What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-01-15 compared with 2020-01-21 · 627 added, 552 removed, 900 unchanged (57% of the section changed)

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CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(In millions, except par value)

2020 November 29,

Current assets:

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Property and equipment, net 1,517 1,293

Operating lease right-of-use assets, net 487 —

Goodwill 10,742 10,691

Other intangibles, net 1,359 1,721

Deferred income taxes 1,370 —

Other assets 663 562

Total assets $ 24,284 $ 20,762

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Income taxes payable 63 56

Operating lease liabilities 92 —

Total current liabilities 5,512 8,191

Long-term liabilities:

Debt 4,117 989

Deferred revenue 130 123

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Deferred income taxes 10 140

Operating lease liabilities 499 —

Other liabilities 223 173

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Accumulated other comprehensive income (loss) ( 158 ) ( 188 )

Treasury stock, at cost (118,495 and 113,171 shares, respectively), net of re-issuances

Treasury stock, at cost ( 122 and 118 shares, respectively)

( 13,546 ) ( 10,615 )

Total stockholders’ equity 13,264 10,530

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CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

Services and support

(In millions, except per share data)

2020 November 29,

2019 November 30,

Subscription $ 11,626 $ 9,634 $ 7,604

Product 507 648 622

Services and other 735 889 804

Total revenue 12,868 11,171 9,030

Cost of revenue:

Services and support

Subscription 1,108 926 574

Product 36 40 46

Services and other 578 707 575

Total cost of revenue 1,722 1,673 1,195

Gross profit 11,146 9,498 7,835

Operating expenses:

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Non-operating income (expense):

Interest and other income (expense), net

Interest expense ( 116 ) ( 157 ) ( 89 )

Investment gains (losses), net 13 52 3

Other income (expense), net 42 42 40

Total non-operating income (expense), net ( 61 ) ( 63 ) ( 46 )

Income before income taxes 4,176 3,205 2,794

Provision for income taxes

Provision for (benefit from) income taxes ( 1,084 ) 254 203

Net income $ 5,260 $ 2,951 $ 2,591

Basic net income per share $ 10.94 $ 6.07 $ 5.28

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(In millions)

2020 November 29,

2019 November 30,

Increase/(Decrease)

Net income $ 5,260 $ 2,951 $ 2,591

Other comprehensive income (loss), net of taxes:

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(In millions)

Capital Retained

Earnings Accumulated

Comprehensive

Income (Loss)

Treasury Stock

Income (Loss) Treasury Stock

Shares Amount Shares Amount Total

Balances at December 1, 2017

Other comprehensive income (losses), net of taxes

601 $ — $ 5,082 $ 9,574 $ ( 112 ) ( 109 ) $ ( 6,085 ) $ 8,459

Net income — — — 2,591 — — — 2,591

Other comprehensive income (loss), net of taxes — — — — ( 36 ) — — ( 36 )

Re-issuance of treasury stock under stock compensation plans

— — ( 1 ) ( 349 ) — 5 148 ( 202 )

Purchase of treasury stock — — — — — ( 9 ) ( 2,050 ) ( 2,050 )

Equity awards assumed for

Equity awards assumed for acquisition — — 3 — — — — 3

Stock-based compensation — — 601 — — — — 601

Value of shares in deferred

compensation plan

Balances at December 1, 2017

Other comprehensive income (losses), net of taxes

Value of shares in deferred compensation plan — — — — — — ( 4 ) ( 4 )

Balances at November 30, 2018

601 $ — $ 5,685 $ 11,816 $ ( 148 ) ( 113 ) $ ( 7,991 ) $ 9,362

Impacts of adoption of the new revenue standard

— — — 442 — — — 442

Net income — — — 2,951 — — — 2,951

Other comprehensive income (loss), net of taxes — — — — ( 40 ) — — ( 40 )

Re-issuance of treasury stock under stock compensation plans

— — 48 ( 380 ) — 5 125 ( 207 )

Purchase of treasury stock — — — — — ( 10 ) ( 2,750 ) ( 2,750 )

Equity awards assumed for

Stock-based compensation — — 771 — — — — 771

Value of shares in deferred

compensation plan

Impacts of the U.S.

Value of shares in deferred compensation plan — — — — — — 1 1

Balances at November 29, 2019

Impacts of adoption of the new revenue standard

Other comprehensive income (losses), net of taxes

601 $ — $ 6,504 $ 14,829 $ ( 188 ) ( 118 ) $ ( 10,615 ) $ 10,530

Net income — — — 5,260 — — — 5,260

Other comprehensive income (loss), net of taxes — — — — 30 — — 30

Re-issuance of treasury stock under stock compensation plans

— — ( 56 ) ( 478 ) — 4 123 ( 411 )

Purchase of treasury stock — — — — — ( 8 ) ( 3,050 ) ( 3,050 )

Stock-based compensation — — 909 — — — — 909

Value of shares in deferred

compensation plan

Value of shares in deferred compensation plan — — — — — — ( 4 ) ( 4 )

Balances at November 27, 2020

601 $ — $ 7,357 $ 19,611 $ ( 158 ) ( 122 ) $ ( 13,546 ) $ 13,264

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(In millions)

2020 November 29,

2019 November 30,

Cash flows from operating activities:

Net income $ 5,260 $ 2,951 $ 2,591

Adjustments to reconcile net income to net cash provided by operating activities:

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Stock-based compensation 909 788 610

Reduction of operating lease right-of-use assets 87 — —

Deferred income taxes ( 1,501 ) 3 ( 469 )

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Trade payables 96 23 55

Accrued expenses

Accrued expenses and other liabilities 86 172 44

Income taxes payable ( 72 ) 4 479

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Purchases of long-term investments, intangibles and other assets ( 15 ) ( 49 ) ( 18 )

Proceeds from sale of long-term investments and other assets

Proceeds from sales of long-term investments and other assets 9 3 5

Net cash used for investing activities ( 414 ) ( 456 ) ( 4,685 )

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Taxes paid related to net share settlement of equity awards ( 681 ) ( 440 ) ( 393 )

Proceeds from debt issuance, net of costs

Proceeds from issuance of debt 3,144 — 2,248

Repayment of debt ( 3,150 ) — —

Other financing activities, net ( 21 ) 11 ( 1 )

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Non-cash investing activities:

Investment in lease receivable applied to building purchase

Issuance of common stock and stock awards assumed in business acquisitions $ — $ — $ 3

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Our products run on personal and server-based computers, as well as on smartphones, tablets and other devices, depending on the product.

We have operations in the Americas, Europe, Middle East and Africa (“EMEA”), and Asia-Pacific (“APAC”).

We have operations in the Americas;

Europe, Middle East and Africa (“EMEA”);

and Asia-Pacific (“APAC”).

Basis of Presentation

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Actual results may differ materially from these estimates.

In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic.

This pandemic has created and may continue to create significant uncertainty in the macroeconomic environment which, in addition to other unforeseen effects of this pandemic, may adversely impact our results of operations.

As a result, most of our estimates and assumptions may require increased judgment and carry a higher degree of variability and volatility.

As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.

Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30.

Fiscal years 2020, 2019 and 2018 were 52 -week years.

Reclassifications

Certain immaterial prior year amounts have been reclassified to conform to current year presentation in the Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recently Adopted Accounting Guidance

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2014-09, Revenue from Contracts with Customers, Topic 606, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the capitalization of incremental costs to obtain a contract with a customer.

The new revenue standard replaces most existing revenue recognition guidance in GAAP and permits the use of either the full retrospective or modified retrospective transition method.

On December 1, 2018, the beginning of our fiscal year 2019, we adopted the requirements of the new revenue standard utilizing the modified retrospective method of transition.

Prior period information has not been restated and continues to be reported under the accounting standard in effect for those periods.

We applied the new revenue standard to contracts that were not completed as of the adoption date, consistent with the transition guidance.

Further, adoption of the new revenue standard resulted in changes to our accounting policies for revenue recognition and sales commissions as detailed below.

We recognized the following cumulative effects of initially applying the new revenue standard as of December 1, 2018:

(in thousands)

November 30, 2018

Topic 606 Adoption Adjustments

Trade receivables, net of allowances for doubtful accounts

Prepaid expenses and other current assets

Liabilities and Stockholders’ Equity

Accrued expenses

Deferred revenue, current

Deferred income taxes

Retained earnings

Below is a summary of the adoption impacts of the new revenue standard:

We capitalized $ 413.2 million of contract acquisition costs comprised of sales and partner commission costs at adoption date (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion), with a corresponding adjustment to retained earnings.

We are amortizing these costs over their respective expected period of benefit.

Revenue for certain contracts that were previously deferred would have been recognized in periods prior to adoption under the new standard.

Upon adoption, we recorded the following adjustments to our beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts:

an increase in unbilled receivables (included in trade receivables, net) of $ 24.8 million , an increase in contract assets (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion) of $ 46.4 million and a decrease in deferred revenue of $ 52.8 million , with corresponding adjustments to retained earnings.

We recorded an increase to our opening deferred income tax liability of $ 82.8 million , with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.

Further, we had other impacts to various accounts which resulted to an immaterial net reduction to our retained earnings.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Adoption of the new revenue standard impacted our Consolidated Statements of Income for the year ended November 29, 2019 as follows:

(in thousands, except per share amounts)

Balances without Topic 606 adoption impact

Services and support

Reclassifications

In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined our Advertising Cloud offerings with our previous Publishing segment.

This realignment is consistent with how we manage our Digital Experience segment to better reflect the strategic shift related to Advertising Cloud and to align with our overall core value proposition of delivering on customer experience management.

Further, we reclassified revenue and related cost of revenue of our Advertising Cloud offerings from subscription to services and other on our Consolidated Statements of Income.

Financial information for all fiscal years presented has been updated in our Consolidated Financial Statements to reflect these reclassifications.

If the change was made at the beginning of fiscal 2020, reported revenue and cost of revenue in our income statements for each quarter of fiscal 2020 would have been as follows:

Quarter Ended

(in millions) February 28 May 29 August 28 November 27 November 27

Subscription $ 2,732 $ 2,831 $ 2,948 $ 3,115 $ 11,626

Product 143 128 109 127 507

Services and other 216 169 168 182 735

Total revenue 3,091 3,128 3,225 3,424 12,868

Operating expenses

Sales and marketing

General and administrative

Provision for income taxes

Basic net income per share

Diluted net income per share

Adoption of the new revenue standard impacted our Consolidated Balance Sheets as of November 29, 2019 as follows:

(in thousands)

Balances without Topic 606 adoption impact

Trade receivables, net of allowances for doubtful accounts

Prepaid expenses and other current assets

Liabilities and Stockholders’ Equity

Accrued expenses

Deferred revenue, current

Deferred revenue, long-term

Income taxes payable, long-term

Deferred income taxes

Retained earnings

There was no net impact to our Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows resulting from the adoption of the new revenue standard other than the impact to reported net income as presented above.

The impact to our Consolidated Statements of Stockholders’ Equity was only to retained earnings, as presented above.

The most significant impact of the new revenue standard relates to our capitalization of certain incremental costs to acquire contracts and the requirement to amortize these amounts over the expected period of benefit.

Under the previous standard, we expensed costs related to the acquisition of revenue-generating contracts as incurred.

Additionally, there was impact from arrangements with our customers that include on-premise term-based software licenses bundled with maintenance and support.

Under the previous standard, revenue attributable to these software licenses was recognized ratably over the term of the arrangement because vendor-specific objective evidence (“VSOE”) did not exist for the undelivered maintenance and support element as it is not sold separately.

The requirement to have VSOE for undelivered elements to enable the separation of revenue recognition for delivered software licenses is eliminated under the new revenue standard.

Accordingly, under the new revenue standard we recognize as revenue a portion of the arrangement fee upon delivery of the software licenses and classify that recognized revenue as product revenue instead of subscription revenue in our Consolidated Statements of Income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other impacts to our policies and disclosures include earlier recognition of revenue for certain contracts due to the elimination of contingent revenue limitations, the requirement to estimate variable consideration for certain arrangements, increased allocation of revenue to and from professional services and other offerings and changes to our financial statement disclosures such as new disclosures related to our remaining performance obligations.

However, the timing and pattern of revenue recognition related to our professional services and cloud-enabled offerings, including Creative Cloud and Document Cloud for enterprises, individuals and teams, remain substantially unchanged.

