Item 8. Financial Statements and Supplementary Data.

			Page
Management’s Report on Internal Control Over Financial Reporting.			62
Report of Independent Registered Public Accounting Firm. (PCAOB ID 238)			63
Consolidated Financial Statements of Discovery, Inc.:			65
Consolidated Balance Sheets.			65
Consolidated Statements of Operations.			66
Consolidated Statements of Comprehensive Income (Loss).			67
Consolidated Statements of Cash Flows.			68
Consolidated Statements of Equity.			69
Notes to Consolidated Financial Statements.			70

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Discovery, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Securities Exchange Act of 1934, as amended. The 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 disposition 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 provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the 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 consolidated financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of the inherent limitations in any internal control, no matter how well designed, 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.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2021 based on the framework set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective at a reasonable assurance level based on the specified criteria.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report in Item 8 of Part II of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm.”

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Discovery, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Discovery, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income (loss), of equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2021 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Changes in Accounting Principles

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for goodwill impairment and content in 2020, and the manner in which it accounts for leases in 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 the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

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

Definition and Limitations of Internal Control over Financial Reporting

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

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

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 a critical audit matter 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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Certain Reserves for Uncertain Tax Positions

As described in Notes 2 and 18 to the consolidated financial statements, the Company’s reserves for uncertain tax positions were $420 million as of December 31, 2021. Management establishes a reserve for uncertain tax positions unless management determines that such positions are more likely than not to be sustained upon examination based on their technical merits, including the resolution of any appeals or litigation processes. As disclosed by management, significant judgment is exercised in evaluating all relevant information, the technical merits of the tax positions, and the accurate measurement of uncertain tax positions when determining the amount of the reserve and whether positions taken on the Company’s tax returns are more likely than not to be sustained. This also involves the use of significant estimates and assumptions with respect to the potential outcome of positions taken on tax returns that may be reviewed by tax authorities.

The principal considerations for our determination that performing procedures relating to certain reserves for uncertain tax positions is a critical audit matter are (i) the significant judgment by management when determining certain reserves for uncertain tax positions, including a high degree of estimation uncertainty when determining the reserves and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s determination of certain reserves for uncertain tax positions, the technical merits of the tax positions, and the accurate measurement of the uncertain tax positions.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the recognition, measurement, and completeness of uncertain tax positions. These procedures also included, among others (i) testing the information used in the determination of certain reserves for uncertain tax positions, including international and federal filing positions and the related final tax returns; (ii) testing the calculation of the liability for certain reserves for uncertain tax positions by jurisdiction, including evaluating management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained, as well as the likelihood of the possible estimated outcome; (iii) for certain uncertain tax positions, testing the completeness of management’s assessment and possible outcomes, and (iv) evaluating the status and results of income tax audits with the relevant tax authorities.

/s/ PricewaterhouseCoopers LLP

Washington, District of Columbia

February 24, 2022

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

DISCOVERY, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

						December 31,
						2021						2020
ASSETS
Current assets:
Cash and cash equivalents						$	3,905					$	2,091
Receivables, net						2,446						2,537
Content rights and prepaid license fees, net						245						532
Prepaid expenses and other current assets						668						970
Total current assets						7,264						6,130
Noncurrent content rights, net						3,832						3,439
Property and equipment, net						1,336						1,206
Goodwill						12,912						13,070
Intangible assets, net						6,317						7,640
Equity method investments						543						507
Other noncurrent assets						2,223						2,095
Total assets						$	34,427					$	34,087
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable						$	412					$	397
Accrued liabilities						2,230						1,793
Deferred revenues						478						557
Current portion of debt						339						335
Total current liabilities						3,459						3,082
Noncurrent portion of debt						14,420						15,069
Deferred income taxes						1,225						1,534
Other noncurrent liabilities						1,927						2,019
Total liabilities						21,031						21,704
Commitments and contingencies (See Note 22)
Redeemable noncontrolling interests						363						383
Equity:
Discovery, Inc. stockholders’ equity:
Series A-1 convertible preferred stock: $0.01 par value; 8 shares authorized, issued and outstanding						—						—
Series C-1 convertible preferred stock: $0.01 par value; 6 shares authorized; 4 shares issued and outstanding and 5 shares issued and outstanding						—						—
Series A common stock: $0.01 par value; 1,700 shares authorized; 170 and 163 shares issued; and 169 and 162 shares outstanding						2						2
Series B convertible common stock: $0.01 par value; 100 shares authorized; 7 shares issued and outstanding						—						—
Series C common stock: $0.01 par value; 2,000 shares authorized; 559 and 547 shares issued; and 330 and 318 shares outstanding						5						5
Additional paid-in capital						11,086						10,809
Treasury stock, at cost: 230 shares						(8,244)						(8,244)
Retained earnings						9,580						8,543
Accumulated other comprehensive loss						(830)						(651)
Total Discovery, Inc. stockholders’ equity						11,599						10,464
Noncontrolling interests						1,434						1,536
Total equity						13,033						12,000
Total liabilities and equity						$	34,427					$	34,087
The accompanying notes are an integral part of these consolidated financial statements.

DISCOVERY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

						Year Ended December 31,
						2021						2020						2019
Revenues:
Advertising						$	6,215					$	5,583					$	6,044
Distribution						5,409						4,866						4,835
Other						567						222						265
Total revenues						12,191						10,671						11,144
Costs and expenses:
Costs of revenues, excluding depreciation and amortization						4,620						3,860						3,819
Selling, general and administrative						4,016						2,722						2,788
Depreciation and amortization						1,582						1,359						1,347
Impairment of goodwill and other intangible assets						—						124						155
Restructuring and other charges						32						91						26
Gain on disposition						(71)						—						—
Total costs and expenses						10,179						8,156						8,135
Operating income						2,012						2,515						3,009
Interest expense, net						(633)						(648)						(677)
Loss on extinguishment of debt						(10)						(76)						(28)
Loss from equity investees, net						(18)						(105)						(2)
Other income (expense), net						82						42						(8)
Income before income taxes						1,433						1,728						2,294
Income tax expense						(236)						(373)						(81)
Net income						1,197						1,355						2,213
Net income attributable to noncontrolling interests						(138)						(124)						(128)
Net income attributable to redeemable noncontrolling interests						(53)						(12)						(16)
Net income available to Discovery, Inc.						$	1,006					$	1,219					$	2,069
Net income per share available to Discovery, Inc. Series A, B and C common stockholders:
Basic						$	1.55					$	1.82					$	2.90
Diluted						$	1.54					$	1.81					$	2.88
Weighted average shares outstanding:
Basic						503						505						529
Diluted						664						672						711
The accompanying notes are an integral part of these consolidated financial statements.

DISCOVERY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

						Year Ended December 31,
						2021						2020						2019
Net income						$	1,197					$	1,355					$	2,213
Other comprehensive income (loss) adjustments, net of tax:
Currency translation						(290)						292						(15)
Pension plan and SERP						2						(8)						(10)
Derivatives						109						(113)						18
Comprehensive income						1,018						1,526						2,206
Comprehensive income attributable to noncontrolling interests						(138)						(124)						(127)
Comprehensive income attributable to redeemable noncontrolling interests						(53)						(12)						(17)
Comprehensive income attributable to Discovery, Inc.						$	827					$	1,390					$	2,062
The accompanying notes are an integral part of these consolidated financial statements.

DISCOVERY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

						Year Ended December 31,
						2021						2020						2019
Operating Activities
Net income						$	1,197					$	1,355					$	2,213
Adjustments to reconcile net income to cash provided by operating activities:
Content rights amortization and impairment						3,501						2,956						2,853
Depreciation and amortization						1,582						1,359						1,347
Deferred income taxes						(511)						(186)						(504)
Equity in losses of equity method investee companies and cash distributions						63						167						62
Loss on extinguishment of debt						10						76						28
Share-based compensation expense						178						110						142
Impairment of goodwill and other intangible assets						—						124						155
Gain on sale of investments						(19)						(103)						(10)
(Gain) loss on disposition						(71)						2						—
Other, net						105						(22)						86
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Receivables, net						47						105						(7)
Content rights and payables, net						(3,381)						(3,053)						(3,060)
Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities						185						(131)						122
Foreign currency, prepaid expenses and other assets, net						(88)						(20)						(28)
Cash provided by operating activities						2,798						2,739						3,399
Investing Activities
Purchases of property and equipment						(373)						(402)						(289)
Purchases of investments						(103)						(250)						—
Investments in and advances to equity investments						(184)						(181)						(254)
Proceeds from sales and maturities of investments and dissolution of joint venture						599						69						125
Business acquisitions, net of cash acquired						(2)						(39)						(73)
(Payments for) proceeds from derivative instruments, net						(86)						85						54
Other investing activities, net						93						15						(1)
Cash used in investing activities						(56)						(703)						(438)
Financing Activities
Principal repayments of debt, including premiums to par value and discount payment						(574)						(2,193)						(2,658)
Borrowings from debt, net of discount and issuance costs						—						1,979						1,479
Repurchases of stock						—						(969)						(633)
Principal repayments of revolving credit facility						—						(500)						(225)
Borrowings under revolving credit facility						—						500						—
Distributions to noncontrolling interests and redeemable noncontrolling interests						(251)						(254)						(250)
Other financing activities, net						(28)						(112)						(70)
Cash used in financing activities						(853)						(1,549)						(2,357)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						(106)						83						(38)
Net change in cash, cash equivalents, and restricted cash						1,783						570						566
Cash, cash equivalents, and restricted cash, beginning of period						2,122						1,552						986
Cash, cash equivalents, and restricted cash, end of period						$	3,905					$	2,122					$	1,552
The accompanying notes are an integral part of these consolidated financial statements.

DISCOVERY, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in millions)

						Preferred Stock												Common Stock												Additional Paid-In Capital						Treasury Stock						Retained Earnings						Accumulated Other Comprehensive Loss						Discovery, Inc. Stockholders’ Equity						Noncontrolling Interests						Total Equity
						Shares						Par Value						Shares						Par Value
December 31, 2018						14						$	—					691						$	7					$	10,647					$	(6,737)					$	5,254					$	(785)					$	8,386					$	1,716					$	10,102
Cumulative effect of accounting changes						—						—						—						—						—						—						34						(30)						4						—						4
Net income available to Discovery, Inc. and attributable to noncontrolling interests						—						—						—						—						—						—						2,069						—						2,069						128						2,197
Other comprehensive loss						—						—						—						—						—						—						—						(7)						(7)						—						(7)
Preferred stock conversion						(1)						—						22						—						—						—						—						—						—						—						—
Share-based compensation						—						—						—						—						73						—						—						—						73						—						73
Repurchases of stock						—						—						—						—						—						(637)						—						—						(637)						—						(637)
Settlement of common stock repurchase contract						—						—						—						—						5						—						—						—						5						—						5
Tax settlements associated with share-based plans						—						—						—						—						(22)						—						—						—						(22)						—						(22)
Dividends paid to noncontrolling interests						—						—						—						—						—						—						—						—						—						(211)						(211)
Issuance of stock in connection with share-based plans						—						—						2						—						44						—						—						—						44						—						44
Redeemable noncontrolling interest adjustments to redemption value						—						—						—						—						—						—						(24)						—						(24)						—						(24)
December 31, 2019						13						—						715						7						10,747						(7,374)						7,333						(822)						9,891						1,633						11,524
Cumulative effect of an accounting change						—						—						—						—						—						—						2						—						2						—						2
Cumulative effect of accounting changes of an equity method investee						—						—						—						—						—						—						(3)						—						(3)						—						(3)
Net income available to Discovery, Inc. and attributable to noncontrolling interests						—						—						—						—						—						—						1,219						—						1,219						124						1,343
Other comprehensive income						—						—						—						—						—						—						—						171						171						—						171
Share-based compensation						—						—						—						—						94						—						—						—						94						—						94
Repurchases of stock						—						—						—						—						—						(965)						—						—						(965)						—						(965)
Tax settlements associated with share-based plans						—						—						—						—						(32)						—						—						—						(32)						—						(32)
Equity exchange with Harpo for step acquisition of OWN (See Note 11)						—						—						—						—						(45)						95						9						—						59						—						59
Dividends paid to noncontrolling interests						—						—						—						—						—						—						—						—						—						(223)						(223)
Issuance of stock in connection with share-based plans						—						—						2						—						43						—						—						—						43						—						43
Redeemable noncontrolling interest adjustments to redemption value						—						—						—						—						—						—						(17)						—						(17)						—						(17)
Other adjustments to stockholders' equity						—						—						—						—						2						—						—						—						2						2						4
December 31, 2020						13						—						717						7						10,809						(8,244)						8,543						(651)						10,464						1,536						12,000
Net income available to Discovery, Inc. and attributable to noncontrolling interests						—						—						—						—						—						—						1,006						—						1,006						138						1,144
Other comprehensive loss						—						—						—						—						—						—						—						(179)						(179)						—						(179)
Share-based compensation						—						—						—						—						158						—						—						—						158						—						158
Preferred stock conversion						(1)						—						11						—						—						—						—						—						—						—						—
Tax settlements associated with share-based plans						—						—						—						—						(71)						—						—						—						(71)						—						(71)
Dividends paid to noncontrolling interests						—						—						—						—						—						—						—						—						—						(240)						(240)
Issuance of stock in connection with share-based plans						—						—						8						—						198						—						—						—						198						—						198
Redeemable noncontrolling interest adjustments to redemption value						—						—						—						—						(8)						—						31						—						23						—						23
December 31, 2021						12						$	—					736						$	7					$	11,086					$	(8,244)					$	9,580					$	(830)					$	11,599					$	1,434					$	13,033
The accompanying notes are an integral part of these consolidated financial statements.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Discovery, Inc. (“Discovery”, the “Company”, "we", "us" or "our") is a global media company that provides content across multiple distribution platforms, including linear platforms such as pay-television ("pay-TV"), free-to-air and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer ("DTC") subscription products. In January 2021, the Company launched discovery+, its aggregated DTC product, in the U.S. across several streaming platforms. The Company also operates production studios. The Company has organized its operations into two reportable segments: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting primarily of international television networks and digital content services.

Basis of Consolidation

The consolidated financial statements include the accounts of Discovery and its majority-owned subsidiaries in which a controlling interest is maintained, including variable interest entities ("VIE") for which the Company is the primary beneficiary. For each non-wholly owned subsidiary, the Company evaluates its ownership and other interests to determine whether it should consolidate the entity or account for its ownership interest as an unconsolidated investment. As part of its evaluation, the Company makes judgments in determining whether the entity is a VIE and, if so, whether it is the primary beneficiary of the VIE and is thus required to consolidate the entity. (See Note 4.) If it is concluded that an entity is not a VIE, then the Company considers its proportional voting interests in the entity. The Company consolidates majority-owned subsidiaries in which a controlling financial interest is maintained. A controlling financial interest is determined by majority ownership and the absence of significant third-party participating rights. Ownership interests in entities for which the Company has significant influence that are not consolidated are accounted for as equity method investments.

Intercompany accounts and transactions between consolidated entities have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates.

Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, estimated credit losses, content rights, leases, depreciation and amortization, business combinations, share-based compensation, income taxes, other financial instruments, contingencies, and the determination of whether the Company should consolidate certain entities.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the coronavirus disease 2019 (“COVID-19”) outbreak to be a global pandemic. COVID-19 has continued to spread throughout the world, and the duration and severity of its effects and associated economic disruption remain uncertain. We continue to closely monitor the impact of COVID-19 on all aspects of our business and geographies, including the impact on our customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties.

Beginning in the second quarter of 2020, demand for the Company’s advertising products and services decreased due to economic disruptions from limitations on social and commercial activity. These economic disruptions and the resulting effect on the Company eased during the second half of 2020. The pandemic did not have a significant impact on demand during fiscal year 2021. Many of the Company’s third-party production partners that were shut down during most of the second quarter of 2020 due to COVID-19 restrictions came back online in the third quarter of 2020 and, as a result, the Company has incurred additional costs to comply with various governmental regulations and implement certain safety measures for the Company's employees, talent, and partners. Additionally, certain sporting events that the Company has rights to were cancelled or postponed, thereby eliminating or deferring the related revenues and expenses, including the Tokyo 2020 Olympic Games, which occurred in July and August 2021. The postponement of the 2020 Olympic Games deferred both Olympic-related revenues and significant expenses from fiscal year 2020 to fiscal year 2021.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In response to the impact of the pandemic, we employed innovative production and programming strategies, including producing content filmed by our on-air talent and seeking viewer feedback on which content to air. We pursued a number of cost savings initiatives, which began during the third quarter of 2020 through the implementation of travel, marketing, production and other operating cost reductions, including personnel reductions, restructurings and resource reallocations to align our expense structure to ongoing changes within the industry.

The full extent of COVID-19’s effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others. We will continue to monitor COVID-19 and its impact on our business results and financial condition. The consolidated financial statements set forth in this Annual Report on Form 10-K reflect management’s latest estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Foreign Currency

The reporting currency of the Company is the U.S. dollar. The functional currency of most of the Company’s international subsidiaries is the local currency. Financial statements of subsidiaries whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date for assets and liabilities and at average exchange rates for revenues and expenses for the respective periods. Translation adjustments are recorded in accumulated other comprehensive loss. Cash flows from the Company's operations in foreign countries are generally translated at the weighted average rate for the applicable period in the consolidated statements of cash flows.

