our payments processors in the event of card association fines against the processor arising out of conduct by us or our customers. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular situation. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.
Off-Balance Sheet Arrangements
As of December 31, 2019 and 2018, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Protection Programs
We provide merchants and consumers with protection programs on most transactions completed on our Payments Platform, except for transactions using our gateway products or where our customer agreements specifically do not provide for protections. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our Buyer Protection Program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our Seller Protection Programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs are considered assurance-type warranties for which we estimate and record associated costs in transaction and loan losses during the period the payment transaction is completed.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The maximum potential exposure under our protection programs is estimated to be the portion of total eligible transaction volume (TPV) for which buyer or seller protection claims may be raised under our existing user agreements. Since eligible transactions are typically completed in a period significantly shorter than the period under which disputes may be opened, and based on our historical losses to date, we do not believe that the maximum potential exposure is representative of our actual potential exposure. The actual amount of potential exposure cannot be quantified as we are unable to determine total eligible transactions where performance by a merchant or consumer is incomplete or completed transactions that may result in a claim under our protection programs. We record a liability with respect to losses under these protection programs when they are probable and the amount can be reasonably estimated. The following table shows changes in the allowance for transaction losses and negative customer balances related to our protection programs for the year end December 31, 2019 and 2018:
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| Beginning balance | $ | 344 | $ | 266 | |||
| Provisions, net of recoveries | 1,092 | 1,059 | |||||
| Realized losses | (1,037 | ) | (981 | ) | |||
| Ending balance | $ | 399 | $ | 344 |
Note 14—Stock Repurchase Programs
In January 2016, our Board of Directors authorized a stock repurchase program that provided for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. In April 2017, our Board of Directors authorized an additional stock repurchase program that provided for the repurchase of up to $5 billion of our common stock, with no expiration from the date of authorization. This program became effective upon completion of the January 2016 stock repurchase program in December 2017. In July 2018, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $10 billion of our common stock, with no expiration from the date of authorization. This program will become effective upon completion of the April 2017 stock repurchase program. Our stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, may also be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions, including accelerated share repurchase agreements, or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. Moreover, any stock repurchases are subject to market conditions and other uncertainties, and we cannot predict if or when any stock repurchases will be made. We may terminate our stock repurchase programs at any time without prior notice.
During the year ended December 31, 2019, we repurchased approximately 14 million shares of our common stock for approximately $1.4 billion, including approximately $656 million in the open market and approximately $750 million pursuant to an accelerated share repurchase (“ASR”) agreement under our April 2017 stock repurchase program.
In February 2019, we entered into an ASR agreement with an unrelated third party financial institution to repurchase shares of our common stock. Under the terms of the ASR agreement, we made an upfront payment of approximately $750 million to the third party financial institution and received approximately 7.7 million shares of our common stock, at an average price of $96.91 per share of common stock during the term of the transaction, which ended in March 2019. The total number of shares of our common stock repurchased was based on the volume-weighted average share price of our common stock during the term of the transaction, less a discount and subject to adjustments pursuant to the terms of the ASR agreement. We recorded the initial payment of $750 million as a reduction to stockholders’ equity on our consolidated balance sheets. All common stock received under the ASR agreement was recorded as treasury stock and the forward contract indexed to our own common stock met all applicable criteria for equity classification.
As of December 31, 2019, a total of approximately $68 million and $10 billion remained available for future repurchases of our common stock under our April 2017 and July 2018 stock repurchase programs, respectively.
During the year ended December 31, 2018, we repurchased approximately 44 million shares of our common stock for approximately $3.5 billion, including approximately $2.5 billion in the open market and approximately $1.0 billion pursuant to an ASR agreement under our April 2017 stock repurchase program.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During the year ended December 31, 2017, we repurchased approximately 20 million shares of our common stock for approximately $1.0 billion in the open market under our January 2016 and April 2017 stock repurchase programs.
Shares of common stock repurchased for the periods presented were recorded as treasury stock for the purposes of calculating earnings per share and were accounted for under the cost method. No repurchased shares of common stock have been retired.
Note 15—Stock-Based and Employee Savings Plans
Equity Incentive Plan
Under the terms of the Amended and Restated PayPal Holdings, Inc. 2015 Equity Incentive Award Plan (the “Plan”), equity awards, including stock options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”), performance based restricted stock units (“PBRSUs”), deferred stock units (“DSUs”), and stock payments, may be granted to our directors, officers, and employees. In May 2018, our stockholders approved increasing the number of shares reserved for issuance under the Plan by an additional 37 million shares. At December 31, 2019, there were 81 million shares authorized under the Plan and 60 million shares were available for future grant. Shares issued as a result of stock option exercises and the release of stock awards were funded primarily with the issuance of new shares of common stock.