When Creative Cloud and Document Cloud are sold with cloud-enabled services, the on-premise/on-device software licenses and cloud-enabled services are so highly interrelated and interdependent that they are not each separately identifiable within the context of the contract and therefore not distinct from each other.

Revenue for these offerings continues to be recognized ratably over the subscription period for which the cloud-enabled services are provided.

There have been no other new accounting pronouncements made effective during fiscal 2019 that have significance, or potential significance, to our Consolidated Financial Statements.

Cost of revenue:

Subscription 274 269 282 283 1,108

Product 7 9 10 10 36

Services and other 171 137 135 135 578

Total cost of revenue $ 452 $ 415 $ 427 $ 428 $ 1,722

Certain other immaterial prior year amounts have been reclassified to conform to current year presentation in the Consolidated Statements of Cash Flows and Notes to Consolidated Financial Statements.

Significant Accounting Policies

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Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Product, Subscription and Services Offerings

Subscription, Product and Services Offerings

We enter into revenue arrangements in which a customer may purchase a combination of cloud-enabled subscriptions, cloud-hosted offerings, term-based, royalty, and perpetual software licenses, associated software maintenance and support plans, consulting services, training and technical support.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fully hosted subscription services (SaaS) allow customers to access hosted software during the contractual term without taking possession of the software.

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Over-usage fees and fees based on the actual number of transactions are billed in accordance with contract terms as these fees are incurred and are included in the transaction price of an arrangement as variable consideration.

Fees based on a number of transactions or impressions per month, where invoicing is aligned to the pattern of performance, customer benefit and consumption, are typically accounted for utilizing the “as-invoiced” practical expedient.

Fees based on a number of transactions, where invoicing is aligned to the pattern of performance, customer benefit and consumption, are typically accounted for utilizing the “as-invoiced” practical expedient.

Revenue for subscriptions sold as a fee per period is recognized ratably over the contractual term as the customer simultaneously receives and consumes the benefit of the underlying service.

When cloud-enabled services are highly integrated and interrelated with on-premise software, such as in our cloud-enabled Creative Cloud and Document Cloud offerings, the individual components are not considered distinct and revenue is recognized ratably over the subscription period for which the cloud-enabled services are provided.

The subscription support plans related to those customer arrangements whose revenues we classify as subscription revenues represent stand-ready performance obligations.

Revenue from these subscription support plans is recognized ratably over their respective contractual terms and classified as subscription revenue.

Licenses for on-premise software may be purchased on a perpetual basis, as a subscription for a fixed period of time or based on usage for certain of our OEM and royalty agreements.

Revenue from distinct on-premise licenses is recognized at the point in time the software is available to the customer, provided all other revenue recognition criteria are met, and classified as product revenue on our Consolidated Statements of Income.

Some of our enterprise license arrangements allow customers to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

commit non-cancellable funds.

Some of our enterprise license arrangements allow customers to commit non-cancellable funds.

These non-cancellable committed funds are nonrefundable and provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services.

Revenue associated with these monthly term-based licenses is classified as subscription revenue.

Our services and support revenue is composed of consulting, training, and maintenance and support, primarily related to our enterprise offerings.

Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products.

We typically sell our consulting contracts on a time-and-materials basis and recognize the related revenue as services are rendered.

We typically sell our maintenance and support contracts on a flat fee or percentage of associated license fees basis and recognize the related revenue ratably over the support term as the underlying service is a stand-ready performance obligation.

Revenue associated with these monthly term-based licenses and associated maintenance and support is classified as subscription revenue.

Our services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support and our advertising offerings.

We typically sell our consulting contracts on a time-and-materials and fixed-fee basis.

These revenues are recognized as the services are performed for time and materials contracts and on a relative performance basis for fixed-fee contracts.

Training revenues are recognized as the services are performed.

Our maintenance and support offerings, which entitle customers, partners and developers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement.

Our transaction-based advertising offerings, where fees are based on a number of impressions per month and invoicing is aligned to the pattern of performance, customer benefit and consumption, are typically accounted for utilizing the “as-invoiced” practical expedient.

We exclude from the transaction price sales and other taxes collected from customers on behalf of the relevant government authority.

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We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided.

In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams.

In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

document workflow solution that operates seamlessly across multiple devices and teams.

We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own.

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When revenue arrangements include components of third-party goods and services, for example in transactions which involve resale, fulfillment or providing advertising impressions to our end customer, we evaluate whether we are the principal, and report revenues on a gross basis, or an agent, and report revenues on a net basis.

In this assessment, we consider if we obtain

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

control of the specified goods or services before they are transferred to the customer by evaluating indicators such as which party is primarily responsible for fulfilling the promise to provide the goods or services, which party has discretion in establishing price and the underlying terms and conditions between the parties to the transaction.

In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer by evaluating indicators such as which party is primarily responsible for fulfilling the promise to provide the goods or services, which party has discretion in establishing price and the underlying terms and conditions between the parties to the transaction.

We offer limited rights of return, rebates and price protection of our products under various policies and programs with our distributors, resellers and/or end-user customers.

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We then apply the historical rate to the current period revenue as a basis for estimating future returns.

When necessary, we also provide a specific reserve in excess of portfolio-level estimated requirements.

When necessary, we also provide a specific reserve in excess of portfolio-level estimated

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

requirements.

This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans and other factors.

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We base our estimates on multiple factors, including historical sales information, seasonality and other business information which may impact our estimates.

We do not estimate variable consideration for our sales and usage-based license royalty agreements, consistent with the associated exception for sales and usage-based royalties for the license of intellectual property under the new revenue standard.

Property and Equipment

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Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or estimated useful lives ranging from 1 to 15 years.

We determine if an arrangement is or contains a lease at contract inception.

In certain of our lease arrangements, primarily those related to our data center arrangements, judgment is required in determining if a contract contains a lease.

For these arrangements, there is judgment in evaluating if the arrangement involves an identified asset that is physically distinct or whether we have the right to substantially all of the capacity of an identified asset that is not physically distinct.

In arrangements that involve an identified asset, there is also judgment in evaluating if we have the right to direct the use of that asset.

We do not have any finance leases.

Operating leases are recorded in our Consolidated Balance Sheets.

Right-of-use (“ROU”) assets and lease liabilities are measured at the lease commencement date based on the present value of the remaining lease payments over the lease term, determined using the discount rate for the lease at the commencement date.

Because the rate implicit in our leases is not readily determinable, we use our incremental borrowing rate as the discount rate, which approximates the interest rate at which we could borrow on a collateralized basis with similar terms and payments and in similar economic environments.

As of November 27, 2020, our leases have remaining lease terms of up to 11 years, some of which include options to extend the lease for up to 14 years and options to terminate the lease within 1 year.

Optional periods to extend the lease, including by not exercising a termination option, are included in the lease term when it is reasonably certain that the option will be exercised.

We also have one land lease that expires in 2091.

Operating lease expense is recognized on a straight-line basis over the lease term.

We account for lease and non-lease components, principally common area maintenance for our facilities leases, as a single lease component for our facilities and data center leases.

Goodwill, Intangibles and Other Long-Lived Assets

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In performing our goodwill impairment test, we first perform a qualitative assessment, which requires that we consider events or circumstances including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting segment’s net assets and changes in our stock price.

If, after assessing the totality of events or circumstances, we determine

If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair values of our reporting segments are greater than the carrying amounts, then the quantitative goodwill impairment test is not performed.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

that it is more likely than not that the fair values of our reporting segments are greater than the carrying amounts, then the quantitative goodwill impairment test is not performed.

If the qualitative assessment indicates that the quantitative analysis should be performed, we then evaluate goodwill for impairment by comparing the fair value of each of our reporting segments to its carrying value, including the associated goodwill.

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We amortize intangible assets with finite lives over their estimated useful lives and review them for impairment whenever an impairment indicator exists.

We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived assets, including our intangible assets, may not be recoverable.

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our long-lived assets, including our intangible assets, may not be recoverable.

When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows.

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Purchased technology 6

Acquired rights to use technology

We use the asset and liability method of accounting for income taxes.

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We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.

During fiscal 2020, we completed intra-entity transfers of certain intellectual property rights (“IP rights”) which resulted in the establishment of deferred tax assets, net of valuation allowance, and related tax benefits of $ 224 million and $ 1.13 billion based on the fair value of the IP rights transferred in April and November 2020, respectively.

The determination of the fair value involves significant judgment on future revenue growth, operating margins and discount rates.

The tax-deductible amortization related to the transferred IP rights will be recognized over the period of economic benefit.

Taxes Collected from Customers

1 unchanged sentence

Accordingly, taxes collected from customers are not reported as revenue.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Treasury Stock

1 unchanged sentence

When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid-in-capital in our Consolidated Balance Sheets.

When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

there are previously recorded gains to offset the losses.

When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that there are previously recorded gains to offset the losses.

If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of treasury stock are recorded as a reduction of retained earnings in our Consolidated Balance Sheets.

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Dollars and in various other currencies.

We may use foreign exchange option and forward contracts to hedge a portion of our forecasted foreign currency denominated revenue primarily in Euros, British Pounds and Japanese Yen.

We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates.

We may use foreign exchange option contracts or forward contracts to hedge a portion of our forecasted foreign currency denominated revenue primarily in Euros, British Pounds, Japanese Yen and Australian Dollars.

Additionally, we hedge our net recognized foreign currency monetary assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates.

We recognize all derivative instruments as either assets or liabilities in our Consolidated Balance Sheets and measure them at fair value.

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Contracts that do not qualify for hedge accounting are adjusted to fair value through earnings.

Gains and losses related to changes in the fair value of interest rate swaps and foreign exchange forward contracts which hedge certain balance sheet positions are recorded each period as a component of interest and other income (expense), net in our Consolidated Statements of Income.

Gains and losses related to changes in the fair value of interest rate swaps and foreign exchange forward contracts which hedge certain balance sheet positions are recorded each period as a component of other income (expense), net in our Consolidated Statements of Income.

Foreign exchange option contracts hedging forecasted foreign currency revenue and Treasury lock agreements are designated as cash flow hedges with gains and losses recorded net of tax as a component of accumulated other comprehensive income (loss) in our Consolidated Balance Sheets until the forecasted transaction occurs.

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We also enter into collateral security agreements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit risk in receivables is limited to OEMs, dealers and distributors of hardware and software products to the retail market, customers to whom we license software directly and our SaaS offerings.

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We also perform ongoing credit evaluations of our customers’ financial condition and require letters of credit or other guarantees, whenever deemed necessary.

The credit limit given to the customer is based on our risk assessment of their ability to pay, country risk and other factors and is not contingent on the resale of the product or on the collection of payments

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

from their customers.

Certain contracts with advertising agencies contain sequential liability provisions, under which the agency is not required to pay until payment is received from the agency’s customers.

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Accordingly, we will not recognize any consideration received as revenue until termination or substantive completion of the services.

Recent Accounting Pronouncements Not Yet Effective

On February 24, 2016, the FASB issued ASU No.

2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases with a lease term of twelve months or less.

For lessees, leases will continue to be classified as either operating or finance leases in the income statement.

Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model.

Lessors will continue to classify leases as operating, direct financing or sales-type leases.

The effective date of the new leases standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.

Early adoption is permitted.

The new leases standard is effective for us beginning in the first quarter of fiscal 2020, and we did not early adopt.

The new leases standard must be adopted using a modified retrospective transition method and allows for the application of the new guidance at the beginning of the earliest comparative period presented or at the adoption date.

In July 2018, the FASB issued ASU No.

2018-11, Leases - Targeted Improvements, providing an optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

We will adopt the new leases standard using this optional transition method.

We have completed our assessment of the impacts of the standard, and note that the most significant impact will be the recognition of right-of-use assets and lease liabilities on our Consolidated Balance Sheets.

The standard will not have a material impact to our Consolidated Statements of Income and Cash Flows.

We are in the final stages of implementing a new lease accounting system and updating our processes for the adoption of the new leases standard.

Recently Adopted Accounting Guidance

On February 24, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842), (“ASC 842”), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet for all leases with terms greater than twelve months, including for those leases classified as operating leases under the legacy standard (“ASC 840”).

Under ASC 842, added disclosures are required as compared to ASC 840 to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

On November 30, 2019, the beginning of our fiscal year 2020, we adopted ASC 842 using the alternative modified retrospective transition method provided in ASU 2018-11, Leases (Topic 842):

Targeted Improvements.

