Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This management’s discussion and analysis provides a review of the results of operations, financial condition and liquidity and capital resources of Visa Inc. and its subsidiaries (“Visa,” “we,” “our” and the “Company”) on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this report.

Overview

Visa is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. We provide our financial institution clients with a global payments infrastructure and support services for the delivery of Visa-branded payment products, including credit, debit and prepaid. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. Each of these constituencies has played a key role in the ongoing worldwide migration from paper-based to electronic forms of payment, and we believe that this transformation continues to yield significant growth opportunities, particularly outside the United States. We continue to explore additional opportunities to enhance our competitive position by expanding the scope of payment solutions we provide.

Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during fiscal 2015 reflects the impacts of continued uneven and tepid economic growth.

Visa Europe acquisition. On November 2, 2015, we entered into a transaction agreement with Visa Europe, pursuant to which we agreed to acquire 100% of the share capital of Visa Europe for a total purchase price of up to €21.2 billion. The purchase price consists of: (a) at the closing of the transaction, up-front cash consideration of €11.5 billion and preferred stock convertible upon certain conditions into class A common stock or class A equivalent preferred stock, valued at approximately €5.0 billion, and (b) following the end of sixteen fiscal quarters post-closing, contingent cash consideration of up to €4.0 billion (plus up to an additional €0.7 billion in interest), determined based on the achievement of specified net revenue levels during such post-closing period. In conjunction with the transaction agreement, the Visa Europe put option was amended to align the terms on which Visa Europe may exercise its rights under the put option agreement with the terms of the transaction agreement. The purchase of Visa Europe's share capital will be effected through the exercise of the amended Visa Europe put option. The preferred stock conversion rates may be reduced from time to time to offset certain liabilities, if any, which may be incurred by us, Visa Europe or its affiliates as a result of certain existing and potential litigation relating to the setting of multilateral interchange fee rates in the Visa Europe territory. As part of the acquisition, we also entered into the U.K. loss sharing agreement with Visa Europe and certain of Visa Europe’s members located in the United Kingdom to compensate us for certain losses which may be incurred by us or Visa Europe as a result of certain existing and potential litigation relating to the setting and implementation of domestic multilateral interchange fee rates in the United Kingdom. See Note 2—Visa Europe, Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities, and Note 20—Legal Matters to our consolidated financial statements. The closing of our acquisition of Visa Europe is subject to regulatory approvals and other customary conditions, and is currently expected to occur in our fiscal third quarter of 2016.

Financial highlights. During fiscal 2015, we recorded net income of $6.3 billion or diluted class A earnings per share of $2.58, an increase of 16% and 20% over the prior year, respectively. Our non-GAAP adjusted net income and diluted earnings per share for fiscal 2015, 2014 and 2013 are as follows:

Fiscal Year Ended September 30,% Change(1)
2015201420132015 vs. 20142014 vs. 2013
(in millions, except percentages)
Net income, as adjusted(2)$6,438$5,721$4,98013%15%
Diluted earnings per share, as adjusted(2),(3)$2.62$2.27$1.9016%19%
(1)Figures in the tables may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(2)Adjusted net income and diluted earnings per share in fiscal 2015 and 2014 exclude the impact of certain significant items that we believe are not indicative of our operating performance, as they either have no cash impact or are related to amounts covered by the U.S. retrospective responsibility plan. For a full reconciliation of our adjusted financial results, see tables in Adjusted financial results below. There were no comparable adjustments recorded during fiscal 2013.
(3)The per share amounts for the prior periods presented have been retroactively adjusted to reflect the four-for-one stock split effected in the fiscal second quarter of 2015.

During fiscal 2015, we recognized a tax benefit of $296 million resulting from the resolution of uncertain tax positions with taxing authorities. Of the $296 million benefit, $239 million relates to prior fiscal years. Our financial results for the year ended September 30, 2014 reflect a one-time tax benefit of $191 million associated with a deduction for U.S. domestic production activities related to fiscal years 2013 and prior. See Note 19—Income Taxes to our consolidated financial statements.

We recorded net operating revenues of $13.9 billion for fiscal 2015, an increase of 9% over the prior year driven by continued growth in our underlying business drivers: nominal payments volume; processed transactions; and cross-border volume. The general strengthening of the U.S. dollar during the year resulted in a two-and-a-half- percentage point decline in total operating revenue growth.

Total operating expenses for fiscal 2015 were $4.8 billion, a decrease of 4% over the prior year, primarily due to the absence of a $450 million litigation provision associated with the interchange multidistrict litigation recorded in fiscal 2014. Excluding this provision, operating expenses increased by 6% over prior year adjusted operating expenses, primarily due to increases in personnel, additional depreciation from our ongoing investments in technology assets and infrastructure, and general and administrative expenses. The increases were partially offset by decreases in network and processing and marketing expenses.

Adjusted financial results. Our financial results for fiscal 2015 and 2014 reflect the impact of significant items that we believe are not indicative of our operating performance in the prior or future years, as they either have no cash impact or are related to amounts covered by the U.S. retrospective responsibility plan. As such, we believe the presentation of adjusted financial results excluding the following amounts provides a clearer understanding of our operating performance for the periods presented.

•Revaluation of Visa Europe put option. During the third quarter of fiscal 2015, we recorded an increase of $110 million in the fair value of the unamended Visa Europe put option, resulting in the recognition of non-cash, non-operating expense in our financial results. This amount is not subject to income tax and therefore has no impact on our reported income tax provision. See Note 2—Visa Europe to our consolidated financial statements.
•Litigation provision. During fiscal 2014, we recorded a litigation provision of $450 million and related tax benefits associated with the interchange multidistrict litigation. The tax impact is determined by applying applicable federal and state tax rates to the litigation provision. Monetary liabilities from settlements of, or judgments in, the U.S. covered litigation will be paid from the litigation escrow account. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities and Note 20—Legal Matters to our consolidated financial statements.

The following tables present our adjusted financial results for fiscal 2015 and 2014. There were no comparable adjustments recorded during fiscal 2013.

Fiscal 2015
(in millions, except for percentages and per share data)Operating ExpensesOperating Margin (1),(2)Net IncomeDiluted Earnings Per Share (2),(3)
As reported$4,81665%$6,328$2.58
Revaluation of Visa Europe put option——1100.04
As adjusted$4,81665%$6,438$2.62
Diluted weighted-average shares outstanding, as reported2,457
Fiscal 2014
(in millions, except for percentages and per share data)Operating ExpensesOperating Margin (1),(2)Net IncomeDiluted Earnings Per Share (2),(3)
As reported$5,00561%$5,438$2.16
Litigation provision(450)4%2830.11
As adjusted$4,55564%$5,721$2.27
Diluted weighted-average shares outstanding, as reported2,523
Fiscal 2013
(in millions, except for percentages and per share data)Operating ExpensesOperating Margin (1),(2)Net IncomeDiluted Earnings Per Share (2),(3)
As reported$4,53961%$4,980$1.90
Diluted weighted-average shares outstanding, as reported2,624
(1)Operating margin is calculated as operating income divided by total operating revenues.
(2)Figures in the table may not recalculate exactly due to rounding. Operating margin and diluted earnings per share figures are calculated based on unrounded numbers.
(3)The per share amounts for the prior periods presented have been retroactively adjusted to reflect the four-for-one stock split effected in the fiscal second quarter of 2015.