The Company is exposed to foreign currency risk to the extent that it enters into transactions denominated in currencies other than its subsidiaries’ respective functional currencies. Transactions denominated in currencies other than subsidiaries’ functional currencies are recorded based on exchange rates at the time such transactions arise. Such transactions include affiliate and ad sales arrangements, content arrangements, equipment and other vendor purchases and intercompany transactions. Changes in exchange rates with respect to amounts recorded in the Company's consolidated balance sheets related to these items will result in unrealized foreign currency transaction gains and losses based upon period-end exchange rates. The Company also records realized foreign currency transaction gains and losses upon settlement of the transactions. Foreign currency transaction gains and losses resulting from the conversion of the transaction currency to functional currency are included in other income (expense), net.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of 90 days or less.

Receivables

Receivables include amounts billed and currently due from customers and are presented net of an estimate for credit losses. To assess collectability, the Company analyzes market trends, economic conditions, historical collection experience, the aging of receivables and customer specific risks, and reserves an amount that it estimates may not be collected. The Company does not require collateral with respect to trade receivables.

Content Rights

Content rights principally consist of television series, specials, films and sporting events. Content aired on the Company’s television networks and digital content offerings is sourced from a wide range of third-party producers, wholly-owned and equity method investee production studios, and sports associations. Content is classified either as produced, coproduced or licensed.

The Company owns most or all of the rights to produced content. The Company collaborates with third parties to finance and develop coproduced content, and it retains significant rights to exploit the programs. Prepaid licensed content includes advance payments for rights to air sporting events that will take place in the future and advance payments for acquired films and television series.

Costs of produced and coproduced content consist of development costs, acquired production costs, direct production costs, certain production overhead costs and participation costs. The Company’s coproduction arrangements generally provide for the sharing of production costs. The Company records its costs but does not record the costs borne by the other party as the Company does not share any associated economics of exploitation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Licensed content is comprised of films or series that have been previously produced by third parties and the Company does not own the rights. Program licenses typically have fixed terms and require payments during the term of the license. The cost of licensed content is capitalized when the cost is known or reasonably determinable, the license period for the programs has commenced, the program materials have been accepted by the Company in accordance with the license agreements, and the programs are available for the first showing. The Company pays in advance of delivery for television series, specials, films and sports rights. Payments made in advance of when the right to air the content is received are recognized as prepaid licensed content. Participation costs are expensed in line with the amortization of production costs. Content distribution, advertising, marketing, general and administrative costs are expensed as incurred.

Linear content amortization expense for each period is recognized based on the revenue forecast model, which approximates the proportion that estimated distribution and advertising revenues for the current period represent in relation to the estimated remaining total lifetime revenues. Digital content amortization for each period is recognized based on estimated viewing patterns as there are no direct revenues to associate to the individual content assets and therefore, number of views is most representative of the use of the title. Judgment is required to determine the useful lives and amortization patterns of the Company’s content assets.

Quarterly, the Company prepares analyses to support its content amortization expense. Critical assumptions used in determining content amortization include: (i) the grouping of content with similar characteristics, (ii) the application of a quantitative revenue forecast model or viewership model based on the adequacy of historical data, (iii) determining the appropriate historical periods to utilize and the relative weighting of those historical periods in the forecast model, (iv) assessing the accuracy of the Company's forecasts and (v) incorporating secondary streams. The Company then considers the appropriate application of the quantitative assessment given forecasted content use, expected content investment and market trends. Content use and future revenues may differ from estimates based on changes in expectations related to market acceptance, network affiliate fee rates, advertising demand, the number of cable and satellite television subscribers receiving the Company’s networks, the number of subscribers to its digital services, and program usage. Accordingly, the Company continually reviews its estimates and planned usage and revises its assumptions if necessary. Any material adjustments from the Company’s review of the amortization rates are applied prospectively in the period of the change for assets in film groups, which represent the largest proportion of the Company's content assets.

The result of the content amortization analysis is either an accelerated method or a straight-line amortization method over the estimated useful lives of generally two to five years. Amortization of capitalized costs for produced and coproduced content begins when a program has been aired. Amortization of capitalized costs for licensed content generally commences when the license period begins and the program is available for use. The Company allocates the cost of multi-year sports programming arrangements over the contract period of each event or season based on the estimated relative value of each event or season. Amortization of sports rights takes place when the content airs.

Capitalized content costs are stated at the lower of cost less accumulated amortization or fair value. Content assets (produced, coproduced and licensed) are predominantly monetized as a group on the Company’s linear networks and digital content offerings. For content assets that are predominantly monetized within film groups, the Company evaluates the fair value of content in aggregate at the group level by considering expected future revenue generation typically by using a discounted cash flow ("DCF") analysis when an event or change in circumstances indicates a change in the expected usefulness of the content or that the fair value may be less than unamortized costs. Estimates of future revenues consider historical airing patterns and future plans for airing content, including any changes in strategy. Given the significant estimates and judgments involved, actual demand or market conditions may be less favorable than those projected, requiring a write-down to fair value. Programming and development costs for programs that the Company has determined will not be produced, are fully expensed in the period the determination is made. The Company’s film groups are generally aligned along the Company’s networks and digital content offerings except for certain international territories wherein content assets are shared across the various networks in the territory and therefore, the territory is the film group. The Company’s rights to the Olympic Games are predominantly monetized on their own as the sublicensing of the rights in certain territories is a significant component of the monetization strategy. Beginning in 2020, all content rights and prepaid license fees are classified as a noncurrent asset, with the exception of content acquired with an initial license period of 12 months or less and prepaid sports rights expected to air within 12 months. (See "Accounting and Reporting Pronouncements Adopted" below and Note 6.)

Investments

The Company holds investments in equity method investees and equity investments with and without readily determinable fair values. (See Note 4.)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity Method Investments

Investments in equity method investees are those for which the Company has the ability to exercise significant influence but does not control and is not the primary beneficiary. Under this method of accounting, the Company typically records its proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. Cash payments to equity method investees such as additional investments, loans and advances and expenses incurred on behalf of investees, as well as payments from equity method investees such as dividends, distributions and repayments of loans and advances are recorded as adjustments to investment balances.

For certain of the Company's equity method investments, such as investments in renewable energy limited liability companies where the capital structure of the equity investment results in different liquidation rights and priorities than what is reflected by the underlying percentage ownership interests, the Company's proportionate share of net earnings is accounted for using the Hypothetical Liquidation at Book Value ("HLBV") methodology available under the equity method of accounting. When applying HLBV, the Company determines the amount that would be received if the investment were to liquidate all of its assets and distribute the resulting cash to the investors based on contractually defined liquidation priorities. The change in the Company's claim on the investee's book value in accordance with GAAP at the beginning and the end of the reporting period, after adjusting for any contributions or distributions, is the Company's share of the earnings or losses for the period.

The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. (See "Asset Impairment Analysis" below.)

Equity Investments with Readily Determinable Fair Values

Investments in entities or other securities in which the Company has no control or significant influence, is not the primary beneficiary, and have a readily determinable fair value are recorded at fair value based on quoted market prices and are classified as equity securities or equity investments with readily determinable fair value. For equity securities with readily determinable fair value, gains and losses are recorded in other income (expense), net. (See Note 4 and Note 20.)

Equity Investments without Readily Determinable Fair Values

Equity investments without readily determinable fair values include ownership rights that either (i) do not meet the definition of in-substance common stock or (ii) do not provide the Company with control or significant influence and these investments do not have readily determinable fair values. Equity investments without readily determinable fair values are recorded at cost, less any impairment, and adjusted for subsequent observable price changes as of the date that an observable transaction takes place and are recorded in other income (expense), net. (See Note 4 and Note 20.)

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and impairments. Internal use software costs are capitalized during the application development stage. Software costs incurred during the preliminary project and post implementation stages are expensed as incurred. Repairs and maintenance expenditures that do not enhance the use or extend the life of property and equipment are expensed as incurred. Depreciation for most property and equipment is recognized using the straight-line method over the estimated useful lives of the assets. (See Note 20.)

Leases

The Company determines if an arrangement is a lease at its inception. Operating lease right-of-use ("ROU") assets are included in "Other noncurrent assets" and operating lease liabilities are included in “Accrued liabilities” and “Other noncurrent liabilities” in the consolidated balance sheets. Finance lease ROU assets are included in "Property and equipment, net" and finance lease liabilities are included in “Accrued liabilities” and “Other noncurrent liabilities” in the consolidated balance sheets.

A rate implicit in the lease when readily determinable is used in arriving at the present value of lease payments. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on information available at lease commencement date for most of its leases. The incremental borrowing rate is based on the Company's U.S. dollar denominated senior unsecured borrowing curves using public credit ratings adjusted down to a collateralized basis using a combination of recovery rate and credit notching approaches and translated into major contract currencies as applicable.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company does not separate lease components from non-lease components across all lease categories. Instead, each separate lease component and non-lease component are accounted for as a single lease component. In addition, variable lease payments that are based on an index or rate are included in measurement of ROU assets and lease liabilities at lease inception. All other variable lease payments are expensed as incurred and are not included in the measurement of ROU assets and lease liabilities. Lease expense for operating leases is recognized on a straight-line basis. For finance leases, the Company recognizes interest expense on lease liabilities using the effective interest method and amortization of ROU assets on a straight-line basis.

Asset Impairment Analysis

Goodwill and Indefinite-lived Intangible Assets

Goodwill is allocated to the Company's reporting units, which are its operating segments or one level below its operating segments. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment annually as of October 1, or earlier if an event or other circumstance indicates that it may not recover the carrying value of the asset. If the Company believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is greater than its carrying amount, the quantitative impairment test is not required. If a qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit goodwill or other indefinite-lived intangible asset exceeds its fair value, a quantitative impairment test is performed. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, an impairment charge is recorded for the amount by which the carrying amount exceeds the fair value, not to exceed the amount of goodwill recorded for that reporting unit. The Company typically performs a quantitative impairment test every three years, irrespective of the outcome of the Company's qualitative assessment.

Long-lived Assets

Long-lived assets such as amortizing trademarks, customer lists, other intangible assets, and property and equipment are not required to be tested for impairment annually, but rather are tested for impairment whenever circumstances indicate that the carrying amount of the asset may not be recoverable. If an impairment analysis is required, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test requires a comparison of undiscounted future cash flows to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, an impairment loss would be recognized equal to the excess of the asset’s carrying value over its fair value, which is typically determined by discounting the future cash flows associated with that asset. If the intent is to hold the asset for sale and certain other criteria are met, the impairment test involves comparing the asset’s carrying value to its fair value less costs to sell. If the carrying value of the asset exceeds the fair value, an impairment loss would be recognized equal to the difference. Significant judgments used for long-lived asset impairment assessments include identifying the appropriate asset groupings and primary assets within those groupings, determining whether events or circumstances indicate that the carrying amount of the asset may not be recoverable, determining the future cash flows for the assets involved and assumptions applied in determining fair value, which include reasonable discount rates, growth rates, market risk premiums and other assumptions about the economic environment.

Equity Method Investments and Equity Investments Without Readily Determinable Fair Value

Equity method investments are reviewed for indicators of other-than-temporary impairment on a quarterly basis. Equity method investments are written down to fair value if there is evidence of a loss in value that is other-than-temporary. The Company may estimate the fair value of its equity method investments by considering recent investee equity transactions, DCF analysis, recent operating results, comparable public company operating cash flow multiples and in certain situations, balance sheet liquidation values. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline has occurred, such as the length of the time and the extent to which the estimated fair value or market value has been below the carrying value, the financial condition and the near-term prospects of the investee, the intent and ability of the Company to retain its investment in the investee for a period of time sufficient to allow for any anticipated recovery in market value, and general market conditions. The estimation of fair value and whether an other-than-temporary impairment has occurred requires the application of significant judgment and future results may vary from current assumptions. If declines in the value of the equity method investments are determined to be other-than-temporary, a loss is recorded in earnings in the current period as a component of loss from equity investees, net on the consolidated statements of operations.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For equity investments without readily determinable fair value, investments are recorded at cost, less impairment, adjusted for subsequent observable price changes as of the date that an observable transaction takes place. The Company performs a qualitative assessment on a quarterly basis to determine if an observable price change has occurred. If the qualitative assessment indicates that an observable price change has occurred, a gain or loss is recorded equal to the difference between the fair value and carrying value in the current period as a component of other income (expense), net. (See Note 4.)

Derivative Instruments

The Company uses derivative financial instruments to modify its exposure to market risks from changes in foreign currency exchange rates, interest rates and from market volatility related to certain equity investments measured at fair value. At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company's intentions and expectations as to the likely effectiveness as a hedge. The three types are:

(1) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge");

(2) a hedge of net investments in foreign operations ("net investment hedge"); or

(3) an instrument with no hedging designation. (See Note 10.)

Cash Flow Hedges

The Company designates foreign currency forward and option contracts as cash flow hedges to mitigate foreign currency risk arising from third-party revenue and intercompany licensing agreements. The Company also designates interest rate contracts used to hedge the interest rate risk for certain senior notes and forecasted debt issuances as cash flow hedges. For foreign exchange forward contracts accounted for as cash flow hedges, the entire change in the fair value of the forward contract is recorded in other comprehensive income (loss) and reclassified into the statement of operations in the same line item in which the hedged item is recorded and in the same period as the hedged item affects earnings.

Net Investment Hedges

The Company designates cross-currency swaps and foreign currency forward contracts as hedges of net investments in foreign operations. The Company assesses effectiveness for net investment hedges utilizing the spot-method. The entire change in the fair value of derivatives that qualify as net investment hedges is initially recorded in the currency translation adjustment component of other comprehensive income. While the change in fair value attributable to hedge effectiveness remains in accumulated other comprehensive loss until the net investment is sold or liquidated, the change in fair value attributable to components excluded from the assessment of hedge effectiveness (e.g., forward points, cross currency basis, etc.) is reflected as a component of interest expense, net in the current period.

No Hedging Designation

The Company may also enter into derivative financial instruments that do not qualify for hedge accounting and are not designated as hedges. These instruments are intended to mitigate economic exposures due to exogenous events and changes in foreign currency exchange rates and interest rates. The changes in fair value of derivatives not designated as hedges are recorded in other income (expense), net.

Financial Statement Presentation

Unsettled derivative contracts are recorded at their gross fair values on the consolidated balance sheets. The portion of the fair value that represents cash flows occurring within one year is classified as current, and the portion related to cash flows occurring beyond one year is classified as noncurrent. Gains and losses on designated cash flow and net investment hedges are initially recognized as components of accumulated other comprehensive loss on the consolidated balance sheets and reclassified into the statements of operations in the same line item in which the hedged item is recorded and in the same period as the hedged item affects earnings. The Company records gains and losses for instruments that receive no hedging designation, as a component of other income (expense), net on the consolidated statements of operations.

Cash flows from designated derivative instruments used as hedges are classified in the consolidated statements of cash flows in the same section as the cash flows of the hedged item. Premiums paid for these instruments and associated settlements are reflected as components of investing cash flows. Cash flows from periodic settlement of interest on cross currency swaps and derivative contracts not designated as hedges are reported as investing activities in the consolidated statements of cash flows.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Treasury Stock

When stock is acquired for purposes other than formal or constructive retirement, the purchase price of the acquired stock is recorded in a separate treasury stock account, which is separately reported as a reduction of equity.

When stock is retired or purchased for formal or constructive retirement, the purchase price is initially recorded as a reduction to the par value of the shares repurchased, with any excess purchase price over par value recorded as a reduction to additional paid-in capital related to the series of shares repurchased and any remaining excess purchase price recorded as a reduction to retained earnings. If the purchase price exceeds the amounts allocated to par value and additional paid-in capital related to the series of shares repurchased and retained earnings, the remainder is allocated to additional paid-in capital related to other series of shares.

To determine the cost of treasury stock that is either sold or reissued, the Company uses the last in, first out method. If the proceeds from the re-issuance of treasury stock are greater than the cost, the excess is recorded as additional paid-in capital. If the proceeds from re-issuance of treasury stock are less than the cost, the excess cost first reduces any additional paid-in capital arising from previous treasury stock transactions for that class of stock, and any additional excess is recorded as a reduction of retained earnings.

Revenue Recognition

The Company generates revenues principally from: (i) advertising revenue from advertising sold on its television networks, authenticated TVE applications, DTC subscription services and websites, (ii) distribution revenues from fees charged to distributors of its network content, which include cable, direct-to-home ("DTH") satellite, telecommunications and digital service providers, and bundled long-term content arrangements, as well as through DTC subscription services, and (iii) other revenue related to several items including: (a) unbundled rights to sales of network content, including sports rights, (b) production studios content development and services, (c) the licensing of the Company's brands for consumer products, and (d) affiliate and advertising sales representation services.

Revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration that the Company expects to receive in exchange for those services or goods. Revenues do not include taxes collected from customers on behalf of taxing authorities such as sales tax and value-added tax. However, certain revenues include taxes that customers pay to taxing authorities on the Company’s behalf, such as foreign withholding tax. Revenue recognition for each source of revenue is also based on the following policies.

Advertising

Advertising revenues are principally generated from the sale of commercial time on linear and digital platforms. A substantial portion of the linear and digital advertising contracts in the U.S. and certain international markets guarantee the advertiser a minimum audience level that either the program in which their advertisements are aired or the advertisement will reach. On the linear platform, the Company provides a service to deliver an advertising campaign which is satisfied by the provision of a minimum number of advertising spots in exchange for a fixed fee over a contract period of one year or less. The Company delivers spots in accordance with these contracts during a variety of day parts and programs. In the agreements governing these advertising campaigns, the Company has also promised to deliver to its customers a guaranteed minimum number of viewers (“impressions”) on a specific television network within a particular demographic (e.g. men aged 18-35). These advertising campaigns are considered to represent a single, distinct performance obligation. Revenues are recognized based on the audience level delivered multiplied by the average price per impression. The Company provides the advertiser with advertising until the guaranteed audience level is delivered, and invoiced advertising revenue receivables may exceed the value of the audience delivery. As such, revenues are deferred until the guaranteed audience level is delivered or the rights associated with the guarantee lapse, which is less than one year. Audience guarantees are initially developed internally, based on planned programming, historical audience levels, the success of pilot programs, and market trends. Actual audience and delivery information is published by independent ratings services.