Under this method, we recorded ROU assets and lease liabilities of approximately $ 519 million and $ 618 million, respectively, at the adoption date and did not include any retrospective adjustments to comparative periods to reflect the adoption of ASC 842.

The lease liabilities reflect the remaining minimum rental payments for our existing leases as of the adoption date, discounted using our incremental borrowing rate for each lease.

The standard had no impact on our consolidated net income or cash flows.

We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our assessments on whether a contract was or contains a lease, our historical lease classification and our initial direct costs for any leases that existed prior to adoption date.

We also elected the practical expedient that allowed us to carry forward our accounting treatment for existing land easements.

We did not elect the hindsight practical expedient to determine the lease term for existing leases.

On August 28, 2017, the FASB issued ASU No.

2017-12, Derivatives and Hedging, requiring expanded hedge accounting for both non-financial and financial risk components and refining the measurement of hedge results to better reflect an entity’s hedging strategies.

For example, adoption would result in reclassification of hedge costs from foreign currency hedges from interest and other income (expense), net to revenue in our Consolidated Statements of Income.

The updated standard also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness.

On November 30, 2019, the beginning of our fiscal year 2020, we adopted the accounting requirements of the updated standard utilizing the modified retrospective method of transition.

The adoption of this standard did not have a material impact on our Consolidated Financial Statements and related disclosures.

Recent Accounting Pronouncements Not Yet Effective

On June 16, 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses, requiring the measurement and recognition of expected credit losses for financial assets held at amortized cost, which include our accounts receivable and contract assets.

The standard also requires that we recognize credit impairment losses related to our available-for-sale debt securities through an allowance for credit losses instead of a reduction in the cost basis.

The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

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With the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to our Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Segment Information

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Our Chief Executive Officer, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments, but does not review operating expenses on a segment by segment basis.

In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.

Our business is organized into three reportable segments:

Digital Media, Digital Experience and Publishing.

In addition, with the exception of goodwill, we do not identify or allocate our assets by the reportable segments.

Following the move of our Advertising Cloud offerings from our Digital Experience segment into the Publishing segment, our business is organized into three reportable segments:

Digital Media, Digital Experience, and Publishing and Advertising.

These segments provide our senior management with a comprehensive financial view of our key businesses.

Our segments are aligned around our

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

two strategic growth opportunities as described in the “Business Overview” within Part I, Item 1, placing our Publishing business in a third segment that contains some of our mature products and solutions.

In fiscal 2019 , we categorized our products into the following reportable segments:

Our segments are aligned around our two strategic growth opportunities as described in the “Business Overview” within Part I, Item 1, placing our Publishing and Advertising business in a third segment that contains some of our legacy products and solutions.

We categorize our products into the following reportable segments:

• Digital Media —Our Digital Media segment provides tools and solutions that enable individuals, teams and enterprises to create, publish, promote and monetize their digital content anywhere.

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Our customers also include knowledge workers who create, collaborate on and distribute documents and creative content.

Digital Experience —Our Digital Experience segment provides products, services and solutions for creating, managing, executing, measuring, monetizing and optimizing customer experiences from advertising to commerce.

• Digital Experience —Our Digital Experience segment provides products, services and solutions for creating, managing, executing, measuring, monetizing and optimizing customer experiences from analytics to commerce.

Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers, marketing executives, information management and technology executives, product development executives, and sales and support executives.

Publishing —Our Publishing segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses.

It also includes our web conferencing and document and forms platforms.

Revenue for fiscal 2019 presented below is in accordance with the new revenue standard that was adopted under the modified retrospective method.

Prior period revenue has not been restated.

Our segment revenue and results for fiscal 2019 , 2018 and 2017 were as follows:

(dollars in thousands)

• Publishing and Advertising —Our Publishing and Advertising segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses.

It also includes our platforms for Advertising Cloud, web conferencing, document and forms, and Primetime.

Financial results for fiscal 2020 and 2019 are presented below in accordance with ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs - Contracts with Customers (Subtopic 340-40), which was adopted under the modified retrospective method at the beginning of fiscal 2019.

Fiscal 2018 revenue has not been restated.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our segment revenue and results for fiscal 2020, 2019 and 2018, updated for segment reclassifications discussed above, were as follows:

(dollars in millions) Digital

Media Digital

Experience Publishing and

Advertising Total

Revenue $ 9,233 $ 3,125 $ 510 $ 12,868

Cost of revenue 352 1,126 244 1,722

Gross profit $ 8,881 $ 1,999 $ 266 $ 11,146

Gross profit as a percentage of revenue 96 % 64 % 52 % 87 %

Revenue $ 7,707 $ 2,795 $ 669 $ 11,171

Cost of revenue 290 1,056 327 1,673

Gross profit $ 7,417 $ 1,739 $ 342 $ 9,498

Gross profit as a percentage of revenue 96 % 62 % 51 % 85 %

Revenue $ 6,325 $ 2,073 $ 632 $ 9,030

Cost of revenue 249 679 267 1,195

Gross profit $ 6,076 $ 1,394 $ 365 $ 7,835

Gross profit as a percentage of revenue 96 % 67 % 58 % 87 %

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue by geographic area for fiscal 2020, 2019 and 2018 were as follows:

(in thousands)

(in millions) 2020 2019 2018

United States $ 6,746 $ 5,904 $ 4,633

Other 708 602 484

Total Americas 7,454 6,506 5,117

United Kingdom 880 794 653

Other 2,520 2,181 1,897

Total EMEA 3,400 2,975 2,550

Japan 893 751 609

Other 1,121 939 754

Total APAC 2,014 1,690 1,363

Revenue $ 12,868 $ 11,171 $ 9,030

Revenue by major offerings in our Digital Media reportable segment for fiscal 2020, 2019 and 2018 were as follows:

(in thousands)

(in millions) 2020 2019 2018

Creative Cloud $ 7,736 $ 6,482 $ 5,343

Document Cloud 1,497 1,225 982

Subscription revenue by segment for fiscal 2019 , 2018 and 2017 were as follows:

(in thousands)

$ 9,233 $ 7,707 $ 6,325

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Further, we reclassified revenue of our Advertising Cloud offerings from subscription to services and other on our Consolidated Statements of Income.

Subscription revenue by segment for fiscal 2020, 2019 and 2018, updated for the reclassifications discussed above, were as follows:

(in millions) 2020 2019 2018

Digital Media $ 8,813 $ 7,208 $ 5,858

Digital Experience 2,660 2,280 1,600

Publishing and Advertising 153 146 146

$ 11,626 $ 9,634 $ 7,604

Contract Balances

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Certain performance obligations may require payment before delivery of the license or service to the customer.

Included in trade receivables on the Consolidated Balance Sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing occurring.

The opening balance of trade receivables, net of allowances for doubtful accounts, as of December 1, 2018 was $ 1.36 billion , inclusive of unbilled receivables of $ 105.8 million .

As of November 27, 2020, the balance of trade receivables, net of allowances for doubtful accounts, was $ 1.40 billion, inclusive of unbilled receivables of $ 84 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of November 29, 2019, the balance of trade receivables, net of allowance for doubtful accounts, was $ 1.53 billion, inclusive of unbilled receivables of $ 149 million.

Allowance for Doubtful Accounts

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During fiscal 2020, 2019 and 2018, our allowance for doubtful accounts activities were as follows:

(in thousands)

(in millions) 2020 2019 2018

Beginning balance $ 10 $ 15 $ 9

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Deductions (1)

( 20 ) ( 10 ) ( 6 )

Ending balance $ 21 $ 10 $ 15

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We regularly review contract asset balances for impairment, considering factors such as historical experience, credit-worthiness, age of the balance and other economic or business factors.

Contract asset impairments were not significant in fiscal 2019 .

The opening balance of contract assets as of December 1, 2018 was $ 46.4 million .

As of November 29, 2019 , the balance of contract assets was $ 63.9 million .

Contract asset impairments were not material in fiscal 2020.

Contract assets were $ 81 million and $ 64 million as of November 27, 2020 and November 29, 2019, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Revenue and Remaining Performance Obligations

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services, including non-cancellable and non-refundable committed funds and deposits.

Deferred revenue is recognized as revenue when transfer of control to customers has occurred.

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Any potential financing fees are considered insignificant in the context of our contracts.

The adjusted opening balance of deferred revenue as of December 1, 2018 was $ 3.00 billion .

As of November 29, 2019 , the balance of deferred revenue was $ 3.50 billion , inclusive of $ 265.4 million of non-cancellable and non-refundable committed funds and $ 56.9 million of refundable customer deposits.

Arrangements with non-cancellable and non-refundable committed funds provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services.

As of November 27, 2020, the balance of deferred revenue was $ 3.76 billion, which includes $ 64 million of refundable customer deposits.

Refundable customer deposits represent arrangements in which the customer has a unilateral cancellation right for which we are obligated to refund amounts paid related to products or services not yet delivered or provided at the time of cancellation on a prorated basis.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Significant movements in the deferred revenue balance during the period consisted of increases due to payments received prior to transfer of control of the underlying performance obligations to the customer and deferred revenue assumed through business combinations, which were offset by decreases due to revenue recognized in the period.

During the year ended November 29, 2019 , approximately $ 2.8 billion of revenue was recognized that was included in the adjusted opening balance of deferred revenue as of December 1, 2018.

Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services.

Non-cancellable and non-refundable committed funds related to these agreements comprised approximately 6 % of the total deferred revenue.

As of November 29, 2019, the balance of deferred revenue was $ 3.50 billion.

Significant movements in the deferred revenue balance during the period consisted of increases due to payments received prior to transfer of control of the underlying performance obligations to the customer, which were offset by decreases due to revenue recognized in the period.

During the year ended November 27, 2020, approximately $ 3.22 billion of revenue was recognized that was included in the balance of deferred revenue as of November 29, 2019.

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods.

Transaction price allocated to the remaining performance obligation is influenced by several factors, including the timing of renewals and average contract terms.

We applied practical expedients to exclude amounts related to performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, sales- and usage-based royalties not yet consumed and any estimated amounts of variable consideration that are subject to constraint in accordance with the new revenue standard.

Remaining performance obligations were approximately $ 9.82 billion as of November 29, 2019 , which includes $ 776.4 million of non-cancellable and non-refundable committed funds related to some of our enterprise customer agreements.

Transaction price allocated to the remaining performance obligation is influenced by several factors, including the timing of renewals and average contract term.

Remaining performance obligations were approximately $ 11.34 billion as of November 27, 2020.

Non-cancellable and non-refundable committed funds related to some of our enterprise customer agreements referred to in the paragraph above comprised approximately 6 % of the total remaining performance obligations.

Approximately 73 % of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Contract Acquisition Costs

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We have determined that certain sales incentive programs meet the requirements to be capitalized.

The costs capitalized under the new revenue standard are primarily sales commissions paid to our sales force personnel.

The costs capitalized are primarily sales commissions paid to our sales force personnel.

Capitalized costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners.

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Amortization of capitalized costs are included in sales and marketing expense in our Consolidated Statements of Income.

During fiscal 2019 , we amortized $ 170.9 million of capitalized contract acquisition costs into sales and marketing expense.

We did not incur any impairment losses.

The opening balance of capitalized contract acquisition costs as of December 1, 2018 was $ 413.2 million .

As of November 29, 2019 , the balance of capitalized contract acquisition costs was $ 473.7 million , of which $ 314.7 million was long-term and included in other assets in the Consolidated Balance Sheets.

During fiscal 2020 and 2019, we amortized $ 186 million and $ 171 million of capitalized contract acquisition costs into sales and marketing expense, respectively.

We did not incur any impairment losses in fiscal 2020 and 2019.

Capitalized contract acquisition costs was $ 530 million and $ 474 million as of November 27, 2020 and November 29, 2019, of which $ 352 million and $ 315 million was long-term and included in other assets in the Consolidated Balance Sheets, respectively.

The remaining balance of the capitalized costs to obtain contracts was current and included in prepaid expenses and other current assets.

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During fiscal 2020, 2019 and 2018, our revenue reserve activities were as follows:

(in thousands)

(in millions) 2020 2019 2018

Beginning balance $ 7 $ 25 $ 22

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Ending balance $ 10 $ 7 $ 25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Refund Liabilities

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Refund liabilities are included in accrued expenses on the Consolidated Balance Sheets.

The opening balance of refund liabilities as of December 1, 2018 was $ 75.3 million .

As of November 29, 2019 , the balance of refund liabilities was $ 126.1 million .