Class A common stock split. In January 2015, Visa’s board of directors declared a four-for-one split of its class A common stock. Each class A common stockholder of record at the close of business on February 13, 2015 ("Record Date") received a dividend of three additional shares on March 18, 2015 for every share held as of the Record Date. Trading began on a split-adjusted basis on March 19, 2015. Holders of class B and C common stock did not receive a stock dividend. Instead, the conversion rate for class B common stock increased to 1.6483 shares of class A common stock per share of class B common stock, and the conversion rate for class C common stock increased to 4.0 shares of class A common stock per share of class C common stock. Immediately following the split, the class A, B and C stockholders retained the same relative ownership percentages that they had prior to the stock split. See Note 14—Stockholders' Equity to our consolidated financial statements.

Reduction in as-converted class A common stock. During fiscal 2015, we repurchased 44 million shares of our class A common stock in the open market using $2.9 billion of cash on hand. As of September 30, 2015, we had remaining authorized funds of $2.8 billion. All share repurchase programs authorized prior to October 2014 have been completed. In October 2015, our board of directors authorized an additional $5.0 billion share repurchase program. See Note 14—Stockholders' Equity to our consolidated financial statements.

Nominal payments volume and transaction counts. Payments volume is the primary driver for our service revenues, and the number of processed transactions is the primary driver for our data processing revenues. Nominal payments volume over the prior year posted strong growth in the United States, driven mainly by consumer credit. Nominal international payments volume growth was negatively impacted by the overall strengthening of the U.S. dollar. On a constant-dollar basis, which excludes the impact of exchange rate movements, our international payments volume growth rate for the 12 months ended June 30, 2015(1) was 13% compared to 15% for the prior year comparable period. Processed transactions sustained healthy growth reflecting the ongoing worldwide shift to electronic currency.

The following tables present nominal payments volume.(2)

United StatesInternationalVisa Inc.
12 months ended June 30,(1)12 months ended June 30,(1)12 months ended June 30,(1)
20152014% Change20152014% Change20152014% Change
(in billions, except percentages)
Nominal payments volume
Consumer credit$980$87212%$1,676$1,6005%$2,656$2,4727%
Consumer debit(3)1,2011,1287%4634542%1,6651,5815%
Commercial(4)41237011%1511454%5635159%
Total nominal payments volume$2,594$2,3699%$2,290$2,1984%$4,884$4,5677%
Cash volume4924695%2,0162,122(5)%2,5082,591(3)%
Total nominal volume(5)$3,086$2,8389%$4,306$4,320—%$7,392$7,1583%
United StatesInternationalVisa Inc.
12 months ended June 30,(1)12 months ended June 30,(1)12 months ended June 30,(1)
20142013% Change20142013% Change20142013% Change
(in billions, except percentages)
Nominal payments volume
Consumer credit$872$78611%$1,600$1,4987%$2,472$2,2848%
Consumer debit(3)1,1281,0468%45439216%1,5811,43810%
Commercial(4)37033411%1451403%5154749%
Total nominal payments volume$2,369$2,1679%$2,198$2,0308%$4,567$4,1979%
Cash volume4694465%2,1222,0832%2,5912,5302%
Total nominal volume(5)$2,838$2,6139%$4,320$4,1135%$7,158$6,7266%

The following table presents nominal and constant payments volume growth.(2)

InternationalVisa Inc.
12 months ended June 30, 2015 vs 2014(1)12 months ended June 30, 2014 vs 2013(1)12 months ended June 30, 2015 vs 2014(1)12 months ended June 30, 2014 vs 2013(1)
NominalConstant(6)NominalConstant(6)NominalConstant(6)NominalConstant(6)
Payments volume growth
Consumer credit5%13%7%13%7%13%8%12%
Consumer debit(3)2%14%16%24%5%9%10%12%
Commercial(4)4%13%3%10%9%12%9%11%
Total payments volume growth4%13%8%15%7%11%9%12%
Cash volume growth(5)%8%2%9%(3)%7%2%8%
Total volume growth—%11%5%12%3%10%6%10%
(1)Service revenues in a given quarter are assessed based on nominal payments volume in the prior quarter. Therefore, service revenues reported for the twelve months ended September 30, 2015, 2014 and 2013, were based on nominal payments volume reported by our financial institution clients for the twelve months ended June 30, 2015, 2014 and 2013, respectively.
(2)Figures in the tables may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(3)Includes consumer prepaid volume.
(4)Includes large, middle and small business credit and debit, as well as commercial prepaid volume.
(5)Total nominal volume is the sum of total nominal payments volume and cash volume. Total nominal payments volume is the total monetary value of transactions for goods and services that are purchased on cards carrying the Visa, Visa Electron and Interlink brands. Cash volume generally consists of cash access transactions, balance access transactions, balance transfers and convenience checks. Total nominal volume is provided by our financial institution clients, subject to review by Visa. On occasion, previously presented volume information may be updated. Prior period updates are not material.
(6)Growth on a constant-dollar basis excludes the impact of foreign currency fluctuations against the U.S. dollar.

The following table provides the number of transactions processed by our VisaNet system, including transactions involving Visa, Visa Electron, Interlink and PLUS cards processed on Visa's networks during the fiscal periods presented.(1)

2015(2)201420132015 vs. 2014 % Change2014 vs. 2013 % Change
(in millions, except percentages)
Visa processed transactions70,96864,99358,4729%11%
(1)Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. On occasion, previously presented information may be updated. Prior period updates are not material.
(2)As a result of recent changes in Russian National Payment System law, we have transitioned the processing of Russian domestic transactions to the Russian National Payment Card System during the third quarter of fiscal 2015. The number of transactions processed by our VisaNet system does not reflect Russian domestic transactions processed after the transition.

Results of Operations

Operating Revenues

Our operating revenues are primarily generated from payments volume on Visa-branded cards and payment products for purchased goods and services, as well as the number of transactions processed on our network. We do not earn revenues from, or bear credit risk with respect to, interest or fees paid by account holders on Visa-branded cards or payment products. Our issuing clients have the responsibility for issuing cards and other payment products, and determining the interest rates and fees paid by account holders. We generally do not earn revenues from the fees that merchants are charged for acceptance by the acquirers, including the merchant discount rate. Our acquiring clients are generally responsible for soliciting merchants, and establishing and earning these fees.

The following sets forth the components of our operating revenues:

Service revenues consist mainly of revenues earned for providing financial institution clients with support services for the delivery of Visa-branded payment products and solutions. Current quarter service revenues are primarily assessed using a calculation of current pricing applied to the prior quarter's payments volume. Service revenues also include assessments designed to support ongoing acceptance and volume growth initiatives, which are recognized in the same period the related volume is transacted.