Digital advertising contracts typically contain promises to deliver guaranteed impressions in specific markets against a targeted demographic during a stipulated period of time. If the specified number of impressions is not delivered, the transaction price is reduced by the number of impressions not delivered multiplied by the contractually stated price per impression. Each promise is considered a separate performance obligation. For digital contracts with an audience guarantee, advertising revenues are recognized as impressions are delivered. Actual audience delivery is typically reported by independent third parties.

For contracts without an audience guarantee, advertising revenues are recognized as each spot airs. The airing of individual spots without a guaranteed audience level are each distinct, individual performance obligations. The Company allocates the consideration to each spot based on its relative standalone selling price.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Distribution

Cable operators, DTH satellite operators and telecommunications service providers typically pay royalties via a per-subscriber fee for the right to distribute the Company’s programming under the terms of distribution contracts. The majority of the Company’s distribution fees are collected monthly throughout the year and distribution revenue is recognized over the term of the contracts based on contracted programming rates and reported subscriber levels. The amount of distribution fees due to the Company is reported by distributors based on actual subscriber levels. Such information is generally not received until after the close of the reporting period. In these cases, the Company estimates the number of subscribers receiving the Company’s programming to estimate royalty revenue. Historical adjustments to recorded estimates have not been material. Distribution revenue from fixed-fee contracts is recognized over the contract term based on the continuous delivery of the content to the affiliate. Any monetary incentives provided to distributors other than for distinct goods or services acquired at fair value are recognized as a reduction of revenue over the service term.

Although the delivery of linear feeds and digital products, such as video-on-demand (“VOD”) and authenticated TVE applications, are considered distinct performance obligations within a distribution arrangement, on demand offerings generally match the programs that are airing on the linear network. Therefore, the Company recognizes revenue for licensing arrangements as the license fee is earned and based on continuous delivery for fixed fee contracts.

For DTC subscription services, the Company recognizes revenue as the service fee is earned over the subscription period.

Revenues associated with digital distribution arrangements are recognized when the Company transfers control of the content and the rights to distribute the content to the customer.

Other

License fees from the sublicensing of sports rights are recognized when the rights become available for airing. Revenue from production studios is recognized when the content is delivered and available for airing by the customer. Royalties from brand licensing arrangements are earned as products are sold by the licensee. Affiliate and ad sales representation services are recognized as services are provided.

Multiple Performance Obligations

Contracts with customers may include multiple distinct performance obligations. Advertising contracts may include sponsorship, production, or product integration in addition to the airing of spots and/or the satisfaction of an audience guarantee. For such contracts, the contract value is allocated to individual performance obligations and recorded as revenue when each performance obligation has been satisfied and value has been transferred to the customer. Distribution contracts also include multiple performance obligations. The Company also enters into certain distribution contracts that include promises to deliver content libraries. There are generally two types of such arrangements: 1) content licensing arrangements that include subscription video on demand (“SVOD”) licensing arrangements and 2) digital content (such as VOD and authenticated TVE applications), which is a performance obligation within the Company's linear distribution arrangements. These contracts vary by customer and in certain instances include a promise by the Company to deliver existing content and new content. For SVOD arrangements, revenue is allocated to each performance obligation based on that performance obligation's relative standalone selling price. In the case of VOD and digital content, content is regularly refreshed over the term of the agreement, as new titles are added and older titles are removed. Consequently, satisfaction of the performance obligations generally occurs in the same pattern as the delivery of the linear feed.

Deferred Revenue

Deferred revenue consists of cash received for television advertising for which the guaranteed viewership has not been provided, product licensing arrangements in which fee collections are in excess of the license value provided, and advanced fees received related to the sublicensing of Olympic rights. The amounts classified as current are expected to be earned within the next year.

Payment terms vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Compensation Expense

The Company has incentive plans under which performance-based restricted stock units (“PRSUs”), service-based restricted stock units (“RSUs”), stock options, and stock appreciation rights (“SARs”) are issued. In addition, the Company offers an Employee Stock Purchase Plan (the "ESPP"). Share-based compensation expense for all awards is recorded as a component of selling, general and administrative expense. Forfeitures for all awards are recognized as incurred. Excess tax benefits realized from the exercise of stock options and vested RSUs, PRSUs and the ESPP are reported as cash inflows from operating activities on the consolidated statements of cash flows.

PRSUs

Vesting for PRSUs is subject to satisfying objective operating performance conditions or a combination of objective and subjective operating performance conditions. Compensation expense for PRSUs is based on the fair value of the Company’s Series A and C common stock on the date of grant. Compensation expense for PRSUs that vest based on achieving subjective operating performance conditions or in situations where the executive is able to withhold taxes in excess of the maximum statutory requirement, is remeasured at fair value each reporting period until the award is settled. Compensation expense for all PRSUs is recognized ratably, following a graded vesting pattern during the vesting period only when it is probable that the operating performance conditions will be achieved. The Company records a cumulative adjustment to compensation expense for PRSUs if there is a change in the determination of the probability that the operating performance conditions will be achieved.

RSUs

Compensation expense for RSUs is based on the fair value of the award on the date of grant and is recognized ratably during the vesting period.

SARs and Stock Options

Compensation expense for SARs is based on the fair value of the award. Because certain SARs are cash-settled, the Company remeasures the fair value of these awards each reporting period until settlement. Compensation expense for SARs, including changes in fair value, is recognized during the vesting period in proportion to the requisite service that has been rendered as of the reporting date. For awards with graded vesting, the Company measures fair value and records compensation expense separately for each vesting tranche.

Compensation expense for stock options is based on the fair value of the award on the date of grant and is recognized ratably during the vesting period.

The fair values of SARs and stock options are estimated using the Black-Scholes option-pricing model. Because the Black-Scholes option-pricing model requires the use of subjective assumptions, changes in these assumptions can materially affect the fair value of awards. For SARs, the expected term is the period from the grant date to the end of the contractual term of the award unless the terms of the award allow for cash-settlement automatically on the date the awards vest, in which case the vesting date is used. For stock options the simplified method is utilized to calculate the expected term, since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The simplified method considers the period from the date of grant through the mid-point between the vesting date and the end of the contractual term of the award. Expected volatility is based on a combination of implied volatilities from traded options on the Company’s common stock and historical realized volatility of the Company’s common stock. The dividend yield is assumed to be zero because the Company has no history of paying cash dividends and no present intention to pay dividends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the award.

ESPP

The ESPP enables eligible employees to purchase shares of the Company’s common stock through payroll deductions or other permitted means. The Company recognizes the fair value of the discount associated with shares purchased under the ESPP as share-based compensation expense.

Advertising Costs

Advertising costs are expensed as promotional services are delivered and are presented in selling, general and administrative expenses. Advertising costs paid to third parties totaled $1.2 billion, $412 million and $390 million for years ended December 31, 2021, 2020 and 2019, respectively.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates the Company expects to apply to taxable income in years in which those temporary differences are expected to reverse. A valuation allowance is provided for deferred tax assets if it is more likely than not such assets will be unrealized.

From time to time, the Company engages in transactions in which the tax consequences may be uncertain. Significant judgment is required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the Company's tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities.

In determining the Company's tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless the Company determines that such positions are more likely than not to be sustained upon examination based on their technical merits, including the resolution of any appeals or litigation processes. The Company includes interest and where appropriate, penalties, as a component of income tax expense on the consolidated statements of operations. There is significant judgment involved in determining the amount of reserve and whether positions taken on the Company's tax returns are more likely than not to be sustained, which involve the use of significant estimates and assumptions with respect to the potential outcome of positions taken on tax returns that may be reviewed by tax authorities. The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, various taxing authorities, as well as changes in tax laws, regulations and interpretations.

Concentrations Risk

Customers

The Company has long-term contracts with distributors around the world. For the U.S. Networks segment, 84% of distribution revenue comes from the 10 largest distributors. Agreements in place with the 10 largest cable and satellite operators with the U.S. Networks expire at various times from 2022 through 2025. Although the Company seeks to renew its agreements with its distributors prior to expiration of a contract, a delay in securing a renewal that results in a service disruption, a failure to secure a renewal or a renewal on less favorable terms may have a material adverse effect on the Company’s financial condition and results of operations. Not only could the Company experience a reduction in distribution revenue, but it could also experience a reduction in advertising revenue, as viewership is impacted by affiliate subscriber levels.

No individual customer accounted for more than 10% of total consolidated revenues for 2021, 2020 or 2019. As of December 31, 2021 and 2020, the Company’s trade receivables do not represent a significant concentration of credit risk as the customers and markets in which the Company operates are varied and dispersed across many geographic areas.

Financial Institutions

Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.

Counterparty Credit Risk

The Company is exposed to the risk that the counterparties to outstanding derivative financial instruments will default on their obligations. The Company manages these credit risks through the evaluation and monitoring of the creditworthiness of, and concentration of risk with, the respective counterparties. In this regard, credit risk associated with outstanding derivative financial instruments is spread across a relatively broad counterparty base of banks and financial institutions. The Company also has a limited number of arrangements where collateral is required to be posted in the instance that certain fair value thresholds are exceeded. As of December 31, 2021, no collateral has been posted under these arrangements. As of December 31, 2021, the Company's exposure to counterparty credit risk included derivative assets with an aggregate fair value of $330 million. (See Note 10.)

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting and Reporting Pronouncements Adopted

LIBOR

In March 2020, the FASB issued guidance providing optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedging relationships, and other transactions associated with the expected market transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance is for March 12, 2020 through December 31, 2022 and may not be applied to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The Company will apply the relevant provisions of the guidance to its existing hedge relationships.

Business Combinations

In October 2021, the Financial Standards Accounting Board ("FASB") issued guidance that requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination as if it had originated the contracts. The guidance is effective for interim and annual periods beginning after December 15, 2022, and may be early adopted. The Company early adopted this guidance during the third quarter of 2021. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements for prior acquisitions in the current annual period, and the impact in future periods will be dependent on the contract assets and contract liabilities acquired in future business combinations.

Content

In March 2019, the FASB issued guidance which generally aligns the accounting for production costs of episodic television series with the accounting for production costs of films. In addition, this guidance modifies certain aspects of the capitalization, impairment, presentation and disclosure requirements. The Company adopted this guidance on January 1, 2020 and applied the provisions prospectively. In connection with this adoption, the Company elected to treat all content rights and prepaid license fees as a noncurrent asset, with the exception of content acquired with an initial license period of 12 months or less and prepaid sports rights expected to air within 12 months. As of December 31, 2021 and 2020, $245 million and $532 million, respectively, of content rights and prepaid license fees were reflected as a current asset. The Company determined that most of its content is exploited as part of film groups. For such content assets, the unit of account for the impairment assessment is the respective film group. There was no material impact upon adoption to the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. (See Note 6.)

Goodwill

In January 2017, the FASB issued guidance simplifying the subsequent measurement of goodwill by eliminating Step 2 from the former two-step goodwill impairment test and eliminating the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Therefore, an entity will recognize impairment charges for the amount by which the carrying amount exceeds the reporting unit's fair value not to exceed the amount of goodwill recorded for that reporting unit. Goodwill impairment will no longer be measured as the excess of the carrying amount of goodwill over its implied fair value determined by assigning the fair value of a reporting unit to all of its assets and liabilities as if it had been acquired in a business combination. The Company adopted this guidance on January 1, 2020 and has applied the provisions to quantitative goodwill impairment assessments performed subsequent to adoption. (See Note 7.)

Leases

In February 2016, the FASB issued guidance, which requires lessees to recognize almost all of their leases on the balance sheet by recording a right-of-use asset and lease liability. The guidance also requires improved disclosures to help users of the financial statements better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance effective January 1, 2019 and elected to apply the guidance at the effective date without recasting the comparative periods presented. Additionally, the Company elected to apply practical expedients allowing it to not reassess: 1) whether any expired or existing contracts previously assessed as not containing leases are, or contain, leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. The Company also elected to not separate lease components from non-lease components across all lease categories. Instead, each separate lease component and non-lease component are accounted for as a single lease component. The Company did not elect to apply the practical expedient to use hindsight in determining the lease term and in assessing the right-of-use assets for impairment. Additionally, the Company did not elect to apply the short-term lease scope exemption.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting and Reporting Pronouncements Not Yet Adopted

Convertible Instruments

In August 2020, the FASB issued guidance simplifying the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. The guidance amends the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, requires the use of the if-converted method for calculating earnings per share for convertible instruments, and makes targeted improvements to the disclosures for convertible instruments and related earnings per share guidance. This guidance is effective for interim and annual periods beginning after December 15, 2021. The Company does not expect adoption of this guidance will have a material impact on its consolidated financial statements and related disclosures.

NOTE 3. ACQUISITIONS AND DISPOSITIONS

Acquisitions

WarnerMedia

In May 2021, the Company entered into an agreement with AT&T Inc. to combine with WarnerMedia’s ("WarnerMedia") entertainment, sports and news assets to create a standalone, global entertainment company.

The proposed combination transaction will be executed through a Reverse Morris Trust type transaction, under which WarnerMedia will be distributed to AT&T’s shareholders via a pro rata distribution (i.e., a spin off). In connection with the combination transaction, AT&T will receive approximately $43 billion (subject to working capital and other adjustments) in a combination of cash, debt securities and WarnerMedia’s retention of certain debt. The Company has concluded that it will be considered the accounting acquirer. The Company established an interest rate derivative program to mitigate interest rate risk associated with the anticipated issuance of future fixed-rate debt by WarnerMedia, which is expected to be guaranteed by the Company and certain subsidiaries of the Company upon closing of the transaction. (See Note 10.)

Immediately prior to closing, all shares of Series A, Series B, and Series C common stock and Series A-1 and Series C-1 convertible preferred stock will be reclassified and converted to one class of the Company's common stock. AT&T’s shareholders that receive WarnerMedia stock in the distribution will receive stock representing 71% of the combined company and the Company's shareholders will continue to own 29% of the combined company, in each case on a fully diluted basis. The Boards of Directors of both AT&T and the Company have approved the transaction.

The transaction is anticipated to close in the second quarter of 2022, subject to approval by the Company's shareholders and the satisfaction of customary closing conditions, including receipt of regulatory approvals. On December 22, 2021, the transaction received unconditional antitrust clearance from the European Commission (“EC”) pursuant to the EC Merger Regulation, and on December 28, 2021, AT&T received a favorable Private Letter Ruling from the Internal Revenue Service regarding the qualification of the transactions for their intended tax-free treatments. On February 9, 2022, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, statutory waiting period has expired or otherwise been terminated, and any agreement not to consummate the transaction between the parties and the Federal Trade Commission or the Antitrust Division of the United States Department of Justice or any other applicable governmental entity, has also expired or otherwise been terminated. Discovery and AT&T are in the process of obtaining other required regulatory approvals. Agreements are in place with Dr. John Malone and Advance/Newhouse Programming Partnership to vote in favor of the transaction, representing approximately 43% of the aggregate voting power of the shares of Discovery voting stock. The transaction requires, among other things, the consent of Advance/Newhouse Programming Partnership under the Company's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock, which consent was given pursuant to a consent agreement. In connection with Advance/Newhouse Programming Partnership’s entry into the consent agreement and related forfeiture of the significant rights attached to the Series A-1 Preferred Stock in the reclassification of the shares of Series A-1 Preferred Stock into common stock, it will receive an increase to the number of shares of common stock of the Company into which the Series A-1 Preferred Stock would be converted. Upon the closing, the impact of the issuance of such additional shares of common stock of the Company will be recorded as a transaction expense. No vote by AT&T shareholders is required.

The merger agreement contains certain customary termination rights for Discovery and AT&T, including, without limitation, a right for either party to terminate if the transaction is not completed on or before July 15, 2023. Termination under specified circumstances will require Discovery to pay AT&T a termination fee of $720 million or AT&T to pay Discovery a termination fee of $1.8 billion.

In anticipation of this combination, in June 2021, Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan that will be guaranteed by the Company and certain material subsidiaries of the Company upon closing of the transaction.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UKTV - Lifestyle Business

On June 11, 2019, the Company and BBC Studios (“BBC”) dissolved their 50/50 joint venture, UKTV, a British multi-channel broadcaster, with the Company taking full control of UKTV’s three lifestyle channels (the “Lifestyle Business”) and BBC taking full control of UKTV’s seven entertainment channels (the "Entertainment Business"). Prior to the transaction, the Company held a note receivable from UKTV of $118 million. Concurrent with the transaction, the note was settled.

To compensate Discovery for the note receivable and for the difference in fair value between the Lifestyle Business and the Entertainment Business retained by BBC, Discovery received cash of $88 million at closing and a note receivable from BBC of $130 million, payable in two equal installments, which were received in June 2020 and June 2021. The Company used a market-based valuation model to determine the fair value of the previously held 50% equity method investment in the Lifestyle Business and recognized an immaterial gain, which is included in other income (expense), net in the Company's consolidated statement of operations.

The Company applied the acquisition method of accounting to the Lifestyle Business, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocated to goodwill. The goodwill reflects the workforce and synergies expected from broader exposure to the lifestyle entertainment sector in the U.K. The goodwill recorded as part of this acquisition is included in the International Networks reportable segment and is not amortizable for tax purposes. Intangible assets consist of electronic program guide slots and trademarks and have a weighted average useful life of 6 years. The Company used DCF analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. The measurement period closed in June 2020, with no material adjustments recorded.