All stock options granted under the Plan generally vest 12.5% six months from the date of grant or 25% one year from the date of grant with the remainder vesting at a rate of 2.08% per month thereafter, and generally expire seven years from the date of grant. The cost of stock options is determined using the Black-Scholes option pricing model on the date of grant. We discontinued granting stock options in January 2016.
RSUs are granted to eligible employees under the Plan. RSUs generally vest in equal annual installments over a period of three years, are subject to an employee’s continuing service to us, and do not have an expiration date. The cost of RSUs granted is determined using the fair market value of PayPal’s common stock on the date of grant.
Certain of our executives and non-executives are eligible to receive PBRSUs, which are equity awards that may be earned based on an initial target number with the final number of PBRSUs that may be vested and settled determined based on the Company’s performance against pre-established performance metrics over a predefined performance period. PBRSUs granted under the Plan generally have one to three-year performance periods with cliff vesting following the completion of the performance period, subject to the Compensation Committee’s approval of the level of achievement against the pre-established performance targets. Over the performance period, the number of PBRSUs that may be issued and related stock-based compensation expense that is recognized is adjusted upward or downward based upon the probability of achieving the approved performance targets against the performance metrics. Depending on the probability of achieving the pre-established performance targets, the number of PBRSUs issued could range from 0% to 200% of the target amount.
Employee Stock Purchase Plan
In May 2018, our stockholders approved increasing the number of shares reserved for issuance under the Amended and Restated PayPal Holdings, Inc. Employee Stock Purchase Plan (“ESPP”) by an additional 50 million shares. Under the terms of the ESPP, shares of our common stock may be purchased over an offering period with a maximum duration of two years at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last business day of each six-month purchase period within the offering period. Employees may contribute between 2% and 10% of their gross compensation during an offering period to purchase shares, but not more than the statutory limitation of $25,000 per year. All company stock purchased through the ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and diluted earnings per share. For the years ended December 31, 2019, 2018, and 2017, our employees purchased 1.8 million, 2.4 million, and 2.7 million shares under the ESPP at an average per share price of $66.36, $43.09, and $34.06, respectively. As of December 31, 2019, approximately 51 million shares were reserved for future issuance under the ESPP.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock Option Activity
The following table summarizes stock option activity of our employees under the Plan for the year ended December 31, 2019:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||
| (In thousands, except per share amounts and years) | ||||||||||||
| Outstanding at January 1, 2019 | 1,183 | $ | 27.39 | |||||||||
| Assumed | — | $ | — | |||||||||
| Exercised | (693 | ) | $ | 29.01 | ||||||||
| Forfeited/expired/canceled | (14 | ) | $ | 22.71 | ||||||||
| Outstanding at December 31, 2019 | 476 | $ | 25.18 | 3.61 | $ | 40,113 | ||||||
| Expected to vest | 78 | $ | 19.78 | 5.61 | $ | 6,973 | ||||||
| Options exercisable | 390 | $ | 26.33 | 3.17 | $ | 32,431 |
No options were granted or assumed in 2019. The weighted average grant date fair value of options assumed from acquisitions during the years ended December 31, 2018 and 2017 was $72.02, and $49.47, respectively. The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock at December 31, 2019. During the years ended December 31, 2019, 2018, and 2017, the aggregate intrinsic value of options exercised under the Plan was $51 million, $71 million, and $53 million, respectively, determined as of the date of option exercise. At December 31, 2019, all outstanding options were in-the-money.
RSU, PBRSU, and Restricted Stock Activity
The following table summarizes the RSUs, PBRSUs, and restricted stock activity under the Plan as of December 31, 2019 and changes during the year ended December 31, 2019:
| Units | Weighted Average Grant-Date Fair Value (per share) | |||||
| (In thousands, except per share amounts) | ||||||
| Outstanding at January 1, 2019 | 27,962 | $ | 57.81 | |||
| Awarded(1) | 14,662 | $ | 95.43 | |||
| Vested(1) | (16,284 | ) | $ | 53.34 | ||
| Forfeited | (3,331 | ) | $ | 74.65 | ||
| Outstanding at December 31, 2019 | 23,009 | $ | 83.61 | |||
| Expected to vest | 20,330 |
(1) Includes approximately 1.4 million additional PBRSUs issued in respect of company performance in connection with the Company’s 2018 annual incentive plan.