Refund liabilities were $ 127 million and $ 126 million as of November 27, 2020 and November 29, 2019, respectively.

Significant Customers

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As of fiscal year end 2020 and 2019, no single customer was responsible for over 10% of our trade receivables.

Subsequent to November 27, 2020, we completed our acquisition of Workfront, a privately held company that provides a work management platform for marketers, for approximately $ 1.50 billion in cash consideration.

The initial purchase accounting for this transaction has not yet been completed given the short period of time between the acquisition date and issuance of these financial statements.

Workfront will be integrated into our Digital Experience reportable segment for financial reporting purposes in the first quarter of fiscal 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Allegorithmic

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See Note 17 for further details regarding our Term Loan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We integrated Marketo into our Digital Experience reportable segment and have included the financial results of Marketo in our Consolidated Financial Statements beginning on the acquisition date.

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The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below represents the final purchase price allocation to the acquired net tangible and intangible assets of Marketo based on their estimated fair values as of October 31, 2018 and the associated estimated useful lives at that date.

During fiscal 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to total purchase price, intangible assets, deferred revenue, tax liabilities assumed and their related impact to goodwill.

(in thousands)

Weighted Average Useful Life (years)

(in millions) Amount Weighted Average Useful Life (years)

Customer contracts and relationships $ 578 11

Purchased technology 444 7

Backlog 105 2

Non-competition agreements 12 2

Trademarks 329 9

Total identifiable intangible assets 1,468

Net liabilities assumed

Net liabilities assumed ( 194 ) N/A

Total purchase price $ 4,733

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Deferred revenue — Included in net liabilities assumed is Marketo’s deferred revenue which represents advance payments from customers related to subscription contracts and professional services.

We estimated our obligation related to the deferred

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

revenue using the cost build-up approach.

We estimated our obligation related to the deferred revenue using the cost build-up approach.

The cost build-up approach determines fair value by estimating the direct and indirect costs related to supporting the obligation plus an assumed operating margin.

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Amortization expense associated with acquired intangible assets is not deductible for tax purposes.

Thus, approximately $ 348.8 million , included in the net liabilities assumed, was established as a deferred tax liability for the future amortization of the intangible assets, and was partially offset by other tax assets of $ 166.2 million , which primarily consist of net operating loss carryforwards.

Thus, approximately $ 349 million, included in the net liabilities assumed, was established as a deferred tax

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

liability for the future amortization of the intangible assets, and was partially offset by other tax assets of $ 166 million, which primarily consist of net operating loss carryforwards.

Any impairment charges made in the future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded.

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The financial information in the table below summarizes the combined results of operations of Adobe and Marketo, on a pro forma basis, as though the companies had been combined as of the beginning of the periods presented.

The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on December 3, 2016 or of results that may occur in the future.

The following unaudited pro forma financial information for fiscal 2018 and 2017 combines the historical results for Adobe for the years ended November 30, 2018 and December 1, 2017 and the historical results of Marketo for the period January 1, 2018 through October 31, 2018 and the year ended December 31, 2017, respectively:

(in thousands)

The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on the earliest period presented or of results that may occur in the future.

The following unaudited pro forma financial information for fiscal 2018 combines the historical results for Adobe for the year ended November 30, 2018 and the historical results of Marketo for the period January 1, 2018 through October 31, 2018:

(in millions) 2018

Net revenues $ 9,339

Net income $ 2,362

On June 18, 2018, we completed our acquisition of Magento Commerce (“Magento”), a privately held commerce platform company, and integrated it into our Digital Experience reportable segment.

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During fiscal 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to net liabilities assumed and their related impact to goodwill.

(in thousands)

Weighted Average Useful Life (years)

(in millions) Amount Weighted Average Useful Life (years)

Customer contracts and relationships $ 208 8

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In-process research and development (1)

Trademarks 21 3

Other intangibles 44 3

Total identifiable intangible assets 396

Net liabilities assumed

Net liabilities assumed ( 68 ) N/A

Total purchase price $ 1,645

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

_________________________________________

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The respective related amortization and write-off were each immaterial.

Non-deductible for tax purposes .

(2) Substantially non-deductible for tax purposes .

Pro forma financial information has not been presented for the Magento acquisition as the impact to our Consolidated Financial Statements was not material.

On December 19, 2016 , we completed our acquisition of TubeMogul, a publicly held video advertising platform company, and integrated it into our Digital Experience reportable segment.

Under the acquisition method of accounting, the total final purchase price was allocated to TubeMogul’s net tangible and intangible assets based upon their estimated fair values as of December 19, 2016 .

During fiscal 2017, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to tangible assets, liabilities assumed, and their related impact to goodwill.

The total final purchase price for TubeMogul was $ 560.8 million of which $ 348.4 million was allocated to goodwill that was non-deductible for tax purposes, $ 113.1 million to identifiable intangible assets and $ 99.3 million to net assets acquired.

Pro forma financial information has not been presented for the TubeMogul acquisition as the impact to our Consolidated Financial Statements was not material.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We also completed other immaterial business acquisitions during the fiscal years presented.

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We classify our investments in marketable debt securities as “available-for-sale.” We carry these investments at fair value, based on quoted market prices or other readily available market information.

Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets.

Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets.

Gains and losses are determined using the specific identification method and recognized when realized in our Consolidated Statements of Income.

When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash, cash equivalents and short-term investments consisted of the following as of November 27, 2020:

(in thousands)

(in millions)

Cost Unrealized

Gains Unrealized

Losses Estimated

Current assets:

Cash $ 849 $ — $ — $ 849

Cash equivalents:

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Corporate debt securities 1,378 8 — 1,386

Foreign government securities 3 — — 3

Municipal securities 19 — — 19

Treasury securities

Total short-term investments 1,505 9 — 1,514

Total cash, cash equivalents and short-term investments $ 5,983 $ 9 $ — $ 5,992

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash, cash equivalents and short-term investments consisted of the following as of November 29, 2019:

(in thousands)

(in millions) Amortized

Cost Unrealized

Gains Unrealized

Losses Estimated

Current assets:

Cash $ 467 $ — $ — $ 467

Cash equivalents:

Corporate debt securities 46 — — 46

Money market mutual funds 2,049 — — 2,049

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Corporate debt securities 1,408 4 — 1,412

Foreign government securities

Municipal securities 18 — — 18

Treasury securities 8 — — 8

Total short-term investments 1,523 4 — 1,527

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See Note 5 for further information regarding the fair value of our financial instruments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of November 29, 2019 and November 30, 2018 :

(in thousands)

Corporate debt securities

Asset-backed securities

Municipal securities

There w e re 115 securities and 369 securities in an unrealized loss position for less than twelve months at November 29, 2019 and at November 30, 2018 , respectively.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that were in a continuous unrealized loss position for more than twelve months, as of November 29, 2019 and November 30, 2018 :

(in thousands)

We had immaterial gross unrealized losses related to our available-for-sale securities as of November 27, 2020 and November 29, 2019.

The following table summarizes the fair value of our available-for-sale securities that have been in a continuous unrealized loss position as of November 27, 2020 and November 29, 2019:

(in millions) 2020 2019

Twelve Months More Than

Twelve Months Less Than

Twelve Months More Than

Twelve Months

Corporate debt securities $ 207 $ — $ 235 $ 44

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Foreign government securities 3 — — —

There were 38 securities and 577 securities in an unrealized loss position for more than twelve months at November 29, 2019 and at November 30, 2018 , respectively.

Total $ 232 $ — $ 245 $ 51

There were 99 securities and 115 securities in an unrealized loss position for less than twelve months at November 27, 2020 and November 29, 2019, respectively.

There were no securities and 38 securities in an unrealized loss position for more than twelve months at November 27, 2020 and November 29, 2019, respectively.

The following table summarizes the cost and estimated fair value of the fixed income securities classified as short-term investments based on stated effective maturities as of November 27, 2020:

(in thousands)

(in millions) Amortized

Cost Estimated

Due within one year $ 841 $ 843

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Due after three years 51 52

Total $ 1,505 $ 1,514

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We review our debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value.

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If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value.

The portion of the write-down related to credit loss would be recorded to interest and other income (expense), net in our Consolidated Statements of Income.

Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets.

The portion of the write-down related to credit loss would be recorded to other income (expense), net in our Consolidated Statements of Income.

Any portion not related to credit loss would be recorded to accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets.

During fiscal 2020, 2019 and 2018, we did not consider any of our investments to be other-than-temporarily impaired.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FAIR VALUE MEASUREMENTS

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The fair value of our financial assets and liabilities at November 27, 2020 was determined using the following inputs:

(in thousands)

Fair Value Measurements at Reporting Date Using

(in millions) Fair Value Measurements at Reporting Date Using

Quoted Prices

Identical Assets

Identical Assets Significant

Inputs Significant

Total (Level 1) (Level 2) (Level 3)

Cash equivalents:

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Corporate debt securities 1,386 — 1,386 —

Foreign government securities 3 — 3 —

Municipal securities 19 — 19 —

Treasury securities

Prepaid expenses and other current assets:

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Deferred compensation plan assets 116 7 109 —

Total assets $ 5,274 $ 3,608 $ 1,666 $ —

Accrued expenses:

Treasury lock derivatives

Foreign currency derivatives $ 4 $ — $ 4 $ —

Interest rate swap derivatives

Total liabilities

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value of our financial assets and liabilities at November 29, 2019 was determined using the following inputs:

(in thousands)

Fair Value Measurements at Reporting Date Using

(in millions) Fair Value Measurements at Reporting Date Using

Quoted Prices

Identical Assets

Identical Assets Significant

Inputs Significant

Total (Level 1) (Level 2) (Level 3)

Cash equivalents:

Corporate debt securities $ 46 $ — $ 46 $ —

Money market mutual funds 2,049 2,049 — —

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Corporate debt securities 1,412 — 1,412 —

Foreign government securities

Municipal securities 18 — 18 —

Treasury securities 8 — 8 —

Prepaid expenses and other current assets:

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Deferred compensation plan assets 94 5 89 —

Total assets $ 3,833 $ 2,142 $ 1,691 $ —

Accrued expenses:

Treasury lock derivatives $ 30 $ — $ 30 $ —

Foreign currency derivatives 3 — 3 —

Other liabilities:

Interest rate swap derivatives

Total liabilities $ 33 $ — $ 33 $ —

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We classify our money market mutual funds and time deposits as Level 1.

Our Level 2 over-the-counter foreign currency, Treasury lock and interest rate swap derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange and interest rate data at the measurement date.

Our deferred compensation plan assets consist of money market mutual funds and other mutual funds.

Our Level 2 over-the-counter foreign currency derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange and interest rate data at the measurement date.

The invested amounts under our deferred compensation plan consist of money market mutual funds and other mutual funds, which are recorded as other assets on our Consolidated Balance Sheets with a corresponding offset to long-term liabilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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These foreign exchange contracts, carried at fair value, have maturities of up to twelve months .

As of November 27, 2020, total notional amounts of outstanding cash flow hedges were $ 1.53 billion, hedging exposures denominated in Euros, British Pounds, Japanese Yen and Australian Dollars.

As of November 29, 2019, total notional amounts of outstanding cash flow hedges were $ 1.20 billion, hedging exposures denominated in Euros, British Pounds and Japanese Yen.

In June 2019, in anticipation of refinancing our $ 2.25 billion Term Loan due April 30, 2020 and $ 900 million notes payable due February 1, 2020, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S.

In June 2019, in anticipation of refinancing our $ 2.25 billion term loan due April 30, 2020 (“Term Loan”) and $ 900 million 4.75 % fixed interest rate senior notes due February 1, 2020 (“2020 Notes”), we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S.

Treasury rates for an aggregate notional amount of $ 1 billion of our future debt issuance.

These derivative instruments hedge the impact of changes in the benchmark interest rate to future interest payments and will be terminated upon closing of our anticipated refinancing.

Upon refinancing and termination of the derivative instruments, their fair value will be amortized over the term of our new debt to interest expense.

These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments and were settled upon debt issuance in the first quarter of fiscal 2020.

We incurred a loss related to the settlement of the instruments which is amortized to interest expense over the term of our debt due February 1, 2030.

See Note 17 for further details regarding our debt.

As of November 27, 2020, we had net derivative losses on our foreign exchange option contracts expected to be recognized within the next 18 months, of which $ 28 million of losses are expected to be recognized into revenue within the next 12 months.