Data processing revenues are earned for authorization, clearing, settlement, network access and other maintenance and support services that facilitate transaction and information processing among our clients globally and with Visa Europe. Data processing revenues are recognized in the same period the related transactions occur or services are rendered.

International transaction revenues are earned for cross-border transaction processing and currency conversion activities. Cross-border transactions arise when the country of origin of the issuer is different from that of the merchant. International transaction revenues are primarily generated by cross-border payments and cash volume.

Other revenues consist mainly of license fees for use of the Visa brand, revenues earned from Visa Europe in connection with the Visa Europe Framework Agreement, fees from account holder services, certification and licensing, and other activities related to our acquired entities. Other revenues also include optional service or product enhancements, such as extended account holder protection and concierge services.

Client incentives consist of long-term contracts with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card and product acceptance and win merchant routing transactions over our network. These incentives are primarily accounted for as reductions to operating revenues.

Operating Expenses

Personnel includes salaries, employee benefits, incentive compensation, share-based compensation and contractor expense.

Marketing includes expenses associated with advertising and marketing campaigns, sponsorships and other related promotions of the Visa brand.

Network and processing mainly represents expenses for the operation of our processing network, including maintenance, equipment rental and fees for other data processing services.

Professional fees mainly consist of fees for legal, consulting and other professional services.

Depreciation and amortization includes depreciation expense for property and equipment, as well as amortization of purchased and internally developed software. Also included in this amount is amortization of finite-lived intangible assets primarily obtained through acquisitions.

General and administrative mainly consists of facilities costs, travel activities, foreign exchange gains and losses and other corporate expenses in support of our business.

Litigation provision is an estimate of litigation expense and is based on management's understanding of our litigation profile, the specifics of the cases, advice of counsel to the extent appropriate and management's best estimate of incurred loss as of the balance sheet date.

Non-operating (Expense) Income

Non-operating (expense) income mainly includes the change in the fair value of the Visa Europe put option, income, gains and losses earned on investments, and accrued interest and penalties related to reserves for uncertain tax positions.

Visa Inc. Fiscal 2015, 2014 and 2013

Operating Revenues

The following table sets forth our operating revenues earned in the United States, internationally and from Visa Europe. Revenues earned from Visa Europe are a result of our contractual arrangement with Visa Europe, as governed by the Framework Agreement that provides for trademark and technology licenses and bilateral services. See Note 2—Visa Europe to our consolidated financial statements.

Fiscal Year Ended September 30,$ Change% Change(1)
2015201420132015 vs. 20142014 vs. 20132015 vs. 20142014 vs. 2013
(in millions, except percentages)
United States$7,406$6,847$6,379$559$4688%7%
International6,2195,6295,17759045210%9%
Visa Europe25522622229413%2%
Total operating revenues$13,880$12,702$11,778$1,178$9249%8%
(1)Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

The increase in operating revenues primarily reflects continued growth in processed transactions and nominal payments volume. These benefits were partially offset by increases in client incentives. Overall revenue growth also reflects the positive impact of select pricing modifications effected in the third quarter of fiscal 2015 combined with higher foreign currency exchange volatility on international transaction revenues.

Our operating revenues, primarily service revenues, international transaction revenues, and client incentives, are impacted by the overall strengthening or weakening of the U.S. dollar as payments volume and related revenues denominated in local currencies are converted to U.S. dollars. The effect of exchange rate movements in fiscal 2015, as partially mitigated by our hedging program, resulted in an overall decline of about two-and-a-half percentage points in total operating revenue growth.

The following table sets forth the components of our total operating revenues.

Fiscal Year Ended September 30,$ Change% Change(1)
2015201420132015 vs. 20142014 vs. 20132015 vs. 20142014 vs. 2013
(in millions, except percentages)
Service revenues$6,302$5,797$5,352$505$4459%8%
Data processing revenues5,5525,1674,6423855257%11%
International transaction revenues4,0643,5603,38950417114%5%
Other revenues82377071653547%7%
Client incentives(2,861)(2,592)(2,321)(269)(271)10%12%
Total operating revenues$13,880$12,702$11,778$1,178$9249%8%
(1)Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
•Service revenues increased in fiscal 2015 and 2014 primarily due to 7% and 9% growth in nominal payments volume, respectively. Service revenues also benefited from select pricing modifications which became effective in the third quarter of fiscal 2015.
•Data processing revenues increased in fiscal 2015 and 2014 due to overall growth in processed transactions of 9% and 11%, respectively.
•International transaction revenues increased in fiscal 2015 primarily due to higher volatility in a broad range of currencies, combined with select pricing modifications that became effective in the third quarter of fiscal 2015. The fiscal 2014 increase was primarily due to 8% growth in nominal cross-border volume, partially offset by lower volatility in a broad range of currencies.
•Client incentives increased in fiscal 2015 and 2014, reflecting overall growth in global payments volume as well as incentives incurred on long-term client contracts that were initiated or renewed during fiscal 2015 and 2014. The amount of client incentives we record in future periods will vary based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts.

Operating Expenses

The following table sets forth the components of our total operating expenses.

Fiscal Year Ended September 30,$ Change% Change(1)
2015201420132015 vs. 20142014 vs. 20132015 vs. 20142014 vs. 2013
(in millions, except percentages)
Personnel$2,079$1,875$1,932$204$(57)11%(3)%
Marketing872900876(28)24(3)%3%
Network and processing474507468(33)39(7)%8%
Professional fees3363284128(84)2%(20)%
Depreciation and amortization494435397593814%10%
General and administrative54750745140568%12%
Litigation provision144533(439)450(97)%NM
Total operating expenses(2)$4,816$5,005$4,539$(189)$466(4)%10%
(1)Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(2)Excluding the litigation provision of $450 million recorded in fiscal 2014 associated with litigation covered by the U.S. retrospective responsibility plan, operating expenses for fiscal 2014 were $4.6 billion. On an adjusted basis, the percentage change of fiscal 2015 over fiscal 2014 is an increase of 6%, and fiscal 2014 over fiscal 2013 was flat.
•Personnel increased in fiscal 2015 primarily due to a continued increase in headcount reflecting our strategy to invest for future growth, particularly in internal technology resources, combined with higher incentive compensation. The decrease in fiscal 2014 was mainly due to lower incentive compensation and severance charges, reductions in our net periodic pension cost and the absence of one-time share-based compensation expenses previously recognized in fiscal 2013, partially offset by an increase in headcount.
•Marketing decreased in fiscal 2015 mainly due to the overall strengthening of the U.S. dollar as marketing spend in local currencies was converted to U.S. dollars, combined with the absence of the 2014 Sochi Winter Olympics and 2014 FIFA World Cup spend incurred in fiscal 2014. The decrease was partially offset by on-going advertising and promotional campaigns to support our growth strategies and new product initiatives, such as Visa Checkout, which began in the second half of fiscal 2014. The increase in marketing during fiscal 2014 compared to fiscal 2013 was also attributable to elevated spend supporting the two sporting campaigns.
•Network and processing in fiscal 2015 decreased as a result of initiatives to optimize the use of our technology resources. The increase in fiscal 2014 was mainly due to continued technology and processing network investments to support growth.
•Professional fees in fiscal 2015 were flat compared to fiscal 2014. The decrease in fiscal 2014 was mainly due to the absence of certain project costs incurred in fiscal 2013 as part of our effort to align resources with our strategic priorities.
•Depreciation and amortization increased in fiscal 2015 and 2014, primarily due to additional depreciation from our ongoing investments in technology assets and infrastructure to support our digital solutions and core business initiatives.
•General and administrative increased in fiscal 2015 mainly due to an increase in travel activities, product enhancements and facilities costs in support of our business growth, combined with losses incurred from the sale of assets held by an international subsidiary. These increases were partially offset by unrealized foreign exchange gains recorded in fiscal 2015 upon the remeasurement of monetary assets and liabilities held by foreign subsidiaries into their functional currency and the absence of the fiscal 2014 disposal of obsolete technology assets. Fiscal 2014 increased mainly due to facilities costs and other corporate expenses, and the disposal of obsolete technology assets, partially offset by a decrease in travel activities.
•Litigation provision in fiscal 2014 reflects a $450 million accrual related to the U.S. covered litigation. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities and Note 20—Legal Matters to our consolidated financial statements.