The final fair value of Lifestyle Business assets acquired and liabilities assumed, as well as a reconciliation to total assets received in dissolution of the UKTV joint venture, is presented in the table below (in millions).

Cash						$	17
Content rights						18
Intangible assets						34
Goodwill						121
Accrued liabilities						(12)
Total assets acquired and liabilities assumed in Lifestyle Business						178
Note receivable from BBC						130
Cash received						88
Net assets received in dissolution of UKTV joint venture						$	396

A summary of total assets derecognized in connection with the dissolution of the UKTV joint venture is presented in the table below (in millions).

Carrying value of UKTV equity method investment						$	278
Settlement of note receivable						118
Total assets derecognized in dissolution of UKTV joint venture						$	396

In connection with the above transaction, the Company contemporaneously entered into a ten-year content licensing arrangement with BBC in exchange for license fees over the term.

Magnolia Discovery Ventures

On July 19, 2019, the Company contributed its linear cable network focused on home improvement, DIY Network, to a new joint venture, Magnolia Discovery Ventures, LLC ("Magnolia"), with Chip and Joanna Gaines acting as Chief Creative Officers to the joint venture. The joint venture replaced and rebranded the DIY Network in January 2022.

Upon formation of Magnolia, Discovery received a 75% ownership interest in the joint venture. In exchange for providing services and exclusivity to the joint venture, the Gaines received a 25% ownership interest in the joint venture, a put right after 6.5 years at fair value, potential for an additional 5% incentive equity, and certain guaranteed payments. Discovery consolidated the joint venture under the voting interest consolidation model. Payments to the Gaines for rendering services in their capacity as the Chief Creative Officers of the joint venture will be accounted for as liability-classified share-based awards to non-employees as services are rendered.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Golf Digest

On May 13, 2019, the Company paid $36 million in cash to acquire Golf Digest, a leading golf brand whose content is available across multiple platforms, including print and social media. The Company applied the acquisition method of accounting to Golf Digest, and recorded net assets of $36 million, including net working capital liabilities of $12 million, intangible assets of $25 million and goodwill of $23 million. The measurement period closed in May 2020, with no material adjustments recorded. Intangible assets consist of trademarks and trade names and licensing agreements and have a weighted average useful life of 9 years. The goodwill reflects the workforce and synergies expected from broader exposure to the golf entertainment sector. The goodwill recorded as part of this acquisition is included in the International Networks reportable segment and is not amortizable for tax purposes.

Other

During 2020 and 2019, the Company completed other immaterial acquisitions.

Dispositions

Great American Country

In June 2021, the Company completed the sale of its Great American Country network to Hicks Equity Partners for a sale price of $90 million. The Company recorded a gain of $76 million.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. INVESTMENTS

The Company’s equity investments consisted of the following, net of investments recorded in other noncurrent liabilities (in millions).

Category						Balance Sheet Location						Ownership						December 31, 2021						December 31, 2020
Equity method investments:
nC+						Equity method investments						32%						$	151					$	164
Discovery Solar Ventures, LLC (a)						Equity method investments						N/A						75						83
All3Media						Equity method investments						50%						78						76
Other						Equity method investments												237						184
Total equity method investments																		541						507
Investments with readily determinable fair values:
Lionsgate Entertainment Corp.						Other noncurrent assets												80						54
Sharecare						Prepaid expenses and other current assets												40						—
fuboTV Inc.						Prepaid expenses and other current assets												—						32
Total equity investments with readily determinable fair values																		120						86
Equity investments without readily determinable fair values:
Group Nine Media (b)						Other noncurrent assets						25%						191						276
Formula E (c)						Other noncurrent assets						28%						83						65
Philo						Other noncurrent assets						19%						50						50
Other						Other noncurrent assets												172						150
Total equity investments without readily determinable fair values																		496						541
Total equity investments																		$	1,157					$	1,134
(a) Discovery Solar Ventures, LLC invests in limited liability companies that sponsor renewable energy projects related to solar energy. These investments are considered VIEs of the Company and are accounted for under the equity method of accounting using the HLBV methodology for allocating earnings.
(b) Overall ownership percentage for Group Nine Media is calculated on an outstanding shares basis. The amount shown herein includes a $20 million note receivable balance, excluding interest, presented within Prepaid expenses and other current assets on the Company's consolidated balance sheets.
(c) Ownership percentage for Formula E includes holdings accounted for as an equity method investment and holdings accounted for as an equity investment without a readily determinable fair value.

Equity Method Investments

Investments in equity method investees are those for which the Company has the ability to exercise significant influence but does not control and is not the primary beneficiary. Impairment losses due to a change in value that are considered other-than-temporary were not material for the years ended December 31, 2021, 2020 and 2019, and are reflected as a component of loss from equity investees, net on the Company's consolidated statements of operations.

With the exception of nC+, the carrying values of the Company’s equity method investments are consistent with its claim in the underlying net assets of the investees. A portion of the Scripps Networks purchase price associated with the investment in nC+ was attributed to amortizable intangible assets. This basis difference is included in the carrying value of nC+ and is amortized over time as a reduction of earnings from nC+. Earnings from nC+ were reduced by the amortization of these intangibles of $10 million, $10 million, and $9 million during the years ended December 31, 2021, 2020 and 2019, respectively. Amortization that reduces the Company's equity in earnings of nC+ for future periods is expected to be $36 million.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain of the Company's other equity method investments are VIEs, for which the Company is not the primary beneficiary. As of December 31, 2021, the Company’s maximum exposure for all its unconsolidated VIEs, including the investment carrying values and unfunded contractual commitments made on behalf of VIEs, was approximately $196 million. The Company's maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $126 million as of December 31, 2021 and $123 million as of December 31, 2020. The Company recognized its portion of VIE operating results with net losses of $35 million, $91 million, and $14 million for the years ended December 31, 2021, 2020 and 2019, respectively, in loss from equity investees, net on the consolidated statements of operations.

Investments with Readily Determinable Fair Value

Investments in entities or other securities in which the Company has no control or significant influence, is not the primary beneficiary, and have a readily determinable fair value are classified as equity investments with readily determinable fair value. The investments are measured at fair value based on a quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs (Level 1). Gains and losses are recorded in other income (expense), net on the consolidated statements of operations.

During the year ended December 31, 2021, Sharecare, an investment that was formerly determined to not have a readily determinable fair value, was listed on the Nasdaq stock exchange and reclassified as an investment with readily determinable fair value. Prior to this reclassification, the Company recorded a gain of $77 million as a result of observable price changes in orderly transactions for the identical or similar investment of the same issuer.

The Company owns shares of common stock of Lions Gate Entertainment Corp. ("Lionsgate"), an entertainment company. Formerly, the Company hedged 50% of the Lionsgate shares with an equity collar (the "Lionsgate Collar") and pledged those shares as collateral to the derivative counterparty with changes in fair value reflected as a component of other income (expense), net on the consolidated statements of operations. (See Note 10.) During the year ended December 31, 2020, the Company terminated the Lionsgate Collar. The Company received cash of $44 million and recognized an immaterial gain, which is included in other income (expense), net on the consolidated statements of operations.

During the fourth quarter of 2020, fuboTV Inc., an investment that was formerly determined to not have a readily determinable fair value, was listed on the New York Stock Exchange. As a result, the Company recognized a total gain of $126 million, including a realized gain and receivable of $101 million pertaining to the Company's sale of 4 million fuboTV Inc. shares. Such gain and receivable are recorded in other income (expense), net on the consolidated statements of operations and prepaid expenses and other current assets on the consolidated balance sheets, respectively. (See Note 20.) As of December 31, 2021, the Company no longer owns shares of fuboTV Inc.

The gains and losses related to the Company's investments with readily determinable fair values for the years ended December 31, 2021, 2020 and 2019 are summarized in the table below (in millions).

						Year Ended December 31,
						2021						2020						2019
Net gains (losses) recognized during the period on equity securities						$	9					$	129					$	(26)
Less: Net gains recognized on equity securities sold						15						101						—
Unrealized gains (losses) recognized during reporting period on equity securities still held at the reporting date						$	(6)					$	28					$	(26)

Equity investments without readily determinable fair values assessed under the measurement alternative

Equity investments without readily determinable fair value include ownership rights that either (i) do not meet the definition of in-substance common stock or (ii) do not provide the Company with control or significant influence and these investments do not have readily determinable fair values.

During the year ended December 31, 2021, the Company invested $42 million in various equity investments without readily determinable fair values and concluded that its other equity investments without readily determinable fair values had decreased $88 million in fair value as a result of observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The decrease was primarily related to the write-down of the Company's investment in Group Nine Media. As of December 31, 2021, the Company had recorded cumulative upward adjustments of $9 million and cumulative impairments of $88 million for its equity investments without readily determinable fair values.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. FAIR VALUE MEASUREMENTS

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the following three categories:

Level 1			–			Quoted prices for identical instruments in active markets.
Level 2			–			Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3			–			Valuations derived from techniques in which one or more significant inputs are unobservable.

The table below presents assets and liabilities measured at fair value on a recurring basis (in millions).

												December 31, 2021
Category						Balance Sheet Location						Level 1						Level 2						Level 3						Total
Assets
Cash equivalents:
Time deposits						Cash and cash equivalents						$	—					$	426					$	—					$	426
Equity securities:
Money market funds						Cash and cash equivalents						425						—						—						425
Mutual funds						Prepaid expenses and other current assets						12						—						—						12
Company-owned life insurance contracts						Prepaid expenses and other current assets						—						1						—						1
Mutual funds						Other noncurrent assets						215						—						—						215
Company-owned life insurance contracts						Other noncurrent assets						—						32						—						32
Total												$	652					$	459					$	—					$	1,111
Liabilities
Deferred compensation plan						Accrued liabilities						$	21					$	—					$	—					$	21
Deferred compensation plan						Other noncurrent liabilities						238						—						—						238
Total												$	259					$	—					$	—					$	259

												December 31, 2020
Category						Balance Sheet Location						Level 1						Level 2						Level 3						Total
Assets
Cash equivalents:
Time deposits						Cash and cash equivalents						$	—					$	7					$	—					$	7
Treasury securities						Cash and cash equivalents						500						—						—						500
Equity securities:
Money market funds						Cash and cash equivalents						—						150						—						150
Time deposits						Prepaid expenses and other current assets						—						250						—						250
Mutual funds						Prepaid expenses and other current assets						14						—						—						14
Company-owned life insurance contracts						Prepaid expenses and other current assets						—						4						—						4
Mutual funds						Other noncurrent assets						200						—						—						200
Company-owned life insurance contracts						Other noncurrent assets						—						48						—						48
Total												$	714					$	459					$	—					$	1,173
Liabilities
Deferred compensation plan						Accrued liabilities						$	28					$	—					$	—					$	28
Deferred compensation plan						Other noncurrent liabilities						220						—						—						220
Total												$	248					$	—					$	—					$	248

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity securities include money market funds, time deposits, investments in mutual funds held in separate trusts, which are owned as part of the Company’s supplemental retirement plans, and company-owned life insurance contracts. (See Note 16.) The fair value of Level 1 equity securities was determined by reference to the quoted market price per share in active markets multiplied by the number of shares held without consideration of transaction costs. The fair value of the deferred compensation plan liability was determined based on the fair value of the related investments elected by employees. Changes in the fair value of the investments are offset by changes in the fair value of the deferred compensation obligation. (See Note 16.) Company-owned life insurance contracts are recorded at their cash surrender value, which approximates fair value (Level 2).

In addition to the financial instruments listed in the tables above, the Company holds other financial instruments, including cash deposits, accounts receivable, accounts payable, and senior notes. The carrying values for such financial instruments, other than the senior notes, each approximated their fair values as of December 31, 2021 and 2020. The estimated fair value of the Company’s outstanding senior notes using quoted prices from over-the-counter markets, considered Level 2 inputs, was $17.2 billion and $18.7 billion as of December 31, 2021 and 2020, respectively.

The Company's derivative financial instruments are discussed in Note 10 and its investments with readily determinable fair value are discussed in Note 4.

NOTE 6. CONTENT RIGHTS

The following table presents the components of content rights (in millions).

						December 31,
						2021						2020
Produced content rights:
Completed						$	10,404					$	8,576
In-production						696						731
Coproduced content rights:
Completed						1,003						888
In-production						91						78
Licensed content rights:
Acquired						1,213						1,312
Prepaid						251						556
Content rights, at cost						13,658						12,141
Accumulated amortization						(9,581)						(8,170)
Total content rights, net						4,077						3,971
Current portion						(245)						(532)
Noncurrent portion						$	3,832					$	3,439

Content expense is included in cost of revenue on the consolidated statements of operations and consisted of the following (in millions).

						Year Ended December 31,
						2021						2020						2019
Content amortization						$	3,496					$	2,908					$	2,786
Other production charges						464						334						412
Content impairments						5						48						67
Total content expense						$	3,965					$	3,290					$	3,265

As of December 31, 2021, the Company expects to amortize approximately 56%, 26% and 13% of its produced and co-produced content, excluding content in-production, and 47%, 23% and 11% of its licensed content rights in the next three twelve-month operating cycles ended December 31, 2022, 2023 and 2024, respectively.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying value and changes in the carrying value of goodwill attributable to each business unit were as follows (in millions).

						U.S. Networks						International Networks												Total
December 31, 2019						$	10,813					$	2,237											$	13,050
Acquisitions (Note 3)						—						25												25
Impairment of goodwill						—						(121)												(121)
Foreign currency translation and other adjustments						—						116												116
December 31, 2020						$	10,813					$	2,257											$	13,070
Dispositions (Note 3)						—						(3)												(3)
Foreign currency translation and other adjustments						—						(155)												(155)
December 31, 2021						$	10,813					$	2,099											$	12,912

The carrying amount of goodwill at the U.S. Networks segment included accumulated impairments of $20 million as of December 31, 2021 and 2020. The carrying amount of goodwill at the International Networks segment included accumulated impairments of $1.6 billion as of December 31, 2021 and 2020.

Intangible Assets

Finite-lived intangible assets consisted of the following (in millions, except years).

			Weighted Average Amortization Period (Years)						December 31, 2021																		December 31, 2020
Gross						Accumulated Amortization						Net						Gross						Accumulated Amortization						Net
Intangible assets subject to amortization:
Trademarks			10						$	1,716					$	(858)					$	858					$	1,751					$	(715)					$	1,036
Customer relationships			10						9,433						(4,303)						5,130						9,551						(3,338)						6,213
Other			8						395						(227)						168						421						(191)						230
Total									$	11,544					$	(5,388)					$	6,156					$	11,723					$	(4,244)					$	7,479

Amortization expense for finite-lived intangible assets reflects the pattern in which the assets' economic benefits are consumed over their estimated useful lives. During the fourth quarter of 2021, the Company reassessed the useful lives and amortization methods for acquired customer relationships and concluded the economic benefits would be consumed in greater proportion earlier in their life with gradual decline, accordingly we have changed the amortization method for these assets from the straight-line method to the sum of the years digits method effective October 1, 2021. This change was considered a change in estimate, was accounted for prospectively, and resulted in incremental amortization expense of $196 million. Amortization expense related to finite-lived intangible assets was $1.3 billion, $1.1 billion and $1.1 billion for the years ended December 31, 2021, 2020 and 2019, respectively.

Amortization expense relating to intangible assets subject to amortization for each of the next five years and thereafter is estimated to be as follows (in millions).

						2022						2023						2024						2025						2026						Thereafter
Amortization expense						$	1,635					$	1,355					$	1,073					$	845					$	625					$	623

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Indefinite-lived intangible assets not subject to amortization (in millions):

						December 31,
						2021						2020
Trademarks						$	161					$	161

Impairment Analysis

Significant judgments and assumptions for all quantitative goodwill tests performed include the amount and timing of future cash flows, including revenue growth rates, long-term growth rates, and discount rates.

2021 Impairment Analysis

During the fourth quarter of 2021, the Company performed a qualitative goodwill impairment assessment for all reporting units and it determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values, therefore, no quantitative goodwill impairment analysis was performed.

2020 Impairment Analysis

During the second quarter of 2020, the Company determined that it was more likely than not that the fair value was greater than the carrying value for all other reporting units with the exception of the Asia-Pacific reporting unit. The Company performed a quantitative goodwill impairment analysis for the Asia-Pacific reporting unit and determined that the estimated fair value did not exceed its carrying value, which resulted in a pre-tax impairment charge to write-off the remaining $36 million goodwill balance. The impairment charge was not deductible for tax purposes. The determination of fair value of the Company’s Asia-Pacific reporting unit represents a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

During the third quarter of 2020, the Company realigned its International Networks management reporting structure. As a result, Australia and New Zealand, which were previously included in the Europe reporting unit, are now included in the Asia-Pacific reporting unit, including the associated goodwill. As a result of this realignment, the Company performed a quantitative goodwill impairment analysis for its Europe and Asia-Pacific reporting units using a DCF valuation model. A market-based valuation model was not weighted in the analysis given the significant volatility in the equity markets. The estimated fair value of both the Europe and Asia-Pacific reporting units exceeded their carrying values and, therefore, no impairment was recorded.

For the 2020 annual impairment test, the Company performed its annual qualitative goodwill impairment assessment for all reporting units and it determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values, except for its Europe and Asia-Pacific reporting units. Given limited headroom of below 20% in its Europe and Asia-Pacific reporting units during the third quarter of 2020, the Company performed a quantitative goodwill impairment analysis for each of these reporting units using a DCF valuation model. A market-based valuation model was not weighted in the analysis due to significant volatility in the reporting units' equity markets.