In addition, we had net derivative losses on our Treasury lock agreements, of which $ 4 million is expected to be recognized into interest expense within the next 12 months.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions.

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In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to the same income statement line item as the hedged item.

If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in the same income statement line item as the hedged item.

We evaluate hedge effectiveness at the inception of the hedge prospectively, and on an ongoing basis both retrospectively and prospectively.

We record any ineffective portion of the hedging instruments in interest and other income (expense), net on our Consolidated Statements of Income.

The net gain or loss recognized in interest and other income (expense), net due to hedge ineffectiveness was insignificant for all fiscal years presented.

Effective in the third quarter of fiscal 2019, all changes in fair value of our foreign currency cash flow hedges are recorded in accumulated other comprehensive income (loss).

Prior to this, we recorded the time value of purchased contracts in interest and other income (expense), net in our Consolidated Statements of Income.

Prior to this, we recorded the time value of purchased contracts in

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

other income (expense), net in our Consolidated Statements of Income.

The impact of the de-designation of our hedges due to the change in methodology in the third quarter of fiscal 2019 was immaterial.

For fiscal 2020, 2019 and 2018, there were no net gains or losses recognized in income relating to hedges of forecasted transactions that did not occur.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Hedges

During the third quarter of fiscal 2014, we entered into interest rate swaps designated as a fair value hedge related to our $ 900 million of 4.75 % fixed interest rate senior notes due February 1, 2020 (the “2020 Notes”).

In effect, the interest rate swaps convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the London Interbank Offered Rate (“LIBOR”).

Under the terms of the swaps, we pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $ 900 million notional amount through February 1, 2020.

In exchange, we receive 4.75 % fixed rate interest from the swap counterparties.

During the third quarter of fiscal 2014, we entered into interest rate swaps designated as a fair value hedge related to our 2020 Notes.

The interest rate swaps converted the fixed interest rate on our 2020 Notes to a floating interest rate based on the London Interbank Offered Rate (“LIBOR”).

See Note 17 for further details regarding our debt.

The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that are attributable to the changes in interest rate.

Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest and other income (expense), net in our Consolidated Statements of Income.

As of November 29, 2019 , the fair value of the interest rate swaps is recognized in accrued expenses on our Consolidated Balance Sheets with a corresponding offset to current debt.

The interest rate swaps were accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that were attributable to the changes in interest rate.

Therefore, the gains and losses related to changes in the fair value of the interest rate swaps were included in other income (expense), net in our Consolidated Statements of Income.

During the first quarter of fiscal 2020, our 2020 Notes became due and were paid in conjunction with our debt refinancing.

As of November 27, 2020, the interest rate swap agreements had matured and were no longer recognized in our Consolidated Financial Statements.

Non-Designated Hedges

Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies.

The changes in fair value of these contracts is recorded to interest and other income (expense), net in our Consolidated Statements of Income.

The changes in fair value of these contracts is recorded to other income (expense), net in our Consolidated Statements of Income.

Changes in the fair value of the underlying assets and liabilities associated with the hedged risk are generally offset by the changes in the fair value of the related contracts.

As of November 29, 2019 , total notional amounts of outstanding foreign currency forward contracts were $ 702.4 million , primarily hedging exposures denominated in Euros, British Pounds, Japanese Yen and Indian Rupees.

As of November 27, 2020, total notional amounts of outstanding foreign currency forward contracts were $ 492 million, primarily hedging exposures denominated in Euros, British Pounds, Japanese Yen, Indian Rupees and Australian Dollars.

As of November 29, 2019, total notional amounts of outstanding contracts were $ 702 million, primarily hedging exposures denominated in Euros, British Pounds, Japanese Yen and Indian Rupees.

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The fair value of derivative instruments on our Consolidated Balance Sheets as of November 27, 2020 and November 29, 2019 were as follows:

(in thousands)

(in millions) 2020 2019

Derivatives Fair Value

Derivatives designated as hedging instruments:

Foreign exchange option contracts (1)

$ 12 $ — $ 26 $ —

Treasury lock (1)

Interest rate swap (3)

Derivatives not designated as hedging instruments:

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_________________________________________

Fair value asset derivatives included in prepaid expenses and other current assets and fair value liability derivatives included in accrued expenses on our Consolidated Balance Sheets.

Hedging effectiveness expected to be recognized to income within the next 18 months , of which $ 13.2 million is expected within the next 12 months.

Included in accrued expenses and other liabilities on our Consolidated Balance Sheets as of November 29, 2019 and November 30, 2018 , respectively.

(1) Fair value asset derivatives are included in prepaid expenses and other current assets and fair value liability derivatives are included in accrued expenses on our Consolidated Balance Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The effects of foreign currency derivative instruments designated as cash flow hedges and foreign currency derivative instruments not designated as hedges in our Consolidated Statements of Income for fiscal 2019 , 2018 and 2017 were as follows:

(in thousands)

Gains (losses) on derivative instruments, net of tax, recognized in our Consolidated Statements of Comprehensive Income for fiscal 2020, 2019 and 2018 were as follows:

(in millions) 2020 2019 2018

Derivatives in cash flow hedging relationships:

Foreign exchange option contracts

$ ( 43 ) $ 23 $ 74

Treasury lock

$ ( 1 ) $ ( 23 ) $ —

The effects of derivative instruments on our Consolidated Statements of Income for fiscal 2020, 2019 and 2018 were as follows:

(in millions) 2020 2019 2018

Revenue Interest Expense Other Income (Expense), Net Revenue Interest Expense Other Income (Expense), Net Revenue Other Income (Expense), Net

Derivatives in cash flow hedging relationships:

Net gain (loss) recognized in OCI, net of tax (1)

Foreign exchange option contracts (1)

Net gain (loss) reclassified from accumulated OCI into income, net of tax $ 3 $ — $ — $ 39 $ — $ — $ 49 $ —

Net gain (loss) recognized in income (3) (4)

Amount excluded from effectiveness testing and ineffective portion $ — $ — $ — $ — $ — $ ( 24 ) $ — $ ( 41 )

Treasury lock

Net gain (loss) reclassified from accumulated OCI into income, net of tax $ — $ ( 3 ) $ — $ — $ ( 1 ) $ — $ — $ —

Derivatives not designated as hedging relationships:

Net gain (loss) recognized in revenue

Net gain (loss) recognized in interest and other income (expense), net

Foreign exchange option contracts $ — $ — $ — $ 1 $ — $ — $ — $ —

Foreign exchange forward contracts

$ — $ — $ 5 $ — $ — $ 4 $ — $ 2

Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).

Effective portion of the foreign currency and Treasury lock cash flow hedges classified as revenue and interest expense, respectively.

Amount excluded from effectiveness testing and ineffective portion classified in interest and other income (expense), net.

Starting the third quarter of fiscal 2019, all changes in fair value of our foreign currency cash flow hedges are recorded in accumulated other comprehensive income.

Net gains (losses) recognized in interest and other income (expense), net relating to foreign currency derivatives not designated as hedging instruments for fiscal 2019 , 2018 and 2017 were as follows:

(in thousands)

_________________________________________

(1) Starting the third quarter of fiscal 2019, all changes in fair value of our foreign currency cash flow hedges are recorded in accumulated other comprehensive income (loss) (“OCI”).

Net gains (losses) recognized in other income (expense), net relating to foreign currency derivatives not designated as hedging instruments for fiscal 2020, 2019 and 2018 were as follows:

(in millions) 2020 2019 2018

Gain (loss) on foreign currency assets and liabilities:

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Net unrealized gain (loss) recognized in other income ( 5 ) 8 ( 4 )

Gain (loss) on foreign currency assets and liabilities ( 7 ) ( 6 ) ( 3 )

Gain (loss) on hedges of foreign currency assets and liabilities:

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Net unrealized gain (loss) recognized in other income ( 1 ) ( 3 ) 4

Net gain (loss) recognized in interest and other income (expense), net

Gain (loss) on hedges of foreign currency assets and liabilities 5 4 2

Net gain (loss) recognized in other income (expense), net $ ( 2 ) $ ( 2 ) $ ( 1 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Property and equipment, net consisted of the following as of November 27, 2020 and November 29, 2019:

(in thousands)

(in millions) 2020 2019

Computers and other equipment $ 1,287 $ 1,424

Buildings 561 483

Building improvements 340 308

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Capital projects in-progress 199 112

Less accumulated depreciation and amortization

Total 2,975 2,862

Accumulated depreciation and amortization ( 1,458 ) ( 1,569 )

Property and equipment, net $ 1,517 $ 1,293

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Property and equipment, net, by geographic area as of November 27, 2020 and November 29, 2019 was as follows:

(in thousands)

(in millions) 2020 2019

United States $ 1,328 $ 1,126

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GOODWILL AND OTHER INTANGIBLES

Goodwill by reportable segment and activity for the years ended November 29, 2019 and November 30, 2018 was as follows:

(in thousands)

Goodwill by reportable segment and activity for fiscal 2020 and 2019 was as follows:

(in millions) 2018 Acquisitions Other (1)

2019 Reclassification (2)

Digital Media $ 2,740 $ 126 $ ( 1 ) $ 2,865 $ — $ 3 $ 2,868

Digital Experience 7,463 — ( 15 ) 7,448 ( 20 ) 48 7,476

Publishing and Advertising 378 — — 378 20 — 398

Goodwill $ 10,581 $ 126 $ ( 16 ) $ 10,691 $ — $ 51 $ 10,742

_________________________________________

Amounts primarily consist of foreign currency translation adjustments.

Other intangibles, net, by reportable segment as of November 29, 2019 and November 30, 2018 were as follows:

(in thousands)

Digital Media

Digital Experience

Other intangibles, net

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Certain goodwill and other intangibles were misclassified between Digital Media and Digital Experience in the prior year, which have been recast in the above tables.

(1) Amounts consist of foreign currency translation adjustments.

(2) In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined Advertising Cloud with our previous Publishing segment.

Certain goodwill balances were misclassified between our reportable segments, which have been updated in the above tables.

The impact to our prior year disclosures was immaterial and there was no impact to the Consolidated Financial Statements resulting from the change in classification.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other intangibles, net, as of November 27, 2020 and November 29, 2019 were as follows:

(in thousands)

Accumulated Amortization

(in millions)

Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net

Customer contracts and relationships $ 958 $ ( 289 ) $ 669 $ 1,219 $ ( 436 ) $ 783

Purchased technology 756 ( 347 ) 409 759 ( 223 ) 536

Acquired rights to use technology

Trademarks 384 ( 122 ) 262 384 ( 73 ) 311

Other 84 ( 65 ) 19 227 ( 136 ) 91

Other intangibles, net $ 2,182 $ ( 823 ) $ 1,359 $ 2,589 $ ( 868 ) $ 1,721

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As of November 27, 2020, we expect the estimated aggregate amortization expense for each of the five succeeding fiscal years to be as follows:

(in thousands)

(in millions)

Other Intangibles

Thereafter 281

Total expected amortization expense $ 1,359

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Accrued expenses as of November 27, 2020 and November 29, 2019 consisted of the following:

(in thousands)

(in millions) 2020 2019

Accrued compensation and benefits $ 375 $ 318

Accrued bonuses 330 222

Refund liabilities 127 126

Accrued corporate marketing 134 80

Accrued media costs 55 118

Accrued building rent

Taxes payable 95 83

Accrued corporate marketing

Sales and marketing allowances

Accrued hosting fees 66 36

Royalties payable 34 62

Fair value of derivatives

Accrued interest expense 32 29

Fair value of derivatives 4 33

Accrued building rent — 99

Other 170 193

Accrued expenses $ 1,422 $ 1,399

Accrued media costs primarily relate to our advertising platform offerings.

We accrue for media costs related to impressions purchased from third-party ad inventory sources.

Other primarily includes general corporate accruals for local and regional expenses and sales returns reserves.

Accrued media costs primarily relate to our transaction-driven Advertising Cloud offerings which we began to discontinue during the second quarter of fiscal 2020.

Other primarily includes general corporate accruals for local and regional expenses, including accruals for fees associated with the cancellation of corporate events.

Beginning the first quarter of fiscal 2020, as a result of ASC 842 adoption, accrued building rent is recorded as a reduction to our operating lease right-of-use assets on our Consolidated Balance Sheets.

See Note 1 for further information regarding our adoption of ASC 842 .