Non-operating (Expense) Income

Non-operating expense in fiscal 2015 primarily reflects a non-cash adjustment to the fair value of the unamended Visa Europe put option of $110 million, which is not subject to tax. The change in value did not reflect any change in the likelihood that Visa Europe would exercise its option in its unamended form at September 30, 2015. See Note 2—Visa Europe and Note 4—Fair Value Measurements and Investments to our consolidated financial statements. Non-operating income in fiscal 2014 increased from fiscal 2013 primarily due to the absence of a $15 million other-than-temporary impairment loss recognized during fiscal 2013. See Note 4—Fair Value Measurements and Investments to our consolidated financial statements.

Effective Income Tax Rate

The effective income tax rates were 30% in fiscal 2015 and 2014. The following highlights the significant tax items recorded in each respective year:

•a $296 million tax benefit recognized in fiscal 2015 resulting from the resolution of uncertain tax positions with taxing authorities. Included in the $296 million is a one-time $239 million tax benefit that relates to prior fiscal years; and
•a $264 million tax benefit recognized in fiscal 2014 related to a deduction for U.S. domestic production activities, of which $191 million was a one-time tax benefit related to prior fiscal years.

The effective income tax rate of 30% in fiscal 2014 differs from the effective income tax rate of 31% in fiscal 2013 mainly due to:

•the aforementioned $264 million tax benefit recognized in fiscal 2014; and
•the absence of the following in fiscal 2014:
•a tax benefit recognized in fiscal 2013 as a result of new guidance issued by the state of California regarding apportionment rules for years prior to fiscal 2012; and
•certain foreign tax credit benefits related to prior years recognized in fiscal 2013.

Liquidity and Capital Resources

Management of Our Liquidity

We regularly evaluate cash requirements for current operations, commitments, development activities and capital expenditures, and we may elect to raise additional funds for these purposes in the future through the issuance of either debt or equity. Our treasury policies provide management with the guidelines and authority to manage liquidity risk in a manner consistent with our corporate objectives.

The objectives of our treasury policies are to:

•provide adequate liquidity to cover operating expenditures and liquidity contingency scenarios;
•ensure timely completion of payments settlement activities;
•ensure payments on required litigation settlements;
•make planned capital investments in our business;
•pay dividends and repurchase our shares at the discretion of our board of directors; and
•optimize income earned by investing excess cash in securities that enable us to meet our working capital and liquidity needs.

Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, we believe that our projected sources of liquidity will be sufficient to meet our projected liquidity needs for more than the next 12 months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions, and other relevant circumstances.

Cash Flow Data

The following table summarizes our cash flow activity for the fiscal years presented:

201520142013
(in millions)
Total cash provided by (used in):
Operating activities$6,584$7,205$3,022
Investing activities(1,435)(941)(1,164)
Financing activities(3,603)(6,478)(1,746)
Effect of exchange rate changes on cash and cash equivalents1(1)—
Increase (decrease) in cash and cash equivalents$1,547$(215)$112

Operating activities. Reported cash provided by operating activities in fiscal 2015, 2014 and 2013 was significantly impacted by cash flows related to the interchange multidistrict litigation, including:

•payments of $426 million made from the litigation escrow account and a related decrease of approximately $157 million of income taxes paid during fiscal 2015;
•the return of $1.1 billion in takedown payments in fiscal 2014 and related increase of $368 million in income taxes paid; and
•payments of $4.4 billion made in fiscal 2013 from the litigation escrow account and a related decrease of $1.5 billion in overall income taxes paid.

The cash inflows and outflows related to the litigation escrow account are also reflected as offsetting cash flows within financing activities for their respective years as they are covered by the retrospective responsibility plan.

Absent the above impacts, cash provided by operating activities increased in fiscal 2015, 2014 and 2013 to approximately $6.9 billion, $6.5 billion, and $5.9 billion respectively, reflecting growth in total operating revenues in all three years. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities and Note 20—Legal Matters to our consolidated financial statements. We believe that cash flow generated from operating activities will be more than sufficient to meet our ongoing operational needs.

Investing activities. Cash used in investing activities was greater during fiscal 2015 compared to the prior year, primarily reflecting a decrease in the proceeds received from maturities and sales of available-for-sale securities, and an increase in purchases of available-for-sale securities. Cash used in investing activities was lower during fiscal 2014 compared to fiscal 2013, reflecting a decrease in purchases of available-for-sale investment securities, offset by an increase in cash used to acquire a business in which we previously held a minority interest. See Note 4—Fair Value Measurements and Investments and Note 7—Intangible Assets and Goodwill to our consolidated financial statements.

Financing activities. Reported financing activities reflect significant cash flows in connection with the interchange multidistrict litigation that offset the impacts discussed above within operating activities as they are covered by the U.S. retrospective responsibility plan. Additionally, reported financing activities in fiscal 2014 include deposits into the litigation escrow account of $450 million. Absent these impacts, which are related to the interchange multidistrict litigation, cash used in financing activities was $4.0 billion, $5.0 billion and $6.1 billion in fiscal 2015, 2014 and 2013, respectively. The changes in fiscal years 2015 and 2014 are primarily due to the repurchase of class A common stock in the open market. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities, Note 14—Stockholders' Equity and Note 20—Legal Matters to our consolidated financial statements.

Sources of Liquidity

Our primary sources of liquidity are cash on hand, cash flow from our operations, our investment portfolio and access to various equity and borrowing arrangements. Funds from operations are maintained in cash and cash equivalents and short-term or long-term available-for-sale investment securities based upon our funding requirements, access to liquidity from these holdings, and the return that these holdings provide. We believe that cash flow generated from operations, in conjunction with access to our other sources of liquidity, will be more than sufficient to meet our ongoing operational needs.