The quantitative goodwill impairment analysis for the Company’s Europe reporting unit indicated that the estimated fair value exceeded its carry value by approximately 20% and, therefore, no impairment was recorded.

The quantitative impairment analysis for the Company’s Asia-Pacific reporting unit indicated that estimated fair value did not exceed its carrying value, which resulted in a pre-tax impairment charge to write-off the remaining $85 million goodwill balance. The impairment charge was not deductible for tax purposes. The determination of fair value of the Company’s Asia-Pacific reporting unit represents a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

2019 Impairment Analysis

During 2019, due to an increasingly challenging business environment in the Asia-Pacific region, which included 1) moderating revenue growth projections, 2) underperformance of certain sports investments, 3) heightened volatility in China and surrounding economies, and 4) a decline in Asia-Pacific stock price multiples for peer media companies, the Company believed the increased risk required it to perform an interim impairment test. The impairment test indicated that the carrying value of the net assets in the Asia-Pacific reporting unit exceeded its fair value and the Company recognized a pre-tax goodwill impairment charge of $155 million during the year ended December 31, 2019, which was not deductible for tax purposes. The determination of fair value of the Company's Asia-Pacific reporting unit represents a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the 2019 annual impairment test, the Company performed a quantitative goodwill impairment assessment for all reporting units. The estimated fair value of each reporting unit exceeded its carrying value and, therefore, no impairment was recorded. The Europe reporting unit, which had headroom of 19%, was the only reporting unit with fair value in excess of carrying value of less than 20%. The fair values of the reporting units were determined using DCF and market-based valuation models. Cash flows were determined based on Company estimates of future operating results and discounted using an internal rate of return based on an assessment of the risk inherent in future cash flows of the respective reporting unit. The market-based valuation models utilized multiples of earnings before interest, taxes, depreciation and amortization. Both the DCF and market-based models resulted in substantially similar fair values.

NOTE 8. DEBT

The table below presents the components of outstanding debt (in millions).

						December 31,
						2021						2020
4.375% Senior Notes, semi-annual interest, due June 2021						$	—					$	335
2.375% Senior Notes, euro denominated, annual interest, due March 2022						339						369
3.300% Senior Notes, semi-annual interest, due May 2022						—						168
3.500% Senior Notes, semi-annual interest, due June 2022						—						62
2.950% Senior Notes, semi-annual interest, due March 2023						796						796
3.250% Senior Notes, semi-annual interest, due April 2023						192						192
3.800% Senior Notes, semi-annual interest, due March 2024						450						450
2.500% Senior Notes, sterling denominated, annual interest, due September 2024						540						545
3.900% Senior Notes, semi-annual interest, due November 2024						497						497
3.450% Senior Notes, semi-annual interest, due March 2025						300						300
3.950% Senior Notes, semi-annual interest, due June 2025						500						500
4.900% Senior Notes, semi-annual interest, due March 2026						700						700
1.900% Senior Notes, euro denominated, annual interest, due March 2027						678						739
3.950% Senior Notes, semi-annual interest, due March 2028						1,700						1,700
4.125% Senior Notes, semi-annual interest, due May 2029						750						750
3.625% Senior Notes, semi-annual interest, due May 2030						1,000						1,000
5.000% Senior Notes, semi-annual interest, due September 2037						548						548
6.350% Senior Notes, semi-annual interest, due June 2040						664						664
4.950% Senior Notes, semi-annual interest, due May 2042						285						285
4.875% Senior Notes, semi-annual interest, due April 2043						516						516
5.200% Senior Notes, semi-annual interest, due September 2047						1,250						1,250
5.300% Senior Notes, semi-annual interest, due May 2049						750						750
4.650% Senior Notes, semi-annual interest, due May 2050						1,000						1,000
4.000% Senior Notes, semi-annual interest, due September 2055						1,732						1,732
Total debt						15,187						15,848
Unamortized discount, premium and debt issuance costs, net (a)						(428)						(444)
Debt, net of unamortized discount, premium and debt issuance costs						14,759						15,404
Current portion of debt						(339)						(335)
Noncurrent portion of debt						$	14,420					$	15,069
(a) Current portion of unamortized discount, premium, and debt issuance costs, net was not material.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Senior Notes

For the year ended December 31, 2021, Discovery Communications, LLC (“DCL”) and Scripps Networks Interactive, Inc. ("Scripps"), wholly owned subsidiaries of Discovery Inc., issued notices for the redemption in full of all $168 million aggregate principal amount outstanding of DCL's 3.300% Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of DCL's and Scripps' 3.500% Senior Notes due June 2022 (collectively, the "2022 Notes"). The 2022 Notes were redeemed in July 2021 for an aggregate redemption price of $235 million, plus accrued interest.

Also, for the year ended December 31, 2021, DCL issued a notice for the redemption in full of all $335 million aggregate principal amount outstanding of its 4.375% Senior Notes due June 2021 (the “2021 Notes”) in accordance with the terms of the indenture governing the 2021 Notes. The 2021 Notes were redeemed in March 2021 for an aggregate redemption price of $339 million, plus accrued interest.

The redemptions for the year ended December 31, 2021 resulted in an immaterial loss on extinguishment of debt.

For the year ended December 31, 2020, Discovery, Inc. commenced five separate private offers to exchange (the “Exchange Offers”) any and all of DCL's outstanding 5.000% Senior Notes due 2037, 6.350% Senior Notes due 2040, 4.950% Senior Notes due 2042, 4.875% Senior Notes due 2043 and 5.200% Senior Notes due 2047 (collectively, the “Old Notes”) for one new series of DCL 4.000% Senior Notes, semi-annual interest, due September 2055 (the “New Notes”). Discovery, Inc. completed the Exchange Offers in September 2020, by exchanging $1.4 billion aggregate principal amount of the Old Notes for $1.7 billion aggregate principal amount of the New Notes (before debt discount of $318 million). The Exchange Offers were accounted for as a debt modification and, as a result, third-party issuance costs totaling $11 million were expensed as incurred.

Also, for the year ended December 31, 2020, the Company completed offers to purchase for cash (the “Cash Offers”) the Old Notes. Approximately $22 million aggregate principal amount of the Old Notes were accepted for purchase by Discovery pursuant to the Cash Offers, for total cash consideration of $27 million, plus accrued interest. The Cash Offers resulted in an immaterial loss on extinguishment of debt.

Finally, for the year ended December 31, 2020, DCL issued $1.0 billion aggregate principal amount of Senior Notes due May 2030 and $1.0 billion aggregate principal amount of Senior Notes due May 2050. The proceeds received by DCL were net of a $1 million issuance discount and $20 million of debt issuance costs. DCL used the proceeds from the offering to repurchase $1.5 billion aggregate principal amount of DCL's and Scripps Networks' senior notes in a cash tender offer. The repurchase resulted in a loss on extinguishment of debt of $71 million. The Company used the remaining proceeds and cash on hand to fully repay the $500 million that was outstanding under its revolving credit facility.

As of December 31, 2021, all senior notes are fully and unconditionally guaranteed by the Company and Scripps Networks, except for $23 million of un-exchanged Scripps Networks senior notes acquired in conjunction with the acquisition of Scripps Networks.

Revolving Credit Facility and Commercial Paper Programs

In June 2021, DCL entered into a multicurrency revolving credit agreement (the "Credit Agreement"), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. DCL has the capacity to initially borrow up to $2.5 billion under the Credit Agreement. Upon the closing of the proposed combination transaction with WarnerMedia and subject to certain conditions, the available commitments will increase by $3.5 billion, to an aggregate amount not to exceed $6 billion. The Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. DCL may also request additional commitments up to $1 billion from the lenders upon satisfaction of certain conditions. Obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by Discovery, Inc. and Scripps Networks Interactive, Inc., and will also be guaranteed by the holding company of the WarnerMedia business upon the closing of the proposed combination transaction. The Credit Agreement will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders' consent. The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of December 31, 2021, DCL was in compliance with all covenants and there were no events of default under the Credit Facility.

Additionally, the Company's commercial paper program is supported by the Credit Facility. Under the commercial paper program, the Company may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is reduced by any outstanding borrowings under the commercial paper program.

As of December 31, 2021 and 2020, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program.

All obligations of DCL and the other borrowers under the Credit Facility are unsecured and are fully and unconditionally guaranteed by Discovery and Scripps.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Agreement Financial Covenants

The Credit Agreement includes financial covenants that require the Company to maintain a minimum consolidated interest coverage ratio of 3.00 to 1.00 and a maximum adjusted consolidated leverage ratio of 4.50 to 1.00, which increases to 5.75 to 1.00 upon the closing of the proposed combination transaction with WarnerMedia, with step-downs to 5.00 to 1.00 and 4.50 to 1.00 on the first and second anniversaries of the closing, respectively.

Long-term Debt Repayment Schedule

The following table presents a summary of scheduled and estimated debt payments, excluding the revolving credit facility and commercial paper borrowings, for the next five years based on the amount of the Company's debt outstanding as of December 31, 2021 (in millions).

						2022						2023						2024						2025						2026						Thereafter
Long-term debt repayments						$	339					$	988					$	1,487					$	800					$	700					$	10,873

NOTE 9. LEASES

The Company has operating and finance leases for transponders, office space, studio facilities, and other equipment. The Company's leases have remaining lease terms of up to 19 years, some of which include options to extend the leases for up to 10 years. Most leases are not cancellable prior to their expiration.

The components of lease cost were as follows (in millions):

						Year Ended December 31,
						2021						2020
Operating lease cost						$	103					$	116
Finance lease cost:
Amortization of right-of-use assets						$	61					$	52
Interest on lease liabilities						7						8
Total finance lease cost						$	68					$	60
Variable lease cost						$	7					$	9

Supplemental cash flow information related to leases was as follows (in millions):

						Year Ended December 31,
						2021						2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases						$	(107)					$	(101)
Operating cash flows from finance leases						$	(7)					$	(8)
Financing cash flows from finance leases						$	(65)					$	(54)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases						$	53					$	51
Finance leases						$	104					$	36

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental balance sheet information related to leases was as follows (in millions):

									December 31,
									2021						2020
Operating Leases			Location on Balance Sheet
Operating lease right-of-use assets			Other noncurrent assets						$	535					$	575
Operating lease liabilities (current)			Accrued liabilities						$	62					$	71
Operating lease liabilities (noncurrent)			Other noncurrent liabilities						567						592
Total operating lease liabilities									$	629					$	663
Finance Leases
Finance lease right-of-use assets			Property and equipment, net						$	249					$	220
Finance lease liabilities (current)			Accrued liabilities						$	58					$	57
Finance lease liabilities (noncurrent)			Other noncurrent liabilities						197						184
Total finance lease liabilities									$	255					$	241

						December 31,
						2021						2020
Weighted average remaining lease term (in years):
Operating leases						12						12
Finance leases						5						5
Weighted average discount rate
Operating leases						2.94		%				3.37		%
Finance leases						3.57		%				3.80		%

Maturities of lease liabilities as of December 31, 2021 were as follows (in millions):

						Operating Leases						Finance Leases
2022						$	84					$	65
2023						75						65
2024						71						48
2025						63						35
2026						60						26
Thereafter						448						38
Total lease payments						801						277
Less: Imputed interest						(172)						(22)
Total						$	629					$	255

As of December 31, 2021, the Company has additional leases that have not yet commenced with total minimum lease payments of approximately $8 million, primarily related to equipment leases. The remaining leases will commence in fiscal year 2022, have lease terms of 4 to 5 years, and include options to extend the terms for up to 10 additional years.

NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments to modify its exposure to market risks from changes in foreign currency exchange rates and interest rates. The Company does not enter into or hold derivative financial instruments for speculative trading purposes. In addition to the Company's normal course of business cash flow hedging program, the Company entered into the following arrangements:

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash Flow Hedges

During the year ended December 31, 2021, the Company dedesignated, unwound and settled foreign exchange forward contracts with a total notional value of $374 million. An $18 million pretax accumulated other comprehensive gain was previously deferred in accumulated other comprehensive loss. In December 2021, the Company determined a portion of the hedged transactions were probable of not occurring within the defined hedge periods. As a result, the Company reclassified $16 million of the pretax gain that was previously deferred in accumulated other comprehensive loss into other income (expense), net in the consolidated statements of operations. The Company also dedesignated additional foreign exchange forward contracts that have not been settled with an aggregate notional amount of $163 million.

During the year ended December 31, 2020, the Company dedesignated, unwound and settled certain foreign exchange forward contracts designated as cash flow hedges with an aggregate notional amount of $255 million. The Company received cash of $19 million, which was deferred in accumulated other comprehensive loss and subsequently reclassified to other income (expense), net in December 2021 due to a change of assumptions in forecasted cash flows as the Company determined that the hedged transactions were no longer probable of occurring.

Also, during the year ended December 31, 2020, the Company executed forward starting interest rate swap contracts designated as cash flow hedges with a total notional value of $1.6 billion. These contracts will mitigate interest rate risk associated with the forecasted issuance of future fixed-rate public debt. The Company also issued and settled interest rate cash flow hedges with a total notional value of $1 billion following the pricing of its offering of 3.625% Senior Notes due May 2030 and 4.650% Senior Notes due May 2050. (See Note 8.) The $7 million pretax accumulated other comprehensive loss at the termination date will be amortized as an adjustment to interest expense, net over the respective terms of the newly issued notes.

No Hedging Designation

During the year ended December 31, 2021, in anticipation of the proposed combination transaction with WarnerMedia, the Company executed forward starting interest rate swap contracts with a total notional value of $5.0 billion, swaption collars with a total notional value of $2.5 billion, and purchase payer swaptions with a total notional value of $7.5 billion. The objective of these contracts is to mitigate interest rate risk associated with the forecasted issuance of future fixed-rate public debt. Premiums of $142 million were paid at execution and reflected as cash outflows from investing activities. The contracts did not receive hedging designation and changes in the fair value are recognized in other income (expense), net in the consolidated statements of operations.

The following table summarizes the impact of derivative financial instruments on the Company's consolidated balance sheets (in millions). There were no amounts eligible to be offset under master netting agreements as of December 31, 2021 and 2020. The fair value of the Company's derivative financial instruments at December 31, 2021 and 2020 was determined using a market-based approach (Level 2).

			December 31, 2021																														December 31, 2020
									Fair Value																														Fair Value
			Notional						Prepaid expenses and other current assets						Other non- current assets						Accrued liabilities						Other non- current liabilities						Notional						Prepaid expenses and other current assets						Other non- current assets						Accrued liabilities						Other non- current liabilities
Cash flow hedges:
Foreign exchange			$	777					$	14					$	—					$	2					$	—					$	1,082					$	2					$	5					$	14					$	17
Interest rate swaps			2,000						44						—						11						—						2,000						—						11						—						89
Net investment hedges: (a)
Cross-currency swaps			3,512						54						61						20						76						3,544						34						41						—						154
Foreign exchange			—						—						—						—						—						44						2						—						—						—
No hedging designation:
Foreign exchange			1,020						—						—						34						66						1,035						—						—						2						26
Interest rate swaps			15,000						126						28						9						5						—						—						—						—						—
Cross-currency swaps			139						3						—						—						5						139						2						—						—						13
Total									$	241					$	89					$	76					$	152											$	40					$	57					$	16					$	299

(a) Excludes £400 million of sterling notes ($540 million equivalent at December 31, 2021) designated as a net investment hedge. (See Note 8.)

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the pretax impact of derivatives designated as cash flow hedges on income and other comprehensive income (loss) (in millions).

						Year Ended December 31,
						2021						2020						2019
Gains (losses) recognized in accumulated other comprehensive loss:
Foreign exchange - derivative adjustments						$	57					$	14					$	17
Interest rate - derivative adjustments						112						(124)						21
Gains (losses) reclassified into income from accumulated other comprehensive loss:
Foreign exchange - advertising revenue						1						1						6
Foreign exchange - distribution revenue						4						30						5
Foreign exchange - costs of revenues						—						2						2
Interest rate - interest expense, net						(2)						1						(2)
Foreign exchange - other expense, net						30						—						3

If current fair values of designated cash flow hedges as of December 31, 2021 remained static over the next twelve months, the Company would reclassify $10 million of net deferred gains from accumulated other comprehensive loss into income in the next twelve months. The maximum length of time the Company is hedging exposure to the variability in future cash flows is 34 years.

The following table presents the pretax impact of derivatives designated as net investment hedges on other comprehensive income (loss) (in millions). Other than amounts excluded from effectiveness testing, there were no other gains (losses) reclassified from accumulated other comprehensive loss to income during the years ended December 31, 2021, 2020 and 2019.

						Year Ended December 31,
						Amount of gain (loss) recognized in AOCI																														Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)						Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
						2021						2020						2019																								2021						2020						2019
Cross currency swaps						$	114					$	(61)					$	93																							Interest expense, net						$	42					$	43					$	44
Foreign exchange contracts						5						(2)						4																								Other income (expense), net						—						—						—
Sterling notes (foreign denominated debt)						6						(20)						(17)																								N/A						—						—						—
Total						$	125					$	(83)					$	80																													$	42					$	43					$	44

The following table presents the pretax gains (losses) on derivatives not designated as hedges and recognized in other income (expense), net in the consolidated statements of operations (in millions).