During the years ended December 31, 2019, 2018, and 2017, the aggregate intrinsic value of RSUs and PBRSUs vested under the Plan was $1.6 billion, $1.4 billion, and $519 million, respectively.
In the year ended December 31, 2019, the Company granted 1.5 million PBRSUs with a one-year performance period (fiscal 2019) and cliff vesting following the completion of the performance period in February 2020 (one year from the annual incentive award cycle grant date), and 0.9 million PBRSUs with a three-year performance period.
In the year ended December 31, 2018, the Company granted 1.6 million PBRSUs with a one-year performance period (fiscal 2018) and cliff vesting following the completion of the performance period in February 2019 (one year from the annual incentive award cycle grant date), and 0.8 million PBRSUs with a three-year performance period. Additionally, in the year ended December 31, 2018, the Company granted 0.4 million PBRSUs with a five-year performance period based on market conditions; the number of PBRSUs that may be issued under this award is fixed.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation Expense
We record stock-based compensation expense for the Plan in accordance with U.S. GAAP, which requires the measurement and recognition of compensation expense based on estimated fair values.
The impact on our results of operations of recording stock-based compensation expense under the Plan for the years ended December 31, 2019, 2018, and 2017 was as follows:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Customer support and operations | $ | 198 | $ | 174 | $ | 142 | |||||
| Sales and marketing | 127 | 125 | 107 | ||||||||
| Technology and development | 420 | 303 | 277 | ||||||||
| General and administrative | 305 | 269 | 218 | ||||||||
| Total stock-based compensation expense | $ | 1,050 | $ | 871 | $ | 744 | |||||
| Capitalized as part of internal use software and website development costs | $ | 38 | $ | 38 | $ | 24 | |||||
| Income tax benefit recognized for stock-based compensation arrangements | $ | 176 | $ | 154 | $ | 218 |
As of December 31, 2019, there was approximately $1.0 billion of unearned stock-based compensation estimated to be expensed primarily from 2020 through 2021. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase, or cancel all or a portion of the remaining unearned stock-based compensation expense. Future unearned stock-based compensation will increase to the extent we grant additional equity awards, change the mix of equity awards we grant, or assume unvested equity awards in connection with acquisitions.
Employee Saving Plan
Under the terms of the PayPal Holdings, Inc. Deferred Compensation Plan, which also qualifies under Section 401(k) of the Code, participating U.S. employees may contribute up to 50% of their eligible compensation, but not more than statutory limits. In the years ended December 31, 2019, 2018, and 2017, under the PayPal plan, eligible employees received one dollar for each dollar contributed, up to 4% of each employee’s eligible salary, subject to a maximum employer contribution of $11,200, $11,200, and $10,800, respectively, per employee. Our non-U.S. employees are covered by other savings plans. For the years ended December 31, 2019, 2018, and 2017, the matching contribution expense for our U.S. and international savings plans was approximately $59 million, $51 million, and $47 million, respectively.
Note 16—Income Taxes
In December 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act included significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system. The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which had not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated.
During the year ended December 31, 2018, we completed our accounting for the income tax effects of the Tax Act. In the year ended December 31, 2018, we recognized $20 million of tax expense in addition to the $180 million of provisional tax expense recorded at December 31, 2017 for the enactment-date effects of the Tax Act, for a total of $200 million of net tax expense, which consists of $1.5 billion of net federal and state Transition Tax, the majority of which is payable in installments over eight years, $1.3 billion net benefit for the decrease in our deferred tax liability on unremitted foreign earnings, and $5 million net expense for remeasurement of our deferred tax assets/liabilities for the corporate rate reduction and changes in our valuation allowance.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In June 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the July 2015 decision of the U.S. Tax Court in Altera Corp. v. Commissioner. In the June 2019 decision, the U.S. Court of Appeals held that a Treasury Regulation requiring stock-based compensation to be included in a qualified intercompany cost sharing arrangement was valid. We have reviewed this case and determined no adjustment is required to PayPal’s consolidated financial statements as a result of this ruling.