Cash and cash equivalents and short-term and long-term available-for-sale investment securities held by our foreign subsidiaries totaled $7.0 billion at September 30, 2015. If it were necessary to repatriate these funds for use in the United States, we would be required to pay U.S. taxes on the amount of undistributed earnings in those subsidiaries. It is our intent to indefinitely reinvest the majority of these funds outside of the United States. As such, we have not accrued a U.S. income tax provision in our financial results related to approximately $6.4 billion of undistributed earnings included in these funds. The amount of income taxes that would have resulted had such earnings been repatriated is not practicably determinable.

Available-for-sale investment securities. Our investment portfolio is designed to invest excess cash in securities which enables us to meet our working capital and liquidity needs. Our investment portfolio primarily consists of debt securities issued by the U.S. Treasury or U.S. government-sponsored agencies. The majority of these investments, $3.4 billion, are classified as non-current as they have stated maturities of more than one year from the balance sheet date. However, these investments are generally available to meet short-term liquidity needs.

Factors that may impact the liquidity of our investment portfolio include, but are not limited to, changes to credit ratings of the securities, uncertainty related to regulatory developments, actions by central banks and other monetary authorities, and the ongoing strength and quality of credit markets. We will continue to review our portfolio in light of evolving market and economic conditions. However, if current market conditions deteriorate, the liquidity of our investment portfolio may be impacted and we could determine that some of our investments are impaired, which could adversely impact our financial results. We have policies that limit the amount of credit exposure to any one financial institution or type of investment. See Item 1A—Risk Factors included elsewhere in this report.

Commercial paper program. We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. Under the program, we are authorized to issue up to $3.0 billion in outstanding notes, with maturities up to 397 days from the date of issuance. We had no outstanding obligations under the program at September 30, 2015. See Note 9—Debt to our consolidated financial statements.

Credit facility. On January 28, 2015, we entered into an unsecured $3.0 billion revolving credit facility. The credit facility, which expires on January 27, 2016, replaced our previous $3.0 billion credit facility, which terminated on January 28, 2015. The new credit facility contains covenants and events of default customary for facilities of this type. There were no borrowings under either facility and we were in compliance with all related covenants during the year ended September 30, 2015. See Note 9—Debt to our consolidated financial statements.

Universal shelf registration statement. In July 2015, we filed a registration statement with the SEC using a shelf registration process. As permitted by the registration statement, we may, from time to time, sell shares of debt or equity securities in one or more transactions. This registration statement expires in July 2018.

Expected debt issuance and change in capital structure. In conjunction with the potential Visa Europe acquisition, we intend to evolve our long-term capital structure. We intend to issue senior unsecured debt in an amount ranging between $15.0 billion and $16.0 billion in the first half of fiscal year 2016, with maturities ranging between 2 and 30 years, depending on market conditions. The proceeds from the debt issuance will be used to fund the upfront cash consideration of the acquisition, and increase the repurchase of class A common stock outstanding in 2016 and 2017 to offset the effect of the expected issuance of preferred stock upon the closing of the acquisition. Our initial leverage is expected to be between 1.4 and 1.5 times gross debt to earnings before interest, taxes, depreciation and amortization, or EBITDA. We expect our long-term leverage to be between 1.1 and 1.5 times gross debt to EBITDA, maintaining flexibility to pursue future growth opportunities. We expect to maintain our current investment credit ratings disclosed below.

Litigation escrow account. Pursuant to the terms of the U.S. retrospective responsibility plan, we maintain a litigation escrow account from which monetary liabilities from settlements of, or judgments in, the U.S. covered litigation will be payable. When we fund the litigation escrow account, the shares of class B common stock held by our stockholders are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities and Note 20—Legal Matters to our consolidated financial statements. The balance in this account at September 30, 2015, was $1.1 billion and is reflected as restricted cash in our consolidated balance sheet. As these funds are restricted for the sole purpose of making payments related to the U.S. covered litigation matters, as described below under Uses of Liquidity, we do not rely on them for other operational needs.

Credit Ratings

At September 30, 2015, our credit ratings by Standard and Poor’s and Moody’s were as follows:

Standard and Poor’sMoody’s
Debt typeRatingOutlookRatingOutlook
Short-term unsecured debtA-1StableP-1Stable
Long-term unsecured debtA+StableA1Stable

Various factors affect our credit ratings, including changes in our operating performance, the economic environment, conditions in the electronic payment industry, our financial position and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs and access to capital markets.

Uses of Liquidity

Payments settlement. Payments settlement due from and to our financial institution clients can represent a substantial daily liquidity requirement. U.S. dollar settlements are typically settled within the same day and do not result in a net receivable or payable balance, while settlement in currencies other than the U.S. dollar generally remain outstanding for one to two business days, which is consistent with industry practice for such transactions. During fiscal 2015, we were not required to fund settlement-related working capital. Our average daily net settlement position was a payable of $272 million.

Visa Europe acquisition. On November 2, 2015, we entered into a transaction agreement to acquire Visa Europe for a total purchase price of up to € 21.2 billion. The purchase price consists of: (a) at the closing of the transaction, up-front cash consideration of €11.5 billion and preferred stock convertible upon certain conditions into class A common stock or class A equivalent preferred stock, valued at approximately €5.0 billion, and (b) following the end of sixteen fiscal quarters post-closing, contingent cash consideration of up to €4.0 billion (plus up to an additional €0.7 billion in interest), determined based on the achievement of specified net revenue levels during such post-closing period. Closing is subject to regulatory approvals and other customary conditions, and is currently expected to occur in the fiscal third quarter of 2016. See Note 2—Visa Europe to our consolidated financial statements.

We also signed an option amendment, which amended the terms of the Visa Europe put option agreement to reflect the terms of the transaction agreement. If the acquisition of Visa Europe, as described above, is not completed, the put option will revert to its original, unamended form. The unamended put option agreement, if exercised, would require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members. If the acquisition does not close and the put option reverts to its unamended terms, Visa Europe may exercise the unamended put option at any time thereafter. The unamended put option agreement provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain adjustments, applies Visa Inc.'s forward price-to-earnings multiple (as defined in the unamended option agreement), or the P/E ratio, at the time the unamended option is exercised, to Visa Europe's adjusted net income for the forward 12-month period (as defined in the unamended option agreement), or the adjusted sustainable income. The calculation of Visa Europe's adjusted sustainable income under the terms of the unamended put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise, under the unamended terms, the key inputs to this formula, including Visa Europe's adjusted sustainable income, would be the result of negotiation between us and Visa Europe. The unamended put option agreement provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.