						Year Ended December 31,
						2021						2020						2019
Interest rate swaps						$	(2)					$	—					$	1
Cross-currency swaps						8						(10)						—
Foreign exchange derivatives						(39)						32						(65)
Equity						—						7						13
Total in other income (expense), net						$	(33)					$	29					$	(51)

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. REDEEMABLE NONCONTROLLING INTERESTS

Redeemable noncontrolling interests are presented outside of permanent equity on the Company's consolidated balance sheet when the put right is outside of the Company's control. Redeemable noncontrolling interests reflected as of the balance sheet date are the greater of the noncontrolling interest balances adjusted for comprehensive income items and distributions or the redemption values remeasured at the period end foreign exchange rates. Adjustments to the carrying amount of redeemable noncontrolling interests to redemption value as a result of changes in exchange rates are reflected in currency translation adjustments, a component of other comprehensive income (loss). Such currency translation adjustments to redemption value are allocated to Discovery stockholders only. Redeemable noncontrolling interest adjustments of carrying value to redemption value are reflected in retained earnings. The adjustment of carrying value to the redemption value that reflects a redemption in excess of fair value is included as an adjustment to income from continuing operations available to Discovery, Inc. stockholders in the calculation of earnings per share. (See Note 19.) The table below summarizes the Company's redeemable noncontrolling interests balances (in millions).

						December 31,
						2021						2020
Discovery Family						$	213					$	206
MotorTrend Group LLC ("MTG")						114						112
Other						36						65
Total						$	363					$	383

The table below presents the reconciliation of changes in redeemable noncontrolling interests (in millions).

						December 31,
						2021						2020						2019
Beginning balance						$	383					$	442					$	415
Initial fair value of redeemable noncontrolling interests of acquired businesses						—						—						25
Cash distributions to redeemable noncontrolling interests						(11)						(31)						(39)
Equity exchange with Harpo for step acquisition of OWN						—						(50)						—
Redemption of redeemable noncontrolling interest						(26)						—						—
Comprehensive income adjustments:
Net income attributable to redeemable noncontrolling interests						53						12						16
Currency translation on redemption values						(5)						3						1
Retained earnings adjustments:
Adjustments of carrying value to redemption value (redemption value does not equal fair value)						(16)						—						14
Adjustments of carrying value to redemption value (redemption value equals fair value)						(15)						7						4
OWN interest adjustment						—						—						6
Ending balance						$	363					$	383					$	442

The significant arrangements for redeemable noncontrolling interests are described below:

Discovery Family

Hasbro Inc. ("Hasbro") has the right to put the entirety of its remaining 40% interest in Discovery Family to Discovery at any time during the one-year period beginning December 31, 2021, or in the event a Discovery performance obligation related to Discovery Family is not met. Embedded in the redeemable noncontrolling interest is also a Discovery call right that is exercisable for one year after December 31, 2021. Upon the exercise of the put or call options, the price to be paid for the redeemable noncontrolling interest is a function of the then-current fair market value of the redeemable noncontrolling interest, to which certain discounts and redemption floor values may apply in specified situations depending upon the party exercising the put or call and the basis for the exercise of the put or call.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MTG

GoldenTree acquired a put right exercisable during 30-day windows beginning on each of March 25, 2021, September 25, 2022 and March 25, 2024, that requires Discovery to either purchase all of GoldenTree's noncontrolling 32.5% interest in the joint venture at fair value or participate in an initial public offering for the joint venture.

OWN

Harpo has the right to require the Company to purchase Harpo's remaining noncontrolling interest in OWN at fair value during four 90-day windows beginning on July 1, 2018 and every two and a half years thereafter through January 1, 2026. In December 2020, the Company and Harpo completed an equity exchange and amended the LLC agreement whereby the Company acquired an additional 20.2% ownership interest in OWN from Harpo in exchange for $35 million of the Company's Series A common stock, which was issued from treasury stock. A third-party exited the joint venture during 2021, and as a result, the Company now owns 95% of OWN with Harpo holding 5%. Harpo's remaining put rights are currently exercisable on July 1, 2023 and January 1, 2026.

NOTE 12. EQUITY

Common Stock

The Company has three series of common stock authorized, issued and outstanding as of December 31, 2021: Series A common stock, Series B common stock and Series C common stock. Holders of these three series of common stock have equal rights, powers and privileges, except as otherwise noted. Holders of Series A common stock are entitled to one vote per share and holders of Series B common stock are entitled to ten votes per share on all matters voted on by stockholders, except for directors to be elected by holders of the Company’s Series A-1 convertible preferred stock. Holders of Series C common stock are not entitled to any voting rights, except as required by Delaware law. Generally, holders of Series A common stock and Series B common stock and Series A-1 convertible preferred stock vote as one class, except for certain preferential rights afforded to holders of Series A-1 convertible preferred stock.

Holders of Series A common stock, Series B common stock and Series C common stock will participate equally in cash dividends if declared by the Board of Directors, subject to preferential rights of outstanding preferred stock.

Each share of Series B common stock is convertible, at the option of the holder, into one share of Series A common stock. Series A and Series C common stock are not convertible.

Generally, distributions made in shares of Series A common stock, Series B common stock or Series C common stock will be made proportionally to all common stockholders. In the event of a reclassification, subdivision or combination of any series of common stock, the shares of the other series of common stock will be equally reclassified, subdivided or combined.

In the event of a liquidation, dissolution, or winding up of Discovery, after payment of Discovery’s debts and liabilities and subject to preferential rights of outstanding preferred stock, holders of Series A common stock, Series B common stock and Series C common stock and holders of Series A-1 and Series C-1 convertible preferred stock will share equally in any assets available for distribution to holders of common stock.

Convertible Preferred Stock

The Company has two series of preferred stock authorized, issued and outstanding as of December 31, 2021: Series A-1 convertible preferred stock and Series C-1 convertible preferred stock. Series A-1 convertible preferred stock is convertible into nine shares of the Company's Series A common stock and Series C-1 convertible preferred stock is convertible into 19.3648 shares of the Company's Series C common stock, subject to certain anti-dilution adjustments. Shares of Series A-1 and Series C-1 convertible preferred stock may be independently converted into Series A common stock and Series C common, respectively.

As of December 31, 2021, all outstanding shares of Series A-1 and Series C-1 convertible preferred stock were held by Advance/Newhouse. Holders of Series A-1 and Series C-1 convertible preferred stock have equal rights, powers and privileges, except as otherwise noted. Except for the election of common stock directors, the holders of Series A-1 convertible preferred stock are entitled to vote on matters to which holders of Series A and Series B common stock are entitled to vote, and holders of Series C-1 convertible preferred stock are entitled to vote on matters to which holders of Series C common stock, which is generally non-voting, are entitled to vote pursuant to Delaware law. Series A-1 convertible preferred stockholders vote on an as converted to common stock basis together with the Series A and Series B common stockholders as a single class on all matters except the election of directors. Series C-1 convertible preferred stock is considered the economic equivalent of Series C common stock and is subject to certain transfer restrictions.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additionally, through its ownership of the Series A-1 convertible preferred stock, Advance/Newhouse has special voting rights on certain matters and the right to elect three directors. Holders of the Company’s common stock are not entitled to vote in the election of such directors. Advance/Newhouse retains these rights so long as it or its permitted transferees own or have the right to vote such shares that equal at least 80% of the shares of Series A convertible preferred stock issued to Advance/Newhouse in connection with the formation of Discovery, as converted to Series A-1 convertible preferred stock, plus any Series A-1 convertible preferred stock released from escrow, as may be adjusted for certain capital transactions. Holders of Series A-1 convertible preferred stock are subject to a right of first offer in favor of Discovery should Advance/Newhouse desire to sell 80% or more of the Series A-1 convertible preferred stock in a “Permitted Transfer” (as defined in the Discovery charter).

Subject to the prior preferences and other rights of any senior stock, holders of Series A-1 and Series C-1 convertible preferred stock will participate equally with common stockholders on an as converted to common stock basis in any cash dividends declared by the Board of Directors.

In the event of a liquidation, dissolution or winding up of Discovery, after payment of Discovery’s debts and liabilities and subject to the prior payment with respect to any stock ranking senior to Series A-1 and Series C-1 convertible preferred stock, the holders of Series A-1 and Series C-1 convertible preferred stock will receive, before any payment or distribution is made to the holders of any common stock or other junior stock, an amount (in cash or property) equal to $0.01 per share. Following payment of such amount and the payment in full of all amounts owing to the holders of securities ranking senior to Discovery’s common stock, holders of Series A-1 and Series C-1 convertible preferred stock will share equally on an as converted to common stock basis with the holders of common stock with respect to any assets remaining for distribution to such holders.

During the years ended December 31, 2021, 2020 and 2019, no Series A-1 convertible preferred stock was converted. During the years ended December 31, 2021 and 2019, Advance Newhouse Programming Partnership converted 0.6 million and 1.1 million shares of its Series C-1 convertible preferred stock into 11.0 million and 22.0 million shares of Series C common stock, respectively. No series C-1 convertible preferred stock was converted during the year ended December 31, 2020.

Repurchase Programs

Common Stock

Under the Company's stock repurchase program, management is authorized to purchase shares of the Company's common stock from time to time through open market purchases, privately negotiated transactions at prevailing prices, pursuant to one or more accelerated stock repurchase agreements, or other derivative arrangements as permitted by securities laws and other legal requirements, and subject to stock price, business and market conditions and other factors.

In February 2020, the Company's Board of Directors authorized additional stock repurchases of up to $2 billion upon completion of its existing $1 billion repurchase authorization announced in May 2019. All common stock repurchases, including prepaid common stock repurchase contracts, have been made through open market transactions and have been recorded as treasury stock on the consolidated balance sheets. Over the life of the Company's repurchase programs and as of December 31, 2021, the Company had repurchased 3 million and 229 million shares of Series A and Series C common stock, respectively, for the aggregate purchase price of $171 million and $8.2 billion, respectively. The table below presents a summary of common stock repurchases (in millions).

						Year Ended December 31,
						2021						2020						2019
Series C Common Stock:
Shares repurchased						—						41.6						23.2
Purchase price						$	—					$	965					$	637

In 2019, the Company made an upfront cash payment of $96 million to enter into common stock repurchase contracts for the Company’s Series C common stock. These contracts settled in cash for a total of $100 million during the year ended December 31, 2019. The contracts were accounted for as equity transactions.

Convertible Preferred Stock

There were no convertible stock repurchases during 2021, 2020, or 2019. Over the life of the Company's repurchase programs and as of December 31, 2021, the Company had repurchased 0.2 million shares of Series C-1 convertible preferred stock for $102 million.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Comprehensive Income (Loss)

The table below presents the tax effects related to each component of other comprehensive (loss) income and reclassifications made into the consolidated statements of operations (in millions).

			Year Ended December 31, 2021																		Year Ended December 31, 2020																		Year Ended December 31, 2019
			Pretax						Tax Benefit (Expense)						Net-of-tax						Pretax						Tax Benefit (Expense)						Net-of-tax						Pretax						Tax Benefit (Expense)						Net-of-tax
Currency translation adjustments:
Unrealized gains (losses):
Foreign currency			$	(404)					$	17					$	(387)					$	357					$	33					$	390					$	(95)					$	14					$	(81)
Net investment hedges			105						(8)						97						(109)						11						(98)						56						4						60
Reclassifications:
Gain on disposition			—						—						—						—						—						—						6						—						6
Total currency translation adjustments			(299)						9						(290)						248						44						292						(33)						18						(15)
Derivative adjustments:
Unrealized gains (losses)			169						(35)						134						(110)						24						(86)						38						(9)						29
Reclassifications from other comprehensive income to net income			(33)						8						(25)						(34)						7						(27)						(14)						3						(11)
Total derivative adjustments			136						(27)						109						(144)						31						(113)						24						(6)						18
Pension plan and SERP liability:
Unrealized gains (losses)			3						(1)						2						(10)						2						(8)						(13)						3						(10)
Other comprehensive income (loss) adjustments			$	(160)					$	(19)					$	(179)					$	94					$	77					$	171					$	(22)					$	15					$	(7)

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Loss

The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes (in millions).

						Currency Translation						Derivative Adjustments						Pension Plan and SERP Liability						Accumulated Other Comprehensive Income (Loss)
December 31, 2018						$	(804)					$	16					$	3					$	(785)
Other comprehensive income (loss) before reclassifications						(20)						29						(10)						(1)
Reclassifications from accumulated other comprehensive loss to net income						6						(11)						—						(5)
Other comprehensive income (loss)						(14)						18						(10)						(6)
Other comprehensive loss attributable to redeemable noncontrolling interests						(1)						—						—						(1)
Reclassifications to retained earnings resulting from the adoption of ASU 2018-02						(28)						(2)						—						(30)
December 31, 2019						(847)						32						(7)						(822)
Other comprehensive income (loss) before reclassifications						292						(86)						(8)						198
Reclassifications from accumulated other comprehensive loss to net income						—						(27)						—						(27)
Other comprehensive income (loss)						292						(113)						(8)						171
December 31, 2020						(555)						(81)						(15)						(651)
Other comprehensive income (loss) before reclassifications						(290)						134						2						(154)
Reclassifications from accumulated other comprehensive loss to net income						—						(25)						—						(25)
Other comprehensive income (loss)						(290)						109						2						(179)
December 31, 2021						$	(845)					$	28					$	(13)					$	(830)

NOTE 13. NONCONTROLLING INTEREST

The Company has a controlling interest in the TV Food Network Partnership (the "Partnership"), which includes the Food Network and Cooking Channel. Food Network and Cooking Channel are operated and organized under the terms of the Partnership. The Company holds 80% of the voting interest and 68.7% of the economic interest in the Partnership. During the fourth quarter of 2020, the Partnership agreement was extended and specifies a dissolution date of December 31, 2022. If the term of the Partnership is not extended prior to the dissolution date of December 31, 2022, the Partnership agreement permits the Company, as holder of 80% of the applicable votes, to reconstitute the Partnership and continue its business. If for some reason the Partnership is not continued, it will be required to limit its activities to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests. Ownership interests attributable to the noncontrolling owner are presented as noncontrolling interests on the Company's consolidated financial statements. Under the terms of the Partnership agreement, the noncontrolling owner cannot force a redemption outside of the Company's control. As such, the noncontrolling interests in the Partnership are reflected as a component of permanent equity in the Company's consolidated financial statements.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. REVENUES AND ACCOUNTS RECEIVABLE

Disaggregated Revenue

The following table presents the Company’s revenues disaggregated by revenue source (in millions). Management uses these categories of revenue to evaluate the performance of its businesses and to assess its financial results and forecasts.

			Year Ended December 31, 2021
			U.S. Networks						International Networks						Corporate, inter-segment eliminations, and other						Total
Revenues:
Advertising			$	4,188					$	2,027					$	—					$	6,215
Distribution			3,297						2,112						—						5,409
Other			177						400						(10)						567
Totals			$	7,662					$	4,539					$	(10)					$	12,191
			Year Ended December 31, 2020
			U.S. Networks						International Networks						Corporate, inter-segment eliminations, and other						Total
Revenues:
Advertising			$	4,012					$	1,571					$	—					$	5,583
Distribution			2,852						2,014						—						4,866
Other			85						128						9						222
Totals			$	6,949					$	3,713					$	9					$	10,671
			Year Ended December 31, 2019
			U.S. Networks						International Networks						Corporate, inter-segment eliminations, and other						Total
Revenues:
Advertising			$	4,245					$	1,799					$	—					$	6,044
Distribution			2,739						2,096						—						4,835
Other			108						146						11						265
Totals			$	7,092					$	4,041					$	11					$	11,144

Accounts Receivable and Credit Losses

Receivables include amounts currently due from customers and are presented net of an estimate for lifetime expected credit losses. Allowance for credit losses is measured using historical loss rates for the respective risk categories and incorporating forward-looking estimates. To assess collectability, the Company analyzes market trends, economic conditions, the aging of receivables and customer specific risks, and records a provision for estimated credit losses expected over the lifetime of receivables. The corresponding expense for the expected credit losses is reflected in selling, general and administrative expenses.

The Company’s accounts receivable balances and the related credit losses arise primarily from distribution and advertising revenue. The Company monitors ongoing credit exposure through active review of customers’ financial conditions, aging of receivable balances, historical collection trends, and expectations about relevant future events that may significantly affect collectability. The allowance for credit losses decreased from $59 million at December 31, 2020 to $54 million at December 31, 2021. The activity in the allowance for credit losses for the twelve months ended December 31, 2021 was not material.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contract Liability

A contract liability, such as deferred revenue, is recorded when cash is received in advance of the Company's performance. Total deferred revenues, including both current and noncurrent, were $573 million and $649 million at December 31, 2021 and December 31, 2020, respectively. Noncurrent deferred revenue is a component of other noncurrent liabilities on the consolidated balance sheets. The change in deferred revenue for the year ended December 31, 2021 was primarily due to cash payments received for which the performance obligation was not satisfied prior to the end of the period, partially offset by revenue recognized during the period, of which $456 million was included in the deferred revenue balance at December 31, 2020. Revenue recognized for the year ended December 31, 2020 related to the deferred revenue balance at December 31, 2019 was $309 million.

Transaction Price Allocated to Remaining Performance Obligations

Most of the Company's distribution contracts are licenses of functional intellectual property where revenue is derived from royalty-based arrangements, for which the guidance allows the application of a practical expedient to record revenues as a function of royalties earned to date instead of estimating incremental royalty contract revenue. Accordingly, in these instances revenue is recognized based upon the royalties earned to date. However, there are certain other distribution arrangements that are fixed price or contain minimum guarantees that extend beyond one year. The Company recognizes revenue for fixed fee distribution contracts on a monthly basis based on minimum monthly fees; by calculating one twelfth of annual license fees specified in its distribution contracts; or based on the pro-rata fees earned calculated on the license fees specified in the distribution contract. The transaction price allocated to remaining performance obligations within these fixed price or minimum guarantee distribution revenue contracts was $1.3 billion as of December 31, 2021 and is expected to be recognized over the next five years.