In connection with the distribution, eBay and PayPal entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement. The tax matters agreement was entered into on the distribution date. Under the tax matters agreement, eBay is generally responsible for all additional taxes (and will be entitled to all related refunds of taxes) imposed on eBay and its subsidiaries (including subsidiaries that were transferred to PayPal pursuant to the separation) arising after the distribution date with respect to the taxable periods (or portions thereof) ended on or prior to July 17, 2015, except for those taxes for which PayPal has reflected an unrecognized tax benefit in its financial statements on the distribution date.
The components of income (loss) before income taxes are as follows:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| United States | $ | 8 | $ | (474 | ) | $ | (593 | ) | |||
| International | 2,990 | 2,850 | 2,793 | ||||||||
| Income before income taxes | $ | 2,998 | $ | 2,376 | $ | 2,200 |
The income tax expense is composed of the following:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Current: | |||||||||||
| Federal | $ | 132 | $ | 180 | $ | 1,522 | |||||
| State and local | 47 | 32 | 36 | ||||||||
| Foreign | 629 | 278 | 146 | ||||||||
| Total current portion of income tax expense | $ | 808 | $ | 490 | $ | 1,704 | |||||
| Deferred: | |||||||||||
| Federal | $ | (107 | ) | $ | (115 | ) | $ | (1,304 | ) | ||
| State and local | (39 | ) | (35 | ) | (3 | ) | |||||
| Foreign | (123 | ) | (21 | ) | 8 | ||||||
| Total deferred portion of income tax expense | (269 | ) | (171 | ) | (1,299 | ) | |||||
| Income tax expense | $ | 539 | $ | 319 | $ | 405 |
The following is a reconciliation of the difference between the effective income tax rate and the federal statutory rate:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | ||
| State taxes, net of federal benefit | 0.3 | % | (0.1 | )% | 0.8 | % | ||
| Foreign income taxed at different rates | (5.0 | )% | (3.9 | )% | (26.7 | )% | ||
| Stock-based compensation expense | (3.9 | )% | (4.1 | )% | (0.8 | )% | ||
| Tax credits | (2.4 | )% | (2.1 | )% | (1.4 | )% | ||
| Change in valuation allowances | 0.1 | % | — | % | 1.4 | % | ||
| U.S. tax reform (the Tax Act) | — | % | 0.9 | % | 8.2 | % | ||
| Intra-group transfer of intellectual property | 7.6 | % | 0.7 | % | 1.0 | % | ||
| Other | 0.3 | % | 1.0 | % | 0.9 | % | ||
| Effective income tax rate | 18.0 | % | 13.4 | % | 18.4 | % |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the year ended December 31, 2019, the difference between the effective income tax rate and the U.S. federal statutory rate of 21% to income before income taxes is primarily the result of foreign income taxed at different rates and stock based compensation deductions, partially offset by tax expense related to the intra-group transfer of intellectual property. For the year ended December 31, 2018, the difference between the effective income tax rate and the federal statutory rate of 21% to income before income taxes is primarily the result of foreign income taxed at different rates and stock based compensation deductions. For the year ended December 31, 2017, the difference between the effective income tax rate and the federal statutory rate of 35% to income before income taxes is primarily the result of foreign income taxed at different rates, partially offset by the effects of the Tax Act discussed above.
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets and liabilities consist of the following:
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| Deferred tax assets: | |||||||
| Net operating loss and credit carryforwards | $ | 182 | $ | 196 | |||
| Accruals and allowances | 235 | 179 | |||||
| Lease liability | 120 | — | |||||
| Partnership investment | 8 | 9 | |||||
| Stock-based compensation | 160 | 136 | |||||
| Net unrealized losses | 5 | 8 | |||||
| Fixed assets and other intangibles | 88 | — | |||||
| Total deferred tax assets | 798 | 528 | |||||
| Valuation allowance | (184 | ) | (132 | ) | |||
| Net deferred tax assets | $ | 614 | $ | 396 | |||
| Deferred tax liabilities: | |||||||
| Unremitted foreign earnings | $ | (17 | ) | $ | (35 | ) | |
| Fixed assets and other intangibles | — | (58 | ) | ||||
| Acquired intangibles | (103 | ) | (167 | ) | |||
| Lease asset | (116 | ) | — | ||||
| Net unrealized gains | (71 | ) | (21 | ) | |||
| Total deferred tax liabilities | (307 | ) | (281 | ) | |||
| Net deferred tax assets | $ | 307 | $ | 115 |
The following table shows the deferred tax assets and liabilities within our consolidated balance sheets:
| As of December 31, | |||||||||
| 2019 | 2018 | ||||||||
| Balance Sheet Location | (In millions) | ||||||||
| Total deferred tax assets (non-current) | Other assets | $ | 396 | $ | 224 | ||||
| Total deferred tax liabilities (non-current) | Deferred tax liability and other long-term liabilities | (89 | ) | (109 | ) | ||||
| Total net deferred tax assets | $ | 307 | $ | 115 |