Income before income taxes for fiscal 2020, 2019 and 2018 consisted of the following:

(in thousands)

(in millions) 2020 2019 2018

Domestic $ 1,090 $ 438 $ 543

Foreign 3,086 2,767 2,251

Income before income taxes $ 4,176 $ 3,205 $ 2,794

The provision for income taxes for fiscal 2019 , 2018 and 2017 consisted of the following:

(in thousands)

The provision for (benefit from) income taxes for fiscal 2020, 2019 and 2018 consisted of the following:

(in millions) 2020 2019 2018

United States federal $ 119 $ 7 $ 501

Foreign 222 211 140

State and local 79 31 29

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United States federal ( 123 ) 23 ( 466 )

Foreign ( 1,313 ) ( 12 ) ( 10 )

State and local ( 68 ) ( 6 ) 9

Total deferred ( 1,504 ) 5 ( 467 )

Provision for income taxes

Provision for (benefit from) income taxes $ ( 1,084 ) $ 254 $ 203

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which significantly changed existing U.S.

tax law and includes many provisions applicable to us, such as reducing the U.S.

federal statutory tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income and adopting a territorial tax system.

The Tax Act reduced the U.S.

federal statutory tax rate from 35 % to 21 % effective January 1, 2018.

For fiscal 2018, our blended U.S.

federal statutory tax rate was 22.2 % .

This was the result of using the tax rate of 35 % for the first month of fiscal 2018 and the reduced tax rate of 21 % for the remaining eleven months of fiscal 2018.

The Tax Act also required us to incur a one-time transition tax on deferred foreign income not previously subject to U.S.

income tax at a rate of 15.5 % for foreign cash and certain other net current assets, and 8 % on the remaining income, in each case reduced by certain foreign tax credits.

The Tax Act also included a provision to tax global intangible low-taxed income of foreign subsidiaries, a special tax deduction for foreign-derived intangible income and a base erosion anti-abuse tax measure that may tax certain payments between a U.S.

corporation and its subsidiaries.

These additional provisions of the Tax Act were effective for us beginning December 1, 2018.

During fiscal 2018, we recorded tax charges for the impact of the Tax Act using the current available information and technical guidance on the interpretations of the Tax Act.

The accounting analysis was finalized based on the guidance, interpretations and data available as of November 30, 2018.

Certain international provisions introduced in the Tax Act are effective for us starting in fiscal 2019.

As part of these provisions, an accounting policy election is available to either account for the tax effects of certain taxes in the period that is subject to such taxes or to provide deferred taxes for book and tax basis differences that upon reversal may be subject to such taxes.

We elected to account for the tax effects of these provisions in the period that it is subject to such tax.

Reconciliation of Provision for Income Taxes

Intra-Entity Transfers of Certain Intellectual Property Rights (“IP rights”)

During fiscal 2020, we completed intra-entity transfers of certain IP rights to our Irish subsidiary in order to better align the ownership of these rights with how our business operates.

The transfers did not result in taxable gains;

however, our Irish subsidiary recognized deferred tax assets for the book and tax basis difference of the transferred IP rights.

As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits of $ 224 million and $ 1.13 billion, based on the fair value of the IP rights transferred in April and November 2020, respectively.

The determination of the fair value involves significant judgment on future revenue growth, operating margins and discount rates.

The tax-deductible amortization related to the transferred IP rights will be recognized over the period of economic benefit.

On December 22, 2017, the U.S.

Tax Cuts and Jobs Act (“U.S.

Tax Act”) was enacted into law, which significantly changed existing U.S.

tax law and included many provisions applicable to us, such as reducing the U.S.

federal statutory tax rate to 21% and imposing a one-time transition tax on deferred foreign income not previously subject to U.S.

income tax and certain international provisions.

During fiscal 2018, we recorded tax charges for the impact of the U.S.

Tax Act using the available information and technical guidance as of November 30, 2018.

Certain international provisions introduced in the U.S.

Tax Act, such as a tax on global intangible low-tax income, a base erosion and anti-abuse tax and a special tax deduction for foreign-derived intangible income, took effect in fiscal 2019.

Treasury releases regulations that impact these provisions, we account for finalized regulations in the period of enactment.

Reconciliation of Provision for (Benefit from) Income Taxes

Total income tax expense differs from the expected tax expense, computed by multiplying the U.S.

federal statutory rate of 21 % in 2019, 22.2 % in 2018 and 35 % in 2017 by income before income taxes) as a result of the following:

(in thousands)

federal statutory rate of 21 % in both fiscal 2020 and 2019 and 22.2 % in fiscal 2018 by income before income taxes, as a result of the following:

(in millions) 2020 2019 2018

Computed “expected” tax expense $ 877 $ 673 $ 620

State tax expense, net of federal benefit 10 24 25

Impacts of intra-entity IP transfers ( 1,360 ) — —

Tax credits ( 101 ) ( 100 ) ( 111 )

Effects of non-U.S.

operations ( 337 ) ( 224 ) ( 384 )

Stock-based compensation, net of tax deduction ( 154 ) ( 86 ) ( 95 )

Resolution of income tax examinations ( 23 ) ( 39 ) ( 42 )

Domestic manufacturing deduction benefit

Impacts of the U.S.

Tax charge for licensing acquired company technology to foreign subsidiaries

Provision for income taxes

Tax Act — 3 186

Provision for (benefit from) income taxes $ ( 1,084 ) $ 254 $ 203

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of November 27, 2020 and November 29, 2019 are presented below:

(in thousands)

(in millions) 2020 2019

Deferred tax assets:

Acquired technology

Intangible assets $ 1,368 $ 5

Reserves and accruals 71 54

Deferred revenue

Stock-based compensation 92 107

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Benefits relating to tax positions 44 47

Operating lease liabilities 131 —

Total gross deferred tax assets 2,307 692

Deferred tax asset valuation allowance

Valuation allowance ( 276 ) ( 245 )

Total deferred tax assets 2,031 447

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Acquired intangible assets 330 413

Operating lease right-of-use assets 131 —

Total deferred tax liabilities 671 587

Net deferred tax liabilities

Net deferred tax assets (liabilities) $ 1,360 $ ( 140 )

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.

Included in the deferred tax assets and liabilities for fiscal 2019 and 2018 are amounts related to various acquisitions.

In assessing the realizability of deferred tax assets, management determined that it is not more likely than not that we will have sufficient taxable income in certain states and foreign jurisdictions to fully utilize available tax credits and other attributes.

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We provide U.S.

income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States or are exempted from taxation as a result of the new territorial tax system.

income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States or are exempted from further taxation.

To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related U.S.

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The net operating loss carryforward assets and tax credits will expire in various years from fiscal 2021 through 2038.

The majority of the state tax credit carryforwards and a portion of the federal net operating loss carryforwards can be carried forward indefinitely.

The net operating loss carryforward assets and certain credits are reduced by the valuation allowance and are subject to an annual limitation under Internal Revenue Code Section 382.

The majority of the state tax credit carryforwards can be carried forward indefinitely.

Certain net operating loss carryforward assets and tax credits are reduced by a valuation allowance and/or are subject to an annual limitation under Internal Revenue Code Section 382.

The carrying amount of such assets and credits is expected to be fully realized.

As of November 29, 2019 , a valuation allowance of $ 244.4 million has been established for certain deferred tax assets related to certain federal, state and foreign assets.

For fiscal 2019 , the total change in the valuation allowance was $ 69.9 million .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of November 27, 2020, a valuation allowance of $ 276 million has been established for certain deferred tax assets related to certain state and foreign assets.

For fiscal 2020, the total change in the valuation allowance was $ 31 million.

Accounting for Uncertainty in Income Taxes

During fiscal 2020 and 2019, our aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:

(in thousands)

(in millions) 2020 2019

Beginning balance $ 173 $ 196

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These amounts were included in long-term income taxes payable in their respective years.

We file income tax returns in the United States on a federal basis and in many U.S.

state and foreign jurisdictions.

While we file federal, state and local income tax returns globally, our major tax jurisdictions are Ireland, California and the United States.

We are subject to the continual examination of our income tax returns by the U.S.

Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities.

Our major tax jurisdictions are Ireland, California and the United States.

Internal Revenue Service and other domestic and foreign tax authorities.

These tax examinations are expected to focus on our intercompany transfer pricing practices, application of tax rules and other matters.

For Ireland, California and the United States, the earliest fiscal years open for examination are 2008, 2016 and 2017, respectively.

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We believe such estimates to be reasonable;

however, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

however, we cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process.

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We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both.

Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $ 0 to approximately $ 20 million .

Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $ 0 to approximately $ 20 million over the next 12 months.

BENEFIT PLANS

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We are under no obligation to continue matching future employee contributions and, at our discretion, may change our practices at any time.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Compensation Plan

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Deferred Compensation Plan, effective December 2, 2006 (the “Deferred Compensation Plan”).

The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain executives and members of the Board of Directors are able to defer a portion of their annual compensation.

Participants may elect to contribute up to 75 % of their base salary and 100 % of other specified compensation, including commissions, bonuses, performance awards, time-based restricted stock units and directors’ fees.

Participants are able

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to elect the payment of benefits to begin on a specified date at least three years after the end of the plan year in which election is made or vests.

The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain executives are able to defer a portion of their annual compensation.

Participants may elect to contribute up to 75 % of their base salary and 100 % of other specified compensation, including commissions, bonuses and directors’ fees.

Participants are able to elect the payment of benefits to begin on a specified date at least three years after the end of the plan year in which election is made or vests.

Members of the Board of Directors are also eligible to participate in the Plan and are able to defer cash compensation and elect cash benefit distributions in the same manner as executives.

Beginning January 1, 2020, only members of the Board are permitted to defer vested equity awards.

For cash benefit elections, distributions are made in cash and in the form of a lump sum, or five, ten, or fifteen-year annual installments.

For stock benefit elections, distributions are settled in stock and in the form of a lump sum payment only.

Beginning January 1, 2020, our updated Deferred Compensation Plan will no longer allow participants, except our Board of Directors, to make stock benefit elections.

For equity award elections, distributions are settled in stock and in the form of a lump sum payment only.

As of November 27, 2020 and November 29, 2019, the invested amounts under the Deferred Compensation Plan total $ 117 million and $ 94 million, respectively and were recorded as other assets on our Consolidated Balance Sheets.

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We have the following stock-based compensation plans and programs:

Restricted Stock Units

Prior to April 2019, we granted restricted stock units and performance awards to eligible employees under our 2003 Equity Incentive Plan, as amended (“2003 Plan”).

In April 2019, our stockholders approved the 2019 Equity Incentive Plan (“2019 Plan”) which replaced the 2003 Plan.

Beginning January 2019, restricted stock units granted as part of our annual review process or for promotions vest over four years.

Restricted stock units granted as part of our annual review process or for promotions with grant dates prior to January 2019 continue to vest over three years.

Restricted stock units granted to new hires generally vest over four years.

Certain grants have other vesting periods approved by our Board of Directors or an authorized committee.

We grant performance awards to officers and key employees which cliff-vest after three years.

Restricted Stock Units and Performance Share Programs

We grant restricted stock units and performance awards to eligible employees under our 2019 Equity Incentive Plan (“2019 Plan”).

Restricted stock units generally vest over four years .

Certain grants have other vesting periods approved by the Executive Compensation Committee of our Board of Directors.

As of November 27, 2020, we had reserved 46.0 million shares of common stock for issuance under our 2019 Plan and had 38.1 million shares available for grant.

Our Performance Share Programs aim to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding Company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals.

The Executive Compensation Committee of our Board of Directors approves the terms of each of our Performance Share Programs, including the award calculation methodology.

Shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period.

Performance share awards will be awarded and cliff-vest upon the later of the Executive Compensation Committee's certification of the level of achievement or the three -year anniversary of each grant.

Participants can earn between 0 % and 200 % of the target number of performance shares.

On January 24, 2020, the Executive Compensation Committee approved the 2020 Performance Share Program, the terms of which are similar to prior year performance share programs as discussed above.

As of November 27, 2020, the shares awarded under our 2020, 2019 and 2018 Performance Share Programs remain outstanding and are yet to be achieved.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions.

The ESPP consists of a twenty-four-month offering period with four six-month purchase periods in each offering period.

The ESPP consists of twenty-four -month offering periods with four six -month purchase periods in each offering period.

Employees purchase shares in each purchase period at 85 % of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.

The ESPP will continue until the earlier of termination by the Board of Directors or the date on which all of the shares available for issuance under the plan have been issued.