The Company's content licensing contracts and sports sublicensing deals are licenses of functional intellectual property. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $712 million as of December 31, 2021 and is expected to be recognized over the next five years.

The Company's brand licensing contracts are licenses of symbolic intellectual property. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $94 million as of December 31, 2021 and is expected to be recognized over the next 11 years.

The value of unsatisfied performance obligations disclosed above does not include: (i) contracts involving variable consideration for which revenues are recognized in accordance with the usage-based royalty exception, and (ii) contracts with an original expected length of one year or less, such as advertising contracts.

Capitalized Contract Costs

Sales commissions are generally expensed as incurred because contracts for which the sales commissions are generated are one year or less or are not material. Sales commissions are recorded as a component of cost of revenues on the consolidated statements of operations. The financing component of content licensing arrangements is not capitalized, because the period between delivery of the license and customer payment is one year or less or is not material.

NOTE 15. SHARE-BASED COMPENSATION

The Company has various incentive plans under which PRSUs, RSUs, stock options and SARs have been issued. As of December 31, 2021, the Company has reserved a total of 87 million shares of its Series A and Series C common stock for future exercises, vestings and grants of stock options, stock-settled SARs, PRSUs and RSUs. Upon exercise or vesting of stock awards, the Company issues new shares from its existing authorized but unissued shares. There were 42 million shares of common stock in reserves that were available for future issuance under the incentive plans as of December 31, 2021.

Share-Based Compensation Expense

The table below presents the components of share-based compensation expense (in millions).

						Year Ended December 31,
						2021						2020						2019
PRSUs						$	10					$	8					$	46
RSUs						110						76						41
Stock options						58						30						33
SARs						—						(4)						22
Total share-based compensation expense						$	178					$	110					$	142
Tax benefit recognized						$	29					$	18					$	17

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liability-classified share-based compensation awards include certain PRSUs and SARs. The Company recorded total liabilities for cash-settled and other liability-classified share-based compensation awards of $22 million and $55 million as of December 31, 2021 and 2020, respectively. The current portion of the liability for cash-settled and other liability-classified awards was $17 million and $37 million as of December 31, 2021 and 2020, respectively.

Share-Based Award Activity

PRSUs

The table below presents PRSU activity (in millions, except years and weighted-average grant price).

						PRSUs						Weighted- Average Grant Date Fair Value						Weighted-Average Remaining Contractual Term (years)						Aggregate Fair Value
Outstanding as of December 31, 2020						1.5						$	26.57					0.0						$	45
Granted						0.2						$	58.18
Converted						(0.8)						$	26.56											$	35
Outstanding as of December 31, 2021						0.9						$	34.84					0.0						$	20
Vested and expected to vest as of December 31, 2021						0.9						$	34.84					0.0						$	20
Convertible as of December 31, 2021						0.6						$	26.58					0.0						$	15

The Company has granted PRSUs to certain senior level executives. PRSUs represent the contingent right to receive shares of the Company’s Series A or C common stock, substantially all of which vest over three to four years based on continuous service and whether the Company achieves certain operating performance targets. The performance targets for substantially all PRSUs are cumulative measures of the Company’s adjusted operating income before depreciation and amortization (as defined in Note 23), free cash flows and revenues over a three-year period. The number of PRSUs that vest principally range from 0% to 100% based on a sliding scale where achieving or exceeding the performance target will result in 100% of the PRSUs vesting and achieving less than 80% of the target will result in no portion of the PRSUs vesting. Additionally, for certain PRSUs, the Company’s Compensation Committee has discretion in determining the final amount of units that vest, but may not increase the amount of any PRSU award above 100%. Upon vesting, each PRSU becomes convertible into one share of the Company’s Series A or Series C common stock as applicable. Holders of PRSUs do not receive payments of dividends in the event the Company pays a cash dividend until such PRSUs are converted into shares of the Company’s common stock.

As of December 31, 2021, there was no unrecognized compensation cost related to PRSUs.

RSUs

The table below presents RSU activity (in millions, except years and weighted-average grant price).

						RSUs						Weighted- Average Grant Date Fair Value						Weighted-Average Remaining Contractual Term (years)						Aggregate Fair Value
Outstanding as of December 31, 2020						8.6						$	26.31					2.8						$	259
Granted						3.2						$	51.20
Vested						(3.0)						$	26.30											$	152
Forfeited						(0.7)						$	31.29
Outstanding as of December 31, 2021						8.1						$	35.56					2.3						$	192
Vested and expected to vest as of December 31, 2021						8.1						$	35.56					2.3						$	192

RSUs represent the contingent right to receive shares of the Company's Series A or C common stock, substantially all of which vest ratably each year over periods of one to four years based on continuous service. As of December 31, 2021, there was $233 million of unrecognized compensation cost related to RSUs, of which $47 million is related to cash settled RSUs. Stock settled RSUs are expected to be recognized over a weighted-average period of 1.0 years and cash settled RSUs are expected to be recognized over a weighted-average period of 2.5 years.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

The table below presents stock option activity (in millions, except years and weighted-average exercise price).

						Stock Options						Weighted- Average Exercise Price						Weighted- Average Remaining Contractual Term (years)						Aggregate Intrinsic Value
Outstanding as of December 31, 2020						21.0						$	29.00					4.0						$	41
Granted						15.5						$	40.25
Exercised						(5.9)						$	27.84											$	145
Forfeited						(0.2)						$	31.77
Outstanding as of December 31, 2021						30.4						$	34.93					5.0						$	0.4
Vested and expected to vest as of December 31, 2021						30.4						$	34.93					5.0						$	0.4
Exercisable as of December 31, 2021						3.1						$	27.14					3.0						$	0.4

Stock options are granted with an exercise price equal to or in excess of the closing market price of the Company’s Series A or Series C common stock on the date of grant. Substantially all stock options vest ratably over three to four years from the grant date based on continuous service and expire seven to ten years from the date of grant. Stock option awards generally provide for accelerated vesting upon retirement or after reaching a specified age and years of service. The Company received cash payments from the exercise of stock options totaling $159 million, $8 million and $17 million during 2021, 2020 and 2019, respectively. As of December 31, 2021, there was $226 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted-average period of 2.5 years.

The fair value of stock options is estimated using the Black-Scholes option-pricing model. The weighted-average assumptions used to determine the fair value of stock options as of the date of grant during 2021, 2020 and 2019 were as follows.

						Year Ended December 31,
						2021						2020						2019
Risk-free interest rate						1.03		%				0.89		%				2.67		%
Expected term (years)						5.9						5.0						5.5
Expected volatility						42.45		%				31.86		%				30.44		%
Dividend yield						—						—						—

The weighted-average grant date fair value of options granted during 2021, 2020 and 2019 was $14.08, $7.57 and $8.43, respectively, per option. The total intrinsic value of options exercised during 2021, 2020 and 2019 was $145 million, $3 million and $4 million, respectively.

SARs

The table below presents SAR award activity (in millions, except years and weighted-average grant price).

						SARs						Weighted- Average Grant Price						Weighted- Average Remaining Contractual Term (years)						Aggregate Intrinsic Value
Outstanding as of December 31, 2020						2.6						$	24.01					0.5						$	12
Settled						(1.7)						$	24.87											$	11
Outstanding as of December 31, 2021						0.9						$	22.46					0.1						$	1
Vested and expected to vest as of December 31, 2021						0.9						$	22.46					0.1						$	1

SAR award grants include cash-settled SARs and stock-settled SARs. Cash-settled SARs entitle the holder to receive a cash payment for the amount by which the price of the Company’s Series A or Series C common stock exceeds the base price established on the grant date. Cash-settled SARs are granted with a base price equal to or greater than the closing market price of the Company’s Series A or Series C common stock on the date of grant. Stock-settled SARs entitle the holder to shares of Series A or Series C common stock in accordance with the award agreement terms.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of outstanding SARs is estimated using the Black-Scholes option-pricing model. The weighted-average assumptions used to determine the fair value of outstanding SARs were as follows.

						Year Ended December 31,
						2021						2020						2019
Risk-free interest rate						0.22		%				0.10		%				1.60		%
Expected term (years)						0.1						0.5						0.8
Expected volatility						41.12		%				42.13		%				30.54		%
Dividend yield						—						—						—

As of December 31, 2021 and 2020, the weighted-average fair value of SARs outstanding was $1.77 and $5.48 per award. The Company made cash payments of $8 million, $11 million, and $2 million to settle exercised SARs during 2021, 2020, and 2019 respectively. As of December 31, 2021, unrecognized compensation cost related to SARs was immaterial.

Employee Stock Purchase Plan

The ESPP enables eligible employees to purchase shares of the Company’s common stock through payroll deductions or other permitted means. Unless otherwise determined by the Company’s Compensation Committee, the purchase price for shares offered under the ESPP is 85% of the closing price of the Company’s Series A common stock on the purchase date. The Company’s Board of Directors has authorized 8 million shares of the Company’s common stock to be issued under the ESPP. During the years ended December 31, 2021, 2020 and 2019 the Company issued 203 thousand, 254 thousand and 142 thousand shares under the ESPP, respectively, and received cash totaling $6 million, $5 million and $3 million, respectively.

NOTE 16. RETIREMENT SAVINGS PLANS

The Company has defined contribution, defined benefit, and other savings plans for the benefit of its employees that meet eligibility requirements.

Defined Contribution Plans

Eligible employees may contribute a portion of their compensation to the plans, which may be subject to certain statutory limitations. For these plans, the Company also makes contributions, including discretionary contributions, subject to plan provisions, which vest immediately. The Company made total contributions of $50 million, $47 million and $37 million for the years ended December 31, 2021, 2020 and 2019, respectively. The Company's contributions were recorded in cost of revenues and selling, general and administrative expense in the consolidated statements of operations.

Executive Deferred Compensation Plans

The Company has a deferred compensation plan through which members of the Company’s executive team in the U.S. may elect to defer a portion of their eligible compensation. The amounts deferred are invested in various mutual funds at the direction of the executive, which are used to finance payment of the deferred compensation obligation. Distributions from the deferred compensation plan are made upon termination or other events as specified in the plan. The Company has established separate rabbi trusts to hold the investments that finance the deferred compensation obligation. The accounts of the separate rabbi trusts are included in the Company’s consolidated financial statements. The investments are included in prepaid expenses and other current assets and other noncurrent assets in the consolidated balance sheets. The deferred compensation obligation is included in accrued liabilities and other noncurrent liabilities in the consolidated balance sheets. The values of the investments and deferred compensation obligation are recorded at fair value. Changes in the fair value of the investments are offset by changes in the fair value of the deferred compensation obligation and are recorded in earnings as a component of other income (expense), net, on the consolidated statements of operations. (See Note 5 and Note 20.)

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Defined Benefit Plans

The Company has a defined benefit pension plan (“Pension Plan”) that covers certain U.S. based employees and a non-qualified unfunded Supplemental Executive Retirement Plan (“SERP”) that provides defined pension benefits to eligible executives. Expense recognized in relation to the Pension Plan and SERP is based upon actuarial valuations. Inherent in those valuations are key assumptions including discount rates and, where applicable, expected returns on assets. Discount rates are based on a bond portfolio approach that includes high-quality debt instruments with maturities matching the Company's expected benefit payments from the plans. Expected returns on assets are based on the weighted-average expected rate of return and capital market forecasts for each asset class employed and also consider the Company's historical compounded return on plan assets for 10 and 15-year periods. Benefits are generally based on the employee’s compensation and years of service. Since December 31, 2009, no additional service benefits have been earned by participants under the Pension Plan. The amount of eligible compensation that is used to calculate a plan participant’s pension benefit includes compensation earned by the employee through December 31, 2019, after which time all plan participants have a frozen pension benefit. Net periodic pension cost was not material for the years ended December 31, 2021, 2020 and 2019.

The projected benefit obligation, fair value of plan assets and discount rate used in determining the projected benefit obligations were as follows (in millions).

						Pension Plan												SERP
						December 31,
						2021						2020						2021						2020
Projected benefit obligation						$	82					$	94					$	22					$	25
Fair value of plan assets (Level 1)						$	63					$	70					$	—					$	—
Discount rate						2.42		%				1.92		%				2.13		%				1.58		%

NOTE 17. RESTRUCTURING AND OTHER CHARGES

Restructuring and other charges by reportable segment and corporate, inter-segment eliminations, and other were as follows (in millions).

						Year Ended December 31,
						2021						2020						2019
U.S. Networks						$	4					$	41					$	15
International Networks						26						29						20
Corporate, inter-segment eliminations, and other						2						21						(9)
Total restructuring and other charges						$	32					$	91					$	26

Restructuring charges for the years ended December 31, 2021, 2020 and 2019 primarily include charges related to employee relocation and termination costs and other cost reduction efforts. During 2020, the Company implemented various cost-savings initiatives including personnel reductions, restructurings and resource reallocations to align its expense structure to ongoing changes within the industry, including economic challenges resulting from the COVID-19 pandemic. These actions were intended to enable the Company to more efficiently operate in a leaner and more directed cost structure and continued throughout 2021.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in restructuring and other liabilities recorded in accrued liabilities by major category and by reportable segment and corporate, inter-segment eliminations, and other were as follows (in millions).

						U.S. Networks						International Networks						Corporate, inter-segment eliminations, and other						Total
December 31, 2019						$	4					$	5					$	9					$	18
Net contract termination accruals						—						—						4						4
Employee termination accruals, net						41						29						13						83
Other accruals, net						—						—						4						4
Cash paid						(22)						(14)						(15)						(51)
December 31, 2020						23						20						15						58
Employee termination accruals, net						4						26						2						32
Cash paid						(23)						(33)						(15)						(71)
December 31, 2021						$	4					$	13					$	2					$	19

NOTE 18. INCOME TAXES

The domestic and foreign components of income before income taxes were as follows (in millions).

						Year Ended December 31,
						2021						2020						2019
Domestic						$	1,598					$	1,916					$	1,910
Foreign						(165)						(188)						384
Income before income taxes						$	1,433					$	1,728					$	2,294

The components of the provision for income taxes were as follows (in millions).

						Year Ended December 31,
						2021						2020						2019
Current:
Federal						$	451					$	422					$	411
State and local						130						12						42
Foreign						166						125						132
						747						559						585
Deferred:
Federal						(250)						(14)						(54)
State and local						6						(24)						(8)
Foreign						(267)						(148)						(442)
						(511)						(186)						(504)
Income taxes						$	236					$	373					$	81

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table reconciles the Company's effective income tax rates to the U.S. federal statutory income tax rates.

						Year Ended December 31,
						2021												2020												2019
Pre-tax income at U.S. federal statutory income tax rate						$	301					21		%				$	363					21		%				$	482					21		%
State and local income taxes, net of federal tax benefit						108						7		%				(10)						—		%				27						1		%
Effect of foreign operations						25						2		%				58						3		%				(21)						(1)		%
UK Finance Act legislative change						(155)						(11)		%				(51)						(3)		%				—						—		%
Noncontrolling interest adjustment						(40)						(3)		%				(29)						(2)		%				(30)						(1)		%
Change in uncertain tax positions						12						1		%				17						1		%				3						—		%
Impairment of goodwill						—						—		%				25						2		%				32						1		%
Deferred tax adjustment						—						—		%				(22)						(1)		%				—						—		%
Legal entity restructuring, deferred tax impact						—						—		%				—						—		%				(445)						(19)		%
Other, net						(15)						(1)		%				22						1		%				33						2		%
Income tax expense						$	236					16		%				$	373					22		%				$	81					4		%

Income tax expense was $236 million and $373 million, and the Company's effective tax rate was 16% and 22% for 2021 and 2020, respectively. The decrease in income tax expense for the year ended December 31, 2021 was primarily attributable to a decrease in pre-tax book income and an increase in the deferred tax benefit from the UK Finance Act 2021 that was enacted in June 2021. Those decreases were partially offset by an increase in the state and local income tax expense recorded in 2021.

Income tax expense was $373 million and $81 million, and the Company's effective tax rate was 22% and 4% for 2020 and 2019, respectively. The increase in income tax expense for the year ended December 31, 2020 was primarily attributable to the discrete, one-time, non-cash deferred tax benefit of $445 million from legal entity restructurings that was recorded during the year ended December 31, 2019. Additionally, the increase in income tax expense was attributable to an increase in provision for uncertain tax positions and an increase in the effect of foreign operations. Those increases were partially offset by a decrease in pre-tax book income, a tax benefit from a favorable multi-year state resolution, and a favorable deferred tax adjustment in the U.S. that was recorded during the year ended December 31, 2020.

Components of deferred income tax assets and liabilities were as follows (in millions).

						December 31,
						2021						2020
Deferred income tax assets:
Accounts receivable						$	8					$	7
Tax attribute carry-forward						445						354
Accrued liabilities and other						548						471
Total deferred income tax assets						1,001						832
Valuation allowance						(305)						(257)
Net deferred income tax assets						696						575
Deferred income tax liabilities:
Intangible assets						(395)						(654)
Content rights						(138)						(163)
Equity method and other investments in partnerships						(413)						(470)
Noncurrent portion of debt						(87)						(85)
Other						(133)						(140)
Total deferred income tax liabilities						(1,166)						(1,512)
Net deferred income tax liabilities						$	(470)					$	(937)

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s net deferred income tax assets and liabilities were reported on the consolidated balance sheets as follows (in millions).

						December 31,
						2021						2020
Noncurrent deferred income tax assets (included within other noncurrent assets)						$	755					$	597
Deferred income tax liabilities						(1,225)						(1,534)
Net deferred income tax liabilities						$	(470)					$	(937)

The Company’s loss carry-forwards were reported on the consolidated balance sheets as follows (in millions).