As of December 31, 2019, our federal, state, and foreign net operating loss carryforwards for income tax purposes were approximately $20 million, $403 million, and $273 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Code. If not utilized, the federal net operating loss carryforwards will begin to expire in 2022, and the state net operating loss carryforwards will begin to expire in 2020. Approximately $14 million of the foreign net operating loss carryforwards will begin to expire in 2021, $56 million will begin to expire in 2034, and $203 million has no expiration date and may be carried forward indefinitely. As of December 31, 2019, our federal and state tax credit carryforwards for income tax purposes were approximately $1 million and $205 million, respectively. The federal tax credits will begin to expire in 2028. Most of the state tax credits may be carried forward indefinitely.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. We have elected the tax law ordering approach to assess the realizability of our net operating losses. During the years ended December 31, 2019, 2018, and 2017, we increased our valuation allowance by $52 million, $39 million, and $50 million, respectively. At December 31, 2019, 2018, and 2017, we maintained a valuation allowance with respect to certain of our deferred tax assets relating to operating losses in certain states and foreign jurisdictions and tax credits in certain states that we believe are not likely to be realized.
At December 31, 2019, none of our unremitted foreign earnings of approximately $6.6 billion are considered to be indefinitely reinvested. We have accrued $17 million of deferred U.S. state and foreign withholding taxes on the $6.6 billion of undistributed foreign earnings.
We benefit from tax rulings concluded in several different jurisdictions, most significantly Singapore and Luxembourg. These rulings result in significantly lower rates of taxation on certain classes of income and require various thresholds of investment and employment in those jurisdictions. We review our compliance on an annual basis to ensure we continue to meet our obligations under these tax rulings. These rulings resulted in tax savings of approximately $472 million, $465 million and $443 million in 2019, 2018, and 2017, respectively. The benefit of these tax rulings on our net income per share (diluted) was approximately $0.40, $0.39, and $0.36 in 2019, 2018, and 2017, respectively. In December 2019, a new tax ruling was concluded in Singapore. The new ruling takes effect after the current ruling expires at the end of 2020 and will be in effect from 2021 through 2030. In December 2019, the Luxembourg government passed legislation confirming that tax rulings granted before January 1, 2015 will no longer be binding after December 31, 2019.
The following table reflects changes in unrecognized tax benefits for the periods presented below:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Gross amounts of unrecognized tax benefits as of the beginning of the period | $ | 800 | $ | 424 | $ | 312 | |||||
| Increases related to prior period tax positions | 97 | 120 | 61 | ||||||||
| Decreases related to prior period tax positions | (28 | ) | (6 | ) | (23 | ) | |||||
| Increases related to current period tax positions | 336 | 287 | 112 | ||||||||
| Settlements | (63 | ) | (20 | ) | (35 | ) | |||||
| Statute of limitation expirations | (1 | ) | (5 | ) | (3 | ) | |||||
| Gross amounts of unrecognized tax benefits as of the end of the period | $ | 1,141 | $ | 800 | $ | 424 |
If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $991 million.
During the year ended December 31, 2018, we increased our unrecognized tax benefits by $194 million due to uncertainties related to the impacts of the Tax Act.
In December 31, 2019, 2018, and 2017, we recognized net interest and penalties of $63 million, $57 million, and $13 million, respectively, related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of December 31, 2019 and 2018 was approximately $171 million and $124 million, respectively.
We are subject to taxation in the U.S. and various state and foreign jurisdictions. We are currently under examination by certain tax authorities for the 2007 to 2018 tax years. The material jurisdictions in which we are subject to examination by tax authorities for tax years after 2006 primarily include the U.S. (Federal and California), France, Germany, India, Israel, and Singapore. During 2019, we settled various audits, including certain U.S. Federal and California audits. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from our open examinations.
Although the timing of the resolution of these audits is uncertain, we do not expect the total amount of unrecognized tax benefits as of December 31, 2019 will materially change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 17—Restructuring
In the first quarters of 2019, 2018, and 2017, management approved strategic reductions of the existing global workforce, which resulted in restructuring charges of $78 million, $25 million, and $40 million, respectively.