As of November 29, 2019 , we had reserved 93.0 million shares of our common stock for issuance under the ESPP and approximately 3.8 million shares remain available for future issuance.

Performance Share Programs

Our 2019 , 2018 and 2017 Performance Share Programs aim to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding Company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals.

The Executive Compensation Committee of our Board of Directors approves the terms of each of our Performance Share Programs, including the award calculation methodology, under the terms of our 2003 Plan.

Shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period.

Performance share awards will be awarded and fully vest upon the later of the Executive Compensation Committee's certification of the level of achievement or the three-year anniversary of each grant.

Program participants generally have the ability to receive up to 200 % of the target number of shares originally granted.

On January 24, 2018, the Executive Compensation Committee approved the 2019 Performance Share Program, the terms of which are similar to prior year performance share programs as discussed above.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of November 29, 2019 , the shares awarded under our 2019 , 2018 and 2017 Performance Share Programs remain outstanding and are yet to be achieved.

In April 2020, our stockholders approved the 2020 Employee Stock Purchase Plan (“2020 ESPP”) which amended and restated the 1997 ESPP to increase the maximum number of shares of our common stock that may be issued under the plan.

As of November 27, 2020, we had reserved 103.0 million shares of our common stock for issuance under the 2020 ESPP and approximately 12.6 million shares remain available for future issuance.

Issuance of Shares

Upon vesting of restricted stock units and performance shares, purchases of shares under the ESPP and exercise of stock options, we will issue treasury stock.

Upon vesting of restricted stock units and performance shares or purchase of shares under the ESPP, we will issue treasury stock.

If treasury stock is not available, common stock will be issued.

In order to minimize the impact of on-going dilution from exercises of stock options and vesting of restricted stock units and performance shares, we instituted a stock repurchase program.

In order to minimize the impact of on-going dilution from issuance of shares, we instituted a stock repurchase program.

See Note 14 for information regarding our stock repurchase programs.

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These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.

The expected term of ESPP shares is the average of the remaining purchase periods under each offering period.

The assumptions used to value employee stock purchase rights were as follows:

Expected life (in years)

Risk free interest rate

1.78% - 2.47%

1.54% - 2.52%

0.62% - 1.41%

Summary of Restricted Stock Units

Restricted stock unit activity for fiscal 2019 , 2018 and 2017 was as follows:

(in thousands)

Restricted stock unit activity for fiscal 2020 was as follows:

(in millions)

Weighted Average

Fair Value Aggregate

Fair Value (1)

(in millions)

Weighted Average

Remaining Contractual Life

Beginning outstanding balance 8.6 $ 211.95

Increase due to acquisition

Awarded 3.1 $ 358.68

Released ( 4.2 ) $ 193.08

Forfeited ( 0.5 ) $ 255.16

Ending outstanding balance 7.0 $ 285.69 $ 3,322 1.15

Expected to vest 6.4 $ 283.77 $ 3,066 1.09

_________________________________________

(1) The aggregate fair value is calculated using the closing stock price as of November 27, 2020 of $ 477.03 .

The weighted average grant date fair values of restricted stock units granted during fiscal 2020, 2019 and 2018 were $ 358.68 , $ 253.91 and $ 208.73 , respectively.

The total fair value of restricted stock units vested during fiscal 2019 , 2018 and 2017 was $ 969.6 million , $ 837.3 million and $ 472.0 million , respectively.

The total fair value of restricted stock units vested during fiscal 2020, 2019 and 2018 was $ 1.61 billion, $ 970 million and $ 837 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Information regarding restricted stock units outstanding at November 29, 2019 , November 30, 2018 and December 1, 2017 is summarized below:

Restricted stock units outstanding

Restricted stock units expected to vest

Restricted stock units outstanding

Restricted stock units expected to vest

Restricted stock units outstanding

Restricted stock units expected to vest

_________________________________________

The intrinsic value is calculated as the market value as of the end of the fiscal period.

As reported by the NASDAQ Global Select Market, the market values as of November 29, 2019 , November 30, 2018 and December 1, 2017 were $ 309.53 , $ 250.89 and $ 179.52 , respectively.

Summary of Performance Shares

Performance share activity for fiscal 2019 , 2018 and 2017 was as follows:

(in thousands)

Shares Eligible

Performance share activity for fiscal 2020 was as follows:

(in millions)

Weighted Average

Fair Value Aggregate

Fair Value (1)

(in millions)

Weighted Average

Remaining Contractual Life

Beginning outstanding balance 1.0 $ 199.78

Awarded 0.6 $ 271.62

Achieved ( 0.8 ) $ 118.84

Forfeited ( 0.1 ) $ 303.13

Ending outstanding balance 0.7 $ 333.85 $ 342 1.16

Expected to vest 0.7 $ 327.36 $ 315 1.12

_________________________________________

Shares awarded during fiscal 2019 include 0.4 million additional shares awarded for the final achievement of the 2016 Performance Share Program which was certified in the first quarter of fiscal 2019.

The remaining awarded shares were for the 2019 Performance Share Program.

Shares achieved during fiscal 2019 resulted from 200 % achievement of target for the 2016 Performance Share Program.

Shares awarded during fiscal 2018 include 0.5 million additional shares awarded for the final achievement of the 2015 Performance Share Program which was certified in the first quarter of fiscal 2018.

The remaining awarded shares were for the 2018 Performance Share Program.

Shares achieved during fiscal 2018 resulted from 200 % achievement of target for the 2015 Performance Share Program.

(1) The aggregate fair value is calculated using the closing stock price as of November 27, 2020 of $ 477.03 .

Shares awarded during fiscal 2020 include 0.4 million additional shares awarded for the final achievement of the 2017 Performance Share Program which was certified in the first quarter of fiscal 2020.

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Shares achieved during fiscal 2020 resulted from 200 % achievement of target for the 2017 Performance Share Program.

The total fair value of performance awards vested during fiscal 2019 , 2018 and 2017 was $ 203.8 million , $ 208.2 million and $ 127.4 million , respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted average grant date fair values of performance awards granted during fiscal 2020, 2019 and 2018 were $ 271.62 , $ 177.33 and $ 123.78 , respectively.

The total fair value of performance awards achieved during fiscal 2020, 2019 and 2018 was $ 273 million, $ 204 million and $ 208 million, respectively.

Summary of Employee Stock Purchase Plan Shares

The weighted average subscription date fair value of shares under the ESPP during fiscal 2019 , 2018 and 2017 were $ 72.98 , $ 53.12 and $ 29.86 , respectively.

Employees purchased 1.2 million shares at an average price of $ 218.37 , 1.5 million shares at an average price of $ 150.55 , and 1.8 million shares at an average price of $ 104.94 for fiscal 2020, 2019 and 2018, respectively.

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The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Grants to Executive Officers

All equity awards granted to executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors.

Grants to Non-Employee Directors

Although the 2003 and 2019 Plans provide for the granting of non-qualified stock options and restricted stock units to non-employee directors, restricted stock units are the primary form of our grants to non-employee directors.

The initial equity grant to new non-employee directors and annual equity grants to existing non-employee directors are restricted stock unit awards, each grant having an aggregate value of $ 0.3 million based on the average stock price over the 30 calendar days ending on the day before the date of grant and vest 100 % on the day preceding the next annual meeting.

The actual target grant value of initial equity grants will be prorated based on the number of days remaining before the next annual meeting or the date of the first anniversary of our last annual meeting if the next annual meeting is not yet scheduled.

Restricted stock units granted to directors for fiscal 2019 , 2018 and 2017 were as follows:

(in thousands)

Annual equity grants to existing directors

Initial equity grants to new directors

Compensation Costs

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Total stock-based compensation costs that have been included in our Consolidated Statements of Income for fiscal 2020, 2019 and 2018 were as follows:

(in thousands)

Income Statement Classifications

Services and Support

(in millions) 2020 2019 2018

Cost of revenue $ 61 $ 55 $ 42

Research and development 467 375 277

Sales and marketing 261 249 206

General and administrative 120 109 85

Restricted Stock Units and Performance

Stock Purchase Rights and Options

$ 909 $ 788 $ 610

_________________________________________

(1) During fiscal 2020, 2019 and 2018, we recorded tax benefits related to stock-based compensation costs of $ 352 million, $ 248 million and $ 222 million, respectively.

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The components of accumulated other comprehensive income (loss) and activity, net of related taxes, for fiscal 2020 were as follows:

(in thousands)

Increase / Decrease

Reclassification Adjustments

Net unrealized gains / losses on available-for-sale securities:

(in millions) November 29,

2019 Increase / Decrease Reclassification Adjustments November 27,

Unrealized gains on available-for-sale securities $ 4 $ 3 $ ( 1 ) (1)

Unrealized losses on available-for-sale securities

Total net unrealized gains / losses on available-for-sale securities

Net unrealized gains / losses on derivative instruments designated as hedging instruments

( 22 ) ( 44 ) 6 (2)

Cumulative foreign currency translation adjustments ( 170 ) 66 — ( 104 )

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_________________________________________

Reclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net.

(1) Reclassification adjustments for gains / losses on available-for-sale securities are classified in other income (expense), net.

(2) Reclassification adjustments for gains / losses on foreign currency hedges are classified in revenue and reclassification adjustments for gains / losses on Treasury lock hedges are classified in interest expense.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the taxes related to each component of other comprehensive income for fiscal 2019 , 2018 and 2017 :

(in thousands)

Available-for-sale securities:

Unrealized gains / losses

Reclassification adjustments

Subtotal available-for-sale securities

Derivatives designated as hedging instruments:

Unrealized gains / losses

Reclassification adjustments

Subtotal derivatives designated as hedging instruments

Foreign currency translation adjustments

Total taxes, other comprehensive income (loss)

Taxes related to each component of other comprehensive income (loss) were immaterial for the fiscal years presented.

STOCK REPURCHASE PROGRAM

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We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time.

We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions.

We only enter into such transactions when the discount that we receive is expected to be higher than the foregone return on our cash prepayments to the financial institutions.

There were no explicit commissions or fees on these structured repurchases.

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We repurchased approximately 8.0 million shares at an average price of $ 376.38 per share in fiscal 2020, 9.9 million shares at an average price of $ 270.23 per share in fiscal 2019, and 8.7 million shares at an average price of $ 230.43 per share in fiscal 2018.

For fiscal 2019 , 2018 and 2017 , the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 29, 2019 , November 30, 2018 and December 1, 2017 were excluded from the computation of earnings per share.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For fiscal 2020, 2019 and 2018, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 27, 2020, November 29, 2019 and November 30, 2018 were excluded from the computation of earnings per share.

As of November 27, 2020, $ 255 million of prepayments remained under the agreement.

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Upon completion of the $ 950 million stock repurchase agreement, $ 1.1 billion remains under our May 2018 authority.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Further, in December 2020, our Board of Directors granted us additional authority to repurchase up to $ 15 billion in common stock through the end of fiscal 2024.

We have not drawn from our new $ 15 billion authority as of the issuance of these financial statements.

NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock units and performance awards.

Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested restricted stock units, purchase rights, performance awards and stock options using the treasury stock method.

Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested restricted stock units, stock purchase rights, performance share awards and stock options using the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share for fiscal 2020, 2019 and 2018:

(in thousands, except per share data)

(in millions, except per share data) 2020 2019 2018

Net income $ 5,260 $ 2,951 $ 2,591

Shares used to compute basic net income per share 480.9 486.3 490.6

Dilutive potential common shares 4.6 5.3 7.2

Restricted stock units and performance share awards

Stock purchase rights and options

Shares used to compute diluted net income per share 485.5 491.6 497.8

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(1) Potential common stock equivalents not included in the calculation of diluted net income per share as the effect would have been anti-dilutive.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

COMMITMENTS AND CONTINGENCIES

Lease Commitments

We lease certain of our facilities and some of our equipment under non-cancellable operating lease arrangements that expire at various dates through 2031 .

We also have one land lease that expires in 2091 .

Rent expense includes base contractual rent and variable costs such as building expenses, utilities, taxes, insurance and equipment rental.

Rent expense for these leases was approximately $ 170.5 million , $ 137.2 million and $ 115.4 million in fiscal 2019 , 2018 and 2017 , respectively.

Our sublease income was immaterial for all periods presented.

Unconditional Purchase Obligations

Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business.