The fair value of the unamended put option represents the value of Visa Europe's option under its unamended terms, which, under certain conditions, could obligate us to purchase its member equity interest for an amount above fair value. At September 30, 2015, we determined the fair value of the unamended put option liability to be approximately $255 million. While this amount represents the fair value of the unamended put option at September 30, 2015, it does not represent the actual purchase price that we may be required to pay if the option is exercised under its unamended terms. The purchase price we could be obligated to pay 285 days after exercise will represent a substantial financial obligation. Given current economic conditions, the purchase price under the unamended terms of the put option would likely be in excess of $15 billion. We may need to obtain third-party financing, either by borrowing funds or undertaking a subsequent equity offering in order to fund this payment. The amount of that potential obligation could vary dramatically based on, among other things, Visa Europe's adjusted sustainable income and our P/E ratio, in each case, as negotiated at the time the put option is exercised.

Given the perpetual nature of the unamended put option and the various economic conditions which could be present at the time of exercise, our ultimate obligation in the event of exercise cannot be reliably estimated. The following table calculates our total obligation assuming, for illustrative purposes only, a range of P/E ratios for Visa Inc. and assuming that Visa Europe demonstrates $500 million of adjusted sustainable income at the date of exercise. The $500 million of assumed adjusted sustainable income provided below is for illustrative purposes only. This does not represent an estimate of the amount of adjusted sustainable income Visa Europe would have been able to demonstrate at September 30, 2015, or will be able to demonstrate at any point in time in the future. Should Visa Europe elect to exercise its put option in its unamended form, we believe it is likely that it will implement changes in its business operations to move to a for-profit model in order to maximize its adjusted sustainable income and, as a result, to increase the purchase price. The table also provides the amount of increase or decrease in the payout, assuming the same range of estimated P/E ratios, for each $100 million of adjusted sustainable income above or below the assumed $500 million demonstrated at the time of exercise. At September 30, 2015, our estimated long-term P/E ratio was 21.3x and the long-term P/E differential, the difference between this ratio and the estimated ratio applicable to Visa Europe, was 1.5x. At September 30, 2015, the spot P/E ratio was 23.2x and the spot P/E differential, the difference between this ratio and the estimated spot ratio applicable to Visa Europe, was 1.8x. These ratios are for reference purposes only and are not necessarily indicative of the ratio or differential that could be applicable if the put option were exercised at any point in the future in its unamended form.

Visa Inc’s Forward Price-to-Earnings RatioPayout Assuming Adjusted Sustainable Income of $500 million(1)Increase/Decrease in Payout for Each $100 million of Adjusted Sustainable Income Above/Below $500 million
(in millions)(in millions)
25$12,500$2,500
20$10,000$2,000
15$7,500$1,500
(1)Given current economic conditions, the purchase price under the unamended terms of the put option would likely be in excess of $15 billion.

U.S. Covered litigation. We are parties to legal and regulatory proceedings with respect to a variety of matters, including certain litigation that we refer to as the U.S. covered litigation. As noted above, monetary liabilities from settlements of, or judgments in, the U.S. covered litigation are payable from the litigation escrow account. During fiscal 2015, we made $426 million in covered litigation payments that were funded from the litigation escrow account, reflecting settlements with the individual opt-out merchants in the interchange multidistrict litigation proceedings. At September 30, 2015, the litigation escrow account had an available balance of $1.1 billion. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities and Note 20—Legal Matters to our consolidated financial statements.

Other litigation. Judgments in and settlements of litigation, other than the U.S. covered litigation, could give rise to future liquidity needs.

Reduction in as-converted class A common stock. During fiscal 2015, we repurchased 44 million shares of our class A common stock in the open market using $2.9 billion of cash on hand. As of September 30, 2015, we had remaining authorized funds of $2.8 billion. All share repurchase programs authorized prior to October 2014 have been completed. In October 2015, our board of directors authorized an additional $5.0 billion share repurchase program. See Note 14—Stockholders' Equity to our consolidated financial statements.

Dividends. During fiscal 2015, we paid $1.2 billion in dividends. In October 2015, our board of directors declared a quarterly dividend in the aggregate amount of $0.14 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis). We expect to pay approximately $341 million in connection with this dividend on December 1, 2015. See Note 14—Stockholders' Equity to our consolidated financial statements. We expect to continue paying quarterly dividends in cash, subject to approval by the board of directors. Holders of class B and C common stock will share ratably on an as-converted basis in such future dividends.

Pension and other postretirement benefits. We sponsor various qualified and non-qualified defined benefit pension plans that generally provide benefits based on years of service, age and eligible compensation. We also

sponsor a postretirement benefit plan that provides postretirement medical benefits for retirees and dependents upon meeting minimum age and service requirements. Our policy with respect to our qualified pension plan is to contribute annually not less than the minimum required under the Employee Retirement Income Security Act. Our non-qualified pension and other postretirement benefit plans are funded on a current basis. We typically fund our qualified pension plan in September of each year. In fiscal 2015, 2014 and 2013, we made contributions to our pension and other postretirement plans of $19 million, $14 million, and $4 million, respectively. In fiscal 2016, given current projections and assumptions, we anticipate funding our defined benefit pension plans and other postretirement plan by approximately $12 million. The actual contribution amount will vary depending upon the funded status of the pension plan, movements in the discount rate, performance of the plan assets, and related tax consequences. See Note 10—Pension, Postretirement and Other Benefits to our consolidated financial statements.

Capital expenditures. Our capital expenditures decreased during fiscal 2015 reflecting the investments to upgrade our processing network during the fourth quarter of 2014. We expect to continue investing in technology assets and payments system infrastructure to support our digital solutions and core business initiatives.

Acquisitions. During fiscal 2015 and fiscal 2014, we acquired businesses in which we previously held a minority interest using $93 million and $134 million of cash on hand, respectively. These amounts primarily reflect the respective purchase price, less cash received. These acquisitions help to expand our loyalty solutions for merchants by strengthening our merchant offers capabilities, and extend our processing capabilities internationally. See Note 7—Intangible Assets and Goodwill to our consolidated financial statements.

Fair Value Measurements—Financial Instruments

The assessment of fair value of our financial instruments is based on a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. As of September 30, 2015, our financial instruments measured at fair value on a recurring basis included approximately $9.3 billion of assets and $268 million of liabilities. Of these instruments, $262 million had significant unobservable inputs, including the unamended Visa Europe put option liability of $255 million, and $7 million of auction rate securities. See Note 4—Fair Value Measurements and Investments to our consolidated financial statements.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements are primarily comprised of guarantees and indemnifications. Visa has no off-balance sheet debt, other than lease and purchase order commitments, as discussed below and reflected in our contractual obligations table.

Indemnifications

We indemnify our financial institution clients for settlement losses suffered due to the failure of any other client to fund its settlement obligations in accordance with our rules. The amount of the indemnification is limited to the amount of unsettled Visa payment transactions at any point in time. We maintain global credit settlement risk policies and procedures to manage settlement risk, which may require clients to post collateral if certain credit standards are not met. See Note 1—Summary of Significant Accounting Policies and Note 11—Settlement Guarantee Management to our consolidated financial statements.

In the ordinary course of business, we enter into contractual arrangements with financial institutions and other clients under which we may agree to indemnify the client for certain types of losses incurred relating to the services we provide or otherwise relating to our performance under the applicable agreement.