						Federal						State						Foreign
Loss carry-forwards						$	9					$	418					$	1,528
Deferred tax asset related to loss carry-forwards						2						20						367
Valuation allowance against loss carry-forwards						—						(17)						(192)
Earliest expiration date of loss carry-forwards						2034						2022						2022

A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest and penalty amounts) is as follows (in millions).

						Year Ended December 31,
						2021						2020						2019
Beginning balance						$	348					$	375					$	378
Additions based on tax positions related to the current year						68						31						54
Additions for tax positions of prior years						64						4						11
Additions for tax positions acquired in business combinations						—						—						47
Reductions for tax positions of prior years						(27)						(5)						(47)
Settlements						(5)						(9)						(19)
Reductions due to lapse of statutes of limitations						(25)						(51)						(50)
Changes due to foreign currency exchange rates						(3)						3						1
Ending balance						$	420					$	348					$	375

The balances as of December 31, 2021, 2020 and 2019 included $420 million, $348 million and $375 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s income tax expense and effective tax rate after giving effect to interest deductions and offsetting benefits from other tax jurisdictions. For the year ended December 31, 2021, increases in unrecognized tax benefits related to the uncertainty of allocation and taxation of income among multiple jurisdictions partially offset by multiple audit resolutions and the lapse of statutes of limitations.

The Company and its subsidiaries file income tax returns in the U.S. and various state and foreign jurisdictions. The Company is currently under audit by the Internal Revenue Service for its 2012 to 2019 consolidated federal income tax returns. It is difficult to predict the final outcome or timing of resolution of any particular tax matter. Accordingly, an estimate of any related impact to the reserve for uncertain tax positions cannot currently be determined. With few exceptions, the Company is no longer subject to audit by any jurisdiction for years prior to 2006. Adjustments that arose from the completion of audits for certain tax years have been included in the change in uncertain tax positions in the table above.

It is reasonably possible that the total amount of unrecognized tax benefits related to certain of the Company's uncertain tax positions could decrease by as much as $125 million within the next twelve months as a result of ongoing audits, foreign judicial proceedings, lapses of statutes of limitations or regulatory developments.

As of December 31, 2021, 2020 and 2019, the Company had accrued approximately $60 million, $53 million, and $58 million, respectively, of total interest and penalties payable related to unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19. EARNINGS PER SHARE

In calculating earnings per share, the Company follows the two-class method, which distinguishes between classes of securities based on the proportionate participation rights of each security type in the Company's undistributed income. The Company's Series A, B and C common stock is treated as one class and the Series C-1 convertible preferred stock is treated as a separate class for purposes of applying the two-class method. The Company's Series C-1 convertible preferred stock is an in-substance common stock equivalent as it has substantially equal rights and shares equally on an as-converted basis with respect to income available to Discovery, Inc. The Company's Series A-1 convertible preferred stock is also a separate class but is not considered a common stock equivalent and therefore is not presented separately in the calculation of earnings per share. Series A-1 convertible preferred stock is currently convertible into 9 shares of the Company's Series A common stock and Series C-1 convertible preferred stock is convertible into 19.3648 shares of the Company's Series C common stock, subject to certain anti-dilution adjustments. During the years ended December 31, 2021, 2020 and 2019, no Series A-1 convertible preferred stock was converted. During the years ended December 31, 2021 and 2019, Advance Newhouse Programming Partnership converted 0.6 million and 1.1 million shares of its Series C-1 convertible preferred stock into 11.0 million and 22.0 million shares of Series C common stock, respectively. No Series C-1 convertible preferred stock was converted during the year ended December 31, 2020.

Net income allocated to Discovery, Inc. Series C-1 convertible preferred stockholders for diluted net income per share is included in net income allocated to Discovery, Inc. Series A, B and C common stockholders for diluted net income per share. The weighted average number of diluted shares outstanding adjusts the weighted average number of shares of Series A, B and C common stock outstanding for the potential dilution that would occur if common stock equivalents, including convertible preferred stock and share-based awards, were converted into common stock or exercised, calculated using the treasury stock method. The computation of the diluted earnings per share of Series A, B and C common stockholders assumes the conversion of Series A-1 and C-1 convertible preferred stock, while the diluted earnings per share amounts of Series C-1 convertible preferred stock does not assume conversion of those shares.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below sets forth the Company's calculated earnings per share (in millions). Earnings per share amounts may not recalculate due to rounding.

						Year Ended December 31,
						2021						2020						2019
Numerator:
Net income						$	1,197					$	1,355					$	2,213
Less:
Allocation of undistributed income to Series A-1 convertible preferred stock						(110)						(128)						(204)
Net income attributable to noncontrolling interests						(138)						(124)						(128)
Net income attributable to redeemable noncontrolling interests						(53)						(12)						(16)
Redeemable noncontrolling interest adjustments of carrying value to redemption value (redemption value does not equal fair value)						16						—						(20)
Net income available to Discovery, Inc. Series A, B and C common and Series C-1 convertible preferred stockholders for basic net income per share						$	912					$	1,091					$	1,845
Allocation of net income:
Series A, B and C common stockholders						780						919						1,531
Series C-1 convertible preferred stockholders						132						172						314
Total						912						1,091						1,845
Add:
Allocation of undistributed income to Series A-1 convertible preferred stockholders						110						128						204
Net income available to Discovery, Inc. Series A, B and C common stockholders for diluted net income per share						$	1,022					$	1,219					$	2,049
Denominator — weighted average:
Series A, B and C common shares outstanding — basic						503						505						529
Impact of assumed preferred stock conversion						156						165						179
Dilutive effect of share-based awards						5						2						3
Series A, B and C common shares outstanding — diluted						664						672						711
Series C-1 convertible preferred stock outstanding — basic and diluted						4						5						6
Basic net income per share allocated to:
Series A, B and C common stockholders						$	1.55					$	1.82					$	2.90
Series C-1 convertible preferred stockholders						$	30.01					$	35.24					$	56.07
Diluted net income per share allocated to:
Series A, B and C common stockholders						$	1.54					$	1.81					$	2.88
Series C-1 convertible preferred stockholders						$	29.80					$	35.12					$	55.80

The table below presents the details of share-based awards that were excluded from the calculation of diluted earnings per share (in millions).

						Year Ended December 31,
						2021						2020						2019
Anti-dilutive share-based awards						17						24						17

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20. SUPPLEMENTAL DISCLOSURES

Property and equipment

Property and equipment consisted of the following (in millions).

									December 31,
			Useful Lives						2021						2020
Broadcast equipment (a)			3 - 5 years						$	672					$	744
Office equipment, furniture, fixtures and other			3 - 5 years						467						510
Capitalized software costs			2 - 5 years						904						696
Land, buildings and leasehold improvements (b)			15- 39 years						481						334
Property and equipment, at cost									2,524						2,284
Accumulated depreciation									(1,329)						(1,363)
									1,195						921
Assets under construction									141						285
Property and equipment, net									$	1,336					$	1,206
(a) Property and equipment includes assets acquired under finance lease arrangements, primarily satellite transponders classified as broadcast equipment. Assets acquired under finance lease arrangements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the related leases. (See Note 9.)
(b) Land has an indefinite life and is not depreciated. Leasehold improvements generally have an estimated useful life equal to the lease term.

Capitalized software costs are for internal use. The net book value of capitalized software costs was $371 million and $247 million as of December 31, 2021 and 2020, respectively. The related accumulated amortization was $533 million and $448 million as of December 31, 2021 and 2020, respectively.

Depreciation expense for property and equipment totaled $311 million, $267 million and $207 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in millions):

			December 31,
			2021						2020
Accrued payroll and related benefits			$	533					$	494
Content rights payable			772						528
Other accrued liabilities			925						771
Total accrued liabilities			$	2,230					$	1,793

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other income (expense), net

Other income (expense), net, consisted of the following (in millions):

						Year Ended December 31,
						2021						2020						2019
Foreign currency gains (losses), net						$	93					$	(115)					$	17
(Losses) gains on derivative instruments, net						(33)						29						(52)
Interest income						18						10						22
Gain on sale of investment with readily determinable fair value						15						101						—
Change in the value of equity investments without readily determinable fair value						(13)						—						—
Change in the value of investments with readily determinable fair value						(6)						28						(26)
Expenses from debt modification						—						(11)						—
Other income, net						8						—						31
Total other income (expense), net						$	82					$	42					$	(8)

Supplemental Cash Flow Information

						Year Ended December 31,
						2021						2020						2019
Cash paid for taxes, net						$	643					$	641					$	562
Cash paid for interest						664						673						708
Non-cash investing and financing activities:
Receivable from sale of fuboTV Inc. shares						—						124						—
Disposal of UKTV investment and acquisition of Lifestyle Business						—						—						291
Accrued purchases of property and equipment						34						48						47
Assets acquired under finance lease and other arrangements						134						91						38
Equity exchange with Harpo for step acquisition of OWN						—						59						—
Unsettled stock repurchases						—						—						4

Cash, Cash Equivalents, and Restricted Cash

																		December 31, 2021						December 31, 2020
Cash and cash equivalents																		$	3,905					$	2,091
Restricted cash - other current assets (a)																		—						31
Total cash, cash equivalents, and restricted cash																		$	3,905					$	2,122
(a) Restricted cash includes cash posted as collateral related to forward starting interest rate swap contracts.

NOTE 21. RELATED PARTY TRANSACTIONS

In the normal course of business, the Company enters into transactions with related parties. Related parties include entities that share common directorship, such as Liberty Global plc (“Liberty Global”), Liberty Broadband Corporation ("Liberty Broadband") and their subsidiaries and equity method investees (together the “Liberty Group”). Discovery’s Board of Directors includes Mr. Malone, who is Chairman of the Board of Liberty Global and beneficially owns approximately 30% of the aggregate voting power with respect to the election of directors of Liberty Global. Mr. Malone is also Chairman of the Board of Liberty Broadband and beneficially owns approximately 49% of the aggregate voting power with respect to the election of directors of Liberty Broadband. The majority of the revenue earned from the Liberty Group relates to multi-year network distribution arrangements. Related party transactions also include revenues and expenses for content and services provided to or acquired from equity method investees or minority partners of consolidated subsidiaries.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents a summary of the transactions with related parties (in millions).

						Year Ended December 31,
						2021						2020						2019
Revenues and service charges:
Liberty Group						$	671					$	686					$	668
Equity method investees						253						223						210
Other						169						103						111
Total revenues and service charges						$	1,093					$	1,012					$	989
Interest income						$	—					$	—					$	1
Expenses						$	(238)					$	(244)					$	(224)
Distributions to noncontrolling interests and redeemable noncontrolling interests						$	(251)					$	(254)					$	(250)

The table below presents amounts due from and to related parties (in millions).

						December 31,
						2021						2020
Receivables						$	172					$	177
Payables						$	23					$	43

NOTE 22. COMMITMENTS, CONTINGENCIES, AND GUARANTEES

Commitments

In the normal course of business, the Company enters into various commitments, which primarily include programming and talent arrangements, operating and finance leases (See Note 9), arrangements to purchase various goods and services, and future funding commitments to equity method investees.

Year Ending December 31,						Content						Other Purchase Obligations						Pension and Other Employee Obligations						Total
2022						$	1,798					$	704					$	3					$	2,505
2023						697						443						2						1,142
2024						985						209						2						1,196
2025						466						132						2						600
2026						289						71						2						362
Thereafter						1,117						52						6						1,175
Total						$	5,352					$	1,611					$	17					$	6,980

Content purchase obligations include commitments and liabilities associated with third-party producers and sports associations for content that airs on our television networks. Production contracts generally require: purchase of a specified number of episodes; payments over the term of the license; and include both programs that have been delivered and are available for airing and programs that have not yet been produced or sporting events that have not yet taken place. If the content is ultimately never produced, our commitments expire without obligation. The commitments disclosed above exclude content liabilities recognized on the consolidated balance sheet.

Other purchase obligations include agreements with certain vendors and suppliers for the purchase of goods and services whereby the underlying agreements are enforceable, legally binding and specify all significant terms. Significant purchase obligations include transmission services, television rating services, marketing commitments and research, equipment purchases, and information technology and other services. Some of these contracts do not require the purchase of fixed or minimum quantities and generally may be terminated with a 30-day to 60-day advance notice without penalty, and are not included in the table above past the 30-day to 60-day advance notice period.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pension and other employee obligations include payments to meet minimum funding requirements of our Pension Plan in 2022 and estimated benefit payments for our SERP that exceed plan assets. Payments for the SERP have been estimated over a ten-year period. While benefit payments under these plans are expected to continue beyond 2031, we believe it is not practicable to estimate payments beyond this period. (See Note 16.)

Although the Company had funding commitments to equity method investees as of December 31, 2021, the Company may also provide uncommitted additional funding to its equity method investments in the future. (See Note 4.)

Contingencies

Put Rights

The Company has granted put rights to certain consolidated subsidiaries. (See Note 11.)

Legal Matters

From time to time, in the normal course of its operations, the Company is subject to various litigation matters and claims, including claims related to employees, vendors, other business partners or patent issues. However, a determination as to the amount of the accrual required for such contingencies is highly subjective and requires judgment about future events. Although the outcome of these matters cannot be predicted with certainty and the impact of the final resolution of these matters on the Company's results of operations in a particular subsequent reporting period is not known, management does not believe that the resolution of these matters will have a material adverse effect on the Company's future consolidated financial position, future results of operations or cash flows.

Guarantees

There were no guarantees recorded under ASC 460 as of December 31, 2021 and 2020.

In the normal course of business, the Company may provide or receive indemnities that are intended to allocate certain risks associated with business transactions. Similarly, the Company may remain contingently liable for certain obligations of a divested business in the event that a third party does not fulfill its obligations under an indemnification obligation. The Company records a liability for its indemnification obligations and other contingent liabilities when probable and estimable. There were no material amounts for indemnifications or other contingencies recorded as of December 31, 2021 and 2020.

NOTE 23. REPORTABLE SEGMENTS

The Company’s operating segments are determined based on: (i) financial information reviewed by its chief operating decision maker ("CODM"), the Chief Executive Officer ("CEO"), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions.

The accounting policies of the reportable segments are the same as the Company’s, except that certain inter-segment transactions that are eliminated for consolidation are not eliminated at the segment level. Inter-segment transactions primarily include advertising and content purchases. The Company does not report assets by segment because this is not used to allocate resources or evaluate segment performance.

The Company evaluates the operating performance of its segments based on financial measures such as revenues and adjusted operating income before depreciation and amortization (“Adjusted OIBDA”). Adjusted OIBDA is defined as operating income excluding: (i) employee share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, (vii) third-party transaction and integration, and (viii) other items impacting comparability. The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance and allocate resources to each segment. The Company believes Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. The Company excludes share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions and acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. The Company also excludes depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. GAAP.

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tables below present summarized financial information for each of the Company’s reportable segments and corporate, inter-segment eliminations, and other (in millions).

Revenues

						Year Ended December 31,
						2021						2020						2019
U.S. Networks						$	7,662					$	6,949					$	7,092
International Networks						4,539						3,713						4,041
Corporate, inter-segment eliminations, and other						(10)						9						11
Total revenues						$	12,191					$	10,671					$	11,144

Reconciliation of Net Income Available to Discovery, Inc. to Adjusted OIBDA

						Year Ended December 31,
						2021						2020						2019
Net income available to Discovery, Inc.						$	1,006					$	1,219					$	2,069
Net income attributable to redeemable noncontrolling interests						53						12						16
Net income attributable to noncontrolling interests						138						124						128
Income tax expense						236						373						81
Income before income taxes						1,433						1,728						2,294
Other (income) expense, net						(82)						(42)						8
Loss from equity investees, net						18						105						2
Loss on extinguishment of debt						10						76						28
Interest expense, net						633						648						677
Operating income						2,012						2,515						3,009
Depreciation and amortization						1,582						1,359						1,347
Impairment of goodwill and other intangible assets						—						124						155
Employee share-based compensation						167						99						137
Restructuring and other charges						32						91						26
Transaction and integration costs						95						6						26
Loss (gain) on disposition						(71)						2						—
Settlement of a withholding tax claim						—						—						(29)
Adjusted OIBDA						$	3,817					$	4,196					$	4,671

Adjusted OIBDA

						Year Ended December 31,
						2021						2020						2019
U.S. Networks						$	3,940					$	3,975					$	4,117
International Networks						494						723						1,057
Corporate, inter-segment eliminations, and other						(617)						(502)						(503)
Adjusted OIBDA						$	3,817					$	4,196					$	4,671

DISCOVERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Content Amortization and Impairment Expense

						Year Ended December 31,
						2021						2020						2019
U.S. Networks						$	1,565					$	1,647					$	1,548
International Networks						1,934						1,307						1,303
Corporate, inter-segment eliminations, and other						2						2						2
Total content amortization and impairment expense						$	3,501					$	2,956					$	2,853

Content expense is generally a component of costs of revenue on the consolidated statements of operations (see Note 6).

Revenues by Geography

						Year Ended December 31,
						2021						2020						2019
U.S.						$	7,728					$	7,025					$	7,152
Non-U.S.						4,463						3,646						3,992
Total revenues						$	12,191					$	10,671					$	11,144

Distribution and advertising revenues are attributed to each country based on viewer location. Other revenues are attributed to each country based on customer location.

Property and Equipment by Geography

						December 31,
						2021						2020
U.S.						$	834					$	645
Poland						176						180
U.K.						164						149
Other non-U.S.						162						232
Total property and equipment, net						$	1,336					$	1,206