The following table summarizes our non-cancellable unconditional purchase obligations and operating leases for each of the next five years and thereafter as of November 29, 2019 :

(in thousands)

Operating Leases

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes our non-cancellable unconditional purchase obligations for each of the next five years and thereafter as of November 27, 2020:

(in millions)

Fiscal Year Purchase Obligations

Total $ 1,885

We have royalty commitments associated with the licensing of certain offerings and products.

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Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition to intellectual property disputes, we are subject to legal proceedings, claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other matters.

Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts of damages.

We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable.

We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible or probable and estimable.

Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements.

This determination is then reviewed and discussed with our Audit Committee and our independent registered public accounting firm.

This determination is then reviewed and discussed with the Audit Committee of the Board of Directors.

We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

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It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers.

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however, it is possible that our consolidated financial position, cash flows or results of operations could be negatively affected in any particular period by the resolution of one or more of these counter-claims.

Our debt as of November 29, 2019 and November 30, 2018 consisted of the following:

(in thousands)

Current debt:

Fair value of interest rate swap

Long-term debt:

Fair value of interest rate swap

Long-term debt

Total carrying value of debt

Term Loan Credit Agreement

In October 2018, we entered into a credit agreement providing for an up to $ 2.25 billion senior unsecured term loan for the purpose of partially funding the purchase price for our acquisition of Marketo and the related fees and expenses incurred in connection with the acquisition.

The Term Loan funds were received on October 31, 2018 upon closing of the acquisition and will mature 18 months following the initial funding date.

In addition, we incurred issuance costs of $ 0.7 million which are amortized to interest expense over the term using the straight-line method.

The Term Loan ranks equally with our other unsecured and unsubordinated indebtedness.

There are no scheduled principal amortization payments prior to maturity and the Term Loan may be prepaid and terminated at our election at any time without penalty or premium.

At our election, the Term Loan will bear interest at either (i) LIBOR plus a margin, based on our debt ratings, ranging from 0.500 % to 1.000 % or (ii) a base rate plus a margin, based on our debt ratings, ranging from 0.040 % to 0.110 % .

Interest is payable periodically, in arrears, at the end of each interest period we elect.

During fiscal 2019 , we made interest payments on our Term Loan totaling $ 69.9 million .

The Term Loan credit agreement contains customary representations, warranties, affirmative and negative covenants, events of default and indemnification provisions in favor of the lenders similar to those contained in the Revolving Credit Agreement, including the financial covenant.

As of November 29, 2019 , we were in compliance with all covenants.

During the second quarter of fiscal 2019, we reclassified the Term Loan as current debt in our Consolidated Balance Sheets.

As of November 29, 2019 , the carrying value of the Term Loan was $ 2.25 billion which is net of debt issuance costs.

We intend to refinance the Term Loan on or before the due date.

In February 2010, we issued $ 900 million of 4.75 % senior notes due February 1, 2020 .

Our proceeds were approximately $ 894.5 million which is net of an issuance discount of $ 5.5 million .

In addition, we incurred issuance costs of $ 6.4 million .

Both the discount and issuance costs are being amortized to interest expense over the term of the 2020 Notes using the effective interest method.

The effective interest rate including the discount and issuance costs was 4.92 % .

Interest is payable semi-annually, in arrears, on February 1 and August 1, and commenced on August 1, 2010 .

In June 2014, we entered into interest rate swaps with a total notional amount of $ 900 million designated as a fair value hedge related to our 2020 Notes.

The interest rate swaps effectively convert the fixed interest rate on our 2020 Notes to a floating interest rate based on LIBOR.

Under the terms of the swap, we will pay monthly interest at the one-month LIBOR interest rate

The carrying value of our borrowings as of November 27, 2020 and November 29, 2019 were as follows:

(dollar in millions) Issuance Date Due Date Effective Interest Rate 2020 2019

4.75% 2020 Notes February 2010 February 2020 4.92 % $ — $ 900

1.70% 2023 Notes February 2020 February 2023 1.92 % 500 —

1.90% 2025 Notes February 2020 February 2025 2.07 % 500 —

3.25% 2025 Notes January 2015 February 2025 3.67 % 1,000 1,000

2.15% 2027 Notes February 2020 February 2027 2.26 % 850 —

2.30% 2030 Notes February 2020 February 2030 2.69 % 1,300 —

Term Loan October 2018 April 2020 2.47 % — 2,250

Total debt outstanding, at par $ 4,150 $ 4,150

Current portion of debt — ( 3,150 )

Unamortized discount and debt issuance costs ( 33 ) ( 11 )

Carrying value of long-term debt $ 4,117 $ 989

Current portion of debt, at par $ — $ 3,150

Unamortized discount and debt issuance costs — ( 1 )

Carrying value of current debt $ — $ 3,149

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

plus a fixed number of basis points on the $ 900 million notional amount.

In exchange, we will receive 4.75 % fixed rate interest from the swap counterparties.

The fair value of the interest rate swaps is included in the carrying value of our debt in the Consolidated Balance Sheets.

In October 2018, we entered into a credit agreement providing a $ 2.25 billion senior unsecured term loan (“Term Loan") with a maturity date of April 30, 2020.

The Term Loan ranked equally with our other unsecured and unsubordinated indebtedness.

There were no scheduled principal amortization payments prior to maturity and the Term Loan could be prepaid and terminated at our election at any time without penalty or premium.

At our election, the Term Loan bore interest at either (i) LIBOR plus a margin, based on our debt ratings, ranging from 0.500 % to 1.000 % or (ii) a base rate plus a margin, based on our debt ratings, ranging from 0.040 % to 0.110 %.

The related issuance costs were amortized to interest expense over the Term Loan period using the effective interest method.

Interest was payable periodically, in arrears, at the end of each interest period we elect.

The Term Loan was paid and terminated in conjunction with our debt refinancing during the first quarter of fiscal 2020.

In February 2010, we issued $ 900 million of 4.75 % senior notes due February 1, 2020 (“2020 Notes").

The related discount and issuance costs were amortized to interest expense over the term of the 2020 Notes using the effective interest method.

The 2020 Notes became due and were paid in conjunction with our debt refinancing during the first quarter of fiscal 2020.

We entered into interest rate swaps with a total notional amount of $ 900 million designated as a fair value hedge related to our 2020 Notes in fiscal 2014.

The interest rate swaps effectively converted the fixed interest rate on our 2020 Notes to a floating interest rate based on LIBOR.

The interest rate swap agreements also matured during the first quarter of fiscal 2020.

See Note 6 for further details regarding our interest rate swap derivatives.

In January 2015, we issued $ 1 billion of 3.25 % senior notes due February 1, 2025 (the “2025 Notes”).

Our proceeds were approximately $ 989.3 million which is net of an issuance discount of $ 10.7 million .

In addition, we incurred issuance costs of $ 7.9 million .

Both the discount and issuance costs are being amortized to interest expense over the term of the 2025 Notes using the effective interest method.

The effective interest rate including the discount, issuance costs and interest rate agreement is 3.67 % .

Interest is payable semi-annually, in arrears on February 1 and August 1, and commenced on August 1, 2015 .

During the first quarter of fiscal 2019, we reclassified the 2020 Notes as current debt in our Consolidated Balance Sheets.

As of November 29, 2019 , the carrying value of the 2020 Notes was $ 899.6 million which includes the fair value of the interest rate swap and is net of debt issuance costs.

We intend to refinance the 2020 Notes on or before the due date.

As of November 29, 2019 , our outstanding notes payable consist of the 2020 Notes and 2025 Notes (the “Notes”) with a total carrying value of $ 1.89 billion , which includes the fair value of the interest rate swaps and is net of debt issuance costs.

Based on quoted prices in inactive markets, the fair value of the Notes was $ 1.96 billion as of November 29, 2019 .

The Notes rank equally with our other unsecured and unsubordinated indebtedness.

Debt Refinancing

In February 2020, we issued $ 500 million of 1.70 % senior notes due February 1, 2023 (“2023 Notes”), $ 500 million of 1.90 % senior notes due February 1, 2025 (“1.90% 2025 Notes”), $ 850 million of 2.15 % senior notes due February 1, 2027 (“2027 Notes”) and $ 1.30 billion of 2.30 % senior notes due February 1, 2030 (“2030 Notes”).

Interest is payable semi-annually, in arrears on February 1 and August 1 commencing on August 1, 2020.

Our total proceeds were approximately $ 3.14 billion, used for general corporate purposes including repayment of the 2020 Notes and Term Loan, and were net of an issuance discount of $ 6 million.

In addition, we incurred total issuance costs of approximately $ 21 million.

Both the discount and issuance costs are being amortized to interest expense over the respective terms of the senior notes using the effective interest method.

In June 2019, in anticipation of our debt refinancing, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S.

Treasury rates for an aggregate notional amount of $ 1 billion of our future debt issuance.

These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments.

Upon debt issuance, the Treasury lock agreements were settled and we incurred a loss which is amortized to interest expense over the term of our 2030 Notes using the effective interest method.

See Note 6 for further details regarding our Treasury lock agreement.

3.25% 2025 Notes

In January 2015, we issued $ 1 billion of 3.25 % senior notes due February 1, 2025 (the “3.25% 2025 Notes”) which remain outstanding as of November 27, 2020.

The related discount and issuance costs are being amortized to interest expense over the term of the 3.25% 2025 Notes using the effective interest method.

Interest is payable semi-annually, in arrears on February 1 and August 1.

As of November 27, 2020, our outstanding notes payable consists of the 2023 Notes, 1.90% 2025 Notes, 3.25% 2025 Notes, 2027 Notes and 2030 Notes (collectively, the “Notes”).

Based on quoted prices in inactive markets, the total fair value of our outstanding Notes was $ 4.48 billion as of November 27, 2020.

Our Notes rank equally with our other unsecured and unsubordinated indebtedness.

We may redeem the Notes at any time, subject to a make-whole premium.

In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Notes, at a price equal to 101 % of their principal amount, plus accrued and unpaid interest to the date of repurchase.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

date of repurchase.

The Notes also include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances.

As of November 27, 2020, we were in compliance with all of the covenants.

During fiscal 2019 , we made semi-annual interest payments on our 2020 and 2025 Notes totaling $ 75.3 million .

In June 2019, in anticipation of refinancing our Term Loan and 2020 Notes, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S.

Treasury rates for an aggregate notional amount of $ 1 billion of our future debt issuance.

These derivative instruments hedge the impact of changes in the benchmark interest rate to future interest payments and will be terminated upon debt issuance.

These derivative instruments were designated as cash flow hedges.

See Note 6 for further details regarding our Treasury lock agreements.

Revolving Credit Agreement

In October 2018, we entered into a credit agreement (“Revolving Credit Agreement”), providing for a five-year $ 1 billion senior unsecured revolving credit facility and incurred issuance costs of $ 0.8 million which are amortized to interest expense over the term using the straight-line method.

In October 2018, we entered into a credit agreement (“Revolving Credit Agreement”), providing for a five-year $ 1 billion senior unsecured revolving credit facility, which replaced our previous five-year $ 1 billion senior unsecured revolving credit agreement dated as of March 2, 2012 (as amended, the “Prior Revolving Credit Agreement”).

In addition, we incurred issuance costs of $ 1 million which is amortized to interest expense over the term using the straight-line method.

The Revolving Credit Agreement provides for loans to Adobe and certain of its subsidiaries that may be designated from time to time as additional borrowers.

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The financial covenant, based on a quarterly financial test, requires us not to exceed a maximum leverage ratio.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The facility will terminate and all amounts owing thereunder will be due and payable on the maturity date unless (a) the commitments are terminated earlier upon the occurrence of certain events, including an event of default, or (b) the maturity date is further extended upon our request, subject to the agreement of the lenders.

As of November 27, 2020, there were no outstanding borrowings under this Credit Agreement and we were in compliance with all covenants.

We lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2031.

We also have one land lease that expires in 2091.

We account for lease and non-lease components as a single lease component for our facilities and data center leases.

We apply the accounting requirements of ASC 842 to short-term leases.

Therefore, leases with an initial term of 12 months or less are recorded on the balance sheet, with lease expense for these leases recognized on a straight-line basis over the lease term.

Our lease agreements do not contain any material residual value guarantees, material variable payment provisions or material restrictive covenants.

After our adoption of ASC 842, operating lease expense was $ 119 million for fiscal 2020.

Operating lease expense was $ 170 million and $ 137 million for fiscal 2019 and 2018, respectively.

We recognized operating lease expense in cost of revenue and operating expenses in our Consolidated Statements of Income.

Our operating lease expense is net of sublease income