Contractual Obligations

Our contractual commitments will have an impact on our future liquidity. The contractual obligations identified in the table below include both on- and off-balance sheet transactions that represent a material, expected or contractually committed future obligation as of September 30, 2015. We believe that we will be able to fund these obligations through cash generated from our operations and available credit facilities.

Payments Due by Period
Less than 1 Year1-3 Years3-5 YearsMore than 5 YearsTotal
(in millions)
Purchase orders(1)$855$196$49$—$1,100
Leases(2)9512070107392
Client incentives(3)3,9175,6683,7924,06717,444
Marketing and sponsorship(4)11224222971654
Dividends(5)341———341
Total(6,7,8)$5,320$6,226$4,140$4,245$19,931
(1)Represents agreements to purchase goods and services that specify significant terms, including: fixed or minimum quantities to be purchased and fixed, minimum or variable price provisions, and the approximate timing of the transaction.
(2)Includes operating leases for premises, equipment and software licenses, which range in terms from one to thirteen years.
(3)Represents future cash payments for long-term contracts with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card and product acceptance and win merchant routing transactions over our network. These agreements, which range in terms from one to thirteen years, can provide card issuance and/or conversion support, volume/growth targets and marketing and program support based on specific performance requirements. Payments under these agreements will generally be offset by revenues earned from higher corresponding payments and transaction volumes. These payment amounts are estimates and will change based on client performance, amendments to existing contracts or execution of new contracts. Related amounts disclosed in Note 17—Commitments and Contingencies to our consolidated financial statements represent the associated expected reduction of revenue related to these agreements that we estimate we will record.
(4)Visa is a party to contractual sponsorship agreements ranging from approximately three to sixteen years. These contracts are designed to increase Visa brand recognition, drive Visa-branded product usage, and differentiate Visa against competition. Over the life of these contracts, Visa is required to make payments in exchange for certain advertising and promotional rights. In connection with these contractual commitments, Visa has an obligation to spend certain minimum amounts for advertising and marketing promotion over the life of the contract. For obligations where the individual years of spend are not specified in the contract, we have estimated the timing of when these amounts will be spent.
(5)Includes expected dividend amount of $341 million as dividends were declared in October 2015 and will be paid on December 1, 2015 to all holders of record of Visa's common stock as of November 13, 2015.
(6)We have liabilities for uncertain tax positions of $752 million. At September 30, 2015, we had also accrued $33 million of interest and $6 million of penalties associated with our uncertain tax positions. We cannot determine the range of cash payments that will be made and the timing of the cash settlements, if any, associated with our uncertain tax positions. Therefore, no amounts related to these obligations have been included in the table.
(7)On November 2, 2015, we entered into an agreement to acquire Visa Europe for a total purchase price of up to €21.2 billion to be paid in a combination of up-front cash, preferred stock, and contingent cash consideration due four years after closing. As the agreement was signed after the balance sheet date, and closing of the acquisition is subject to regulatory approvals and other customary conditions, the maximum potential purchase price is not included in the table above. Additionally, in conjunction with the agreement to acquire Visa Europe, we also entered into an option amendment, which amended the terms of the Visa Europe put option to align with the terms of the transaction agreement to acquire Visa Europe. If the acquisition does not close, the Visa Europe put option will revert to its original, unamended terms. Due to the perpetual nature of the unamended instrument and the various economic conditions, which could exist if the unamended put were exercised, the ultimate amount and timing of Visa's obligation, if any, cannot be reliably estimated. Therefore, no amounts related to this obligation have been included in the table. However, given the current economic conditions and circumstances under which Visa Europe could exercise its unamended option, the purchase price under the unamended terms of the put option would likely be in excess of $15 billion. The fair value of the unamended Visa Europe put option itself totaling $255 million at September 30, 2015 has also been excluded from this table as it does not represent the amount, or an estimate of the amount, of Visa's obligation in the event of exercise. See the Liquidity and Capital Resources and Critical Accounting Estimates sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2—Visa Europe to our consolidated financial statements.
(8)We evaluate the need to make contributions to our pension plan after considering the funded status of the pension plan, movements in the discount rate, performance of the plan assets and related tax consequences. Expected contributions to our pension plan have not been included in the table as such amounts are dependent upon the considerations discussed above, and may result in a wide range of amounts. See Note 10—Pension, Postretirement and Other Benefits to our consolidated financial statements and the Liquidity and Capital Resources section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require us to make judgments, assumptions and estimates that affect the amounts reported. See Note 1—Summary of Significant Accounting Policies to our consolidated financial statements. We have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. However, actual results could differ from our assumptions and estimates, and such differences could be material.

We believe that the following accounting estimates are the most critical to fully understand and evaluate our reported financial results, as they require our most subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable.

Revenue Recognition—Client Incentives

Critical estimates. We enter into incentive agreements with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card and product acceptance and win merchant routing transactions over our network. These incentives are primarily accounted for as reductions to operating revenues; however, if a separate identifiable benefit at fair value can be established, they are accounted for as operating expenses. We generally capitalize advance incentive payments under these agreements if select criteria are met. The capitalization criteria include the existence of future economic benefits to Visa, the existence of legally enforceable recoverability language (e.g., early termination clauses), management's ability and intent to enforce the recoverability language and the ability to generate future earnings from the agreement in excess of amounts deferred. Capitalized amounts are amortized over the shorter of the period of contractual recoverability or the corresponding period of economic benefit. Incentives not yet paid are accrued systematically and rationally based on management's estimate of each client's performance. These accruals are regularly reviewed and estimates of performance are adjusted as appropriate, based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts.

Assumptions and judgment. Estimation of client incentives relies on forecasts of payments volume, card issuance and card conversion. Performance is estimated using customer-reported information, transactional information accumulated from our systems, historical information and discussions with our clients.

Impact if actual results differ from assumptions. If our clients' actual performance or recoverable cash flows are not consistent with our estimates, client incentives may be materially different than initially recorded. Increases in incentive payments are generally driven by increased payments and transaction volume, which drive our net revenues. As a result, in the event incentive payments exceed estimates, such payments are not expected to have a material effect on our financial condition, results of operations or cash flows. The cumulative impact of a revision in estimates is recorded in the period such revisions become probable and estimable. For the year ended September 30, 2015, client incentives represented 17% of gross operating revenues.

Fair Value—Visa Europe Put Option

Critical estimates. On November 2, 2015, the Visa Europe put option was amended in conjunction with our agreement to acquire Visa Europe. At September 30, 2015, the fair value of the put option liability was based on the unamended terms. If the acquisition of Visa Europe, described in Note 2—Visa Europe, is not completed, the put option will revert to its original, unamended form. If the put option is exercised under its unamended terms, we will be required to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The unamended put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain adjustments, applies our forward price-to-earnings multiple (as defined in the unamended option agreement), or the P/E ratio, at the time the option is exercised to Visa Europe's projected adjusted net income for the forward 12-month period (as defined in the unamended option agreement), or the adjusted sustainable income.