The approved strategic reductions for 2019 were intended to better align our teams to support key business priorities, and included the transfer of certain operational functions between geographies, as well as the impact of the transition servicing activities provided to Synchrony, which ended in the second quarter of 2019. The following table summarizes the restructuring reserve activity during the year ended December 31, 2019:
| Employee Severance and Benefits | |||
| (In millions) | |||
| Accrued liability as of January 1, 2019 | $ | 3 | |
| Charges | 78 | ||
| Payments | (72 | ) | |
| Accrued liability as of December 31, 2019 | $ | 9 |
The strategic reduction approved in the first quarter of 2018 included restructuring charges related to the decision to wind down TIO’s operations. We incurred employee and severance benefits expenses under both the 2018 and 2017 strategic reductions, which were substantially completed by the end of 2018 and 2017, respectively.
Note 18—Subsequent Events
On January 3, 2020, we completed our acquisition of Honey Science Corporation (“Honey”) by acquiring all outstanding shares for total consideration of approximately $4.0 billion, consisting of approximately $3.6 billion in cash and approximately $400 million in restricted stock, subject to vesting conditions. We believe our acquisition of Honey will enhance our value proposition by allowing us to further simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants. The acquisition will be accounted for as a business combination.
PayPal Holdings, Inc.
Supplementary Data — Quarterly Unaudited Financial Data
The following tables present certain unaudited consolidated quarterly financial information for the years ended December 31, 2019 and 2018.
| 2019 Quarter Ended | |||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||
| (Unaudited, in millions, except per share amounts) | |||||||||||||||
| Net revenues | $ | 4,128 | $ | 4,305 | $ | 4,378 | $ | 4,961 | |||||||
| Net income | $ | 667 | $ | 823 | $ | 462 | $ | 507 | |||||||
| Net income per share - basic | $ | 0.57 | $ | 0.70 | $ | 0.39 | $ | 0.43 | |||||||
| Net income per share - diluted | $ | 0.56 | $ | 0.69 | $ | 0.39 | $ | 0.43 | |||||||
| Weighted average shares: | |||||||||||||||
| Basic | 1,171 | 1,175 | 1,175 | 1,174 | |||||||||||
| Diluted | 1,188 | 1,187 | 1,188 | 1,187 |
| 2018 Quarter Ended | |||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||
| (Unaudited, in millions, except per share amounts) | |||||||||||||||
| Net revenues | $ | 3,685 | $ | 3,857 | $ | 3,683 | $ | 4,226 | |||||||
| Net income | $ | 511 | $ | 526 | $ | 436 | $ | 584 | |||||||
| Net income per share - basic | $ | 0.43 | $ | 0.44 | $ | 0.37 | $ | 0.50 | |||||||
| Net income per share - diluted | $ | 0.42 | $ | 0.44 | $ | 0.36 | $ | 0.49 | |||||||
| Weighted average shares: | |||||||||||||||
| Basic | 1,192 | 1,187 | 1,181 | 1,177 | |||||||||||
| Diluted | 1,217 | 1,202 | 1,199 | 1,196 |
PayPal Holdings, Inc.
FINANCIAL STATEMENT SCHEDULE
The Financial Statement Schedule II—VALUATION AND QUALIFYING ACCOUNTS is filed as part of this Annual Report on Form 10-K.
| Balance at Beginning of Period | Charged/ (Credited) to Net Income | Charges Utilized/ (Write-offs) | Balance at End of Period | ||||||||||||
| (In millions) | |||||||||||||||
| Allowance for Transaction Losses and Negative Customer Balances | |||||||||||||||
| Year Ended December 31, 2017 | $ | 222 | $ | 823 | $ | (779 | ) | $ | 266 | ||||||
| Year Ended December 31, 2018 | $ | 266 | $ | 1,059 | $ | (981 | ) | $ | 344 | ||||||
| Year Ended December 31, 2019 | $ | 344 | $ | 1,092 | $ | (1,037 | ) | $ | 399 | ||||||
| Allowance for Loans and Interest Receivable | |||||||||||||||
| Year Ended December 31, 2017 | $ | 339 | $ | 274 | $ | (484 | ) | $ | 129 | ||||||
| Year Ended December 31, 2018 | $ | 129 | $ | 243 | $ | (200 | ) | $ | 172 | ||||||
| Year Ended December 31, 2019 | $ | 172 | $ | 325 | $ | (239 | ) | $ | 258 |
Previous: Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES · Next: Item 16. FORM 10-K SUMMARY