The calculation of Visa Europe's adjusted sustainable income under the terms of the unamended put option agreement includes potentially material adjustments for cost synergies and other negotiated items.

Upon exercise of the unamended put option, the key inputs to this formula, including Visa Europe's adjusted sustainable income, would be the result of negotiation between us and Visa Europe. The unamended put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price. See Note 2—Visa Europe to our consolidated financial statements for further detail regarding the calculation of the put exercise price under the unamended agreement.

The fair value of Visa Europe's unamended option was estimated to be approximately $255 million at September 30, 2015. While the unamended put option is in fact non-transferable, this amount, recorded in our financial statements, represents our estimate of the amount we would be required to pay a third-party market participant to transfer the potential obligation in an orderly transaction. The fair value of the unamended put option is computed by comparing the estimated strike price, under the terms of the unamended put agreement, to the estimated fair value of Visa Europe. The fair value of Visa Europe is defined as the estimated amount a third-party market participant might pay in an arm's length transaction under normal business conditions. A probability of exercise assumption is applied to reflect the possibility that Visa Europe will never exercise its option in its unamended form.

While this amount represents the fair value of the unamended put option at September 30, 2015, it does not represent the actual purchase price that we may be required to pay if the unamended option is exercised. Given current economic conditions, the purchase price under the unamended terms of the put option would likely be in excess of $15 billion. See the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Assumptions and judgment. The most significant estimates used in the valuation of the unamended put option are the assumed probability that Visa Europe will elect to exercise its option in its unamended form, and the estimated differential between the forward price-to-earnings multiple applicable to our common stock, as defined in the unamended put option agreement, and that applicable to Visa Europe on a stand-alone basis at the time of exercise, which we refer to as the P/E differential.

Probability of exercise—Exercise of the unamended put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe shareholders pursuant to authority granted to Visa Europe, including under its Articles of Association). We estimate the assumed probability of exercise based on the unamended terms of the put option agreement and other reasonably available information including, but not limited to: (i) Visa Europe's stated intentions (if any) to exercise the put option in its unamended form; (ii) evaluation of market conditions, including the regulatory environment, that could impact the potential future profitability of Visa Europe; and (iii) other qualitative factors including, but not limited to, qualitative factors related to Visa Europe's largest members, which could indicate a change in their need or desire to liquidate their investment holdings.

P/E differential—The P/E differential is determined by estimating the relative difference in the forward price-to-earnings multiples applicable to our common stock, as defined in the unamended put option agreement, and that applicable to Visa Europe at the time of exercise. For valuation purposes, the forward price-to-earnings multiple applicable to our common stock at the time of exercise is estimated by evaluating various quantitative measures and qualitative factors. Quantitatively, we estimate our P/E ratio by dividing the average stock price over the preceding 24 months (the “long-term P/E calculation”) and the last 30 trading dates (the “30-day P/E calculation”) prior to the measurement date by the median estimate of our net income per share for the 12 months starting with the next calendar quarter immediately following the reporting date. This median earnings estimate is obtained from the Institutional Brokers' Estimate System. We then determine the best estimate of our long-term price-to-earnings multiple for valuation purposes by qualitatively evaluating the 30-day P/E calculation as compared to the long-term P/E calculation. In this evaluation we examine both measures to determine whether differences, if any, are the result of a fundamental change in our long-term value or the result of short-term market volatility or other non-Company specific market factors that may not be indicative of our long-term forward P/E. We believe, given the perpetual nature of the unamended put option, that a market participant would more heavily weigh long-term value indicators, as opposed to short-term indicators.

Factors that might indicate a fundamental change in long-term value include, but are not limited to, changes in the regulatory environment, client portfolios, long-term growth rates or new product innovations. A consistent methodology is applied to a group of comparable public companies used to estimate the forward price-to-earnings

multiple applicable to Visa Europe. These estimates, therefore, are impacted by changes in stock prices and the financial market's expectations of our future earnings and those of comparable companies.

Other estimates of lesser significance include growth rates and foreign currency exchange rates applied in the calculation of Visa Europe's adjusted sustainable income. Growth rates assumed in the valuation reflect a for-profit model, as we believe it is likely that, should Visa Europe choose to exercise the put option in its unamended form, it will seek to maximize the purchase price by adopting a for-profit business model in advance of exercising the unamended put option. The foreign exchange rate used to translate Visa Europe's results from euros to U.S. dollars reflects a blend of forward exchange rates observed in the marketplace. The assumed timing of exercise of the unamended put option used in the various modeled scenarios is not an overly significant assumption in the valuation, as obligations calculated in later years are more heavily discounted in the calculation of present value.

Impact if actual results differ from assumptions. In the determination of the fair value of the unamended put option at September 30, 2015, we have assumed a 40% probability of exercise by Visa Europe at some point in the future and an estimated long-term P/E differential at the time of exercise of approximately 1.5x. The use of a probability of exercise that is 5% higher than our estimate would have resulted in an increase of approximately $37 million in the value of the unamended put option. An increase of 1.0x in the assumed P/E differential would have resulted in an increase of approximately $249 million in the value of the unamended put option. The unamended put option is exercisable at any time at the sole discretion of Visa Europe. As such, the unamended put option liability is included in accrued liabilities in our consolidated balance sheet at September 30, 2015. Classification in current liabilities reflects the fact that this obligation could become payable within 12 months at September 30, 2015.

Legal and Regulatory Matters

Critical estimates. We are currently involved in various legal proceedings, the outcomes of which are not within our complete control or may not be known for prolonged periods of time. Management is required to assess the probability of loss and amount of such loss, if any, in preparing our financial statements.

Assumptions and judgment. We evaluate the likelihood of a potential loss from legal or regulatory proceedings to which we are a party. We record a liability for such claims when a loss is deemed probable and the amount can be reasonably estimated. Significant judgment may be required in the determination of both probability and whether an exposure is reasonably estimable. Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. As additional information becomes available, we reassess the potential liability related to pending claims and may revise our estimates.

Our U.S. retrospective responsibility plan only addresses monetary liabilities from settlements of, or final judgments in, the U.S. covered litigation. The plan's mechanisms include the use of the litigation escrow account. The accrual related to the U.S. covered litigation could be either higher or lower than the litigation escrow account balance. We did not record an accrual for the U.S. covered litigation during fiscal 2015. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities and Note 20—Legal Matters to our consolidated financial statements.

Impact if actual results differ from assumptions. Due to the inherent uncertainties of the legal and regulatory processes in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes, which could have material adverse effects on our business, financial conditions and results of operations. See Note 20—Legal Matters to our consolidated financial statements.

Income Taxes

Critical estimates. In calculating our effective income tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions.

Assumptions and judgment. We have various tax filing positions with regard to the timing and amount of deductions and credits, the establishment of liabilities for uncertain tax positions and the allocation of income among various tax jurisdictions. We are also required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of such positions that may not be sustained, or may only be partially sustained, upon examination by the relevant taxing authorities.

Impact if actual results differ from assumptions. Although we believe that our estimates and judgments are reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by

the taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material adverse effect on our financial results and cash flows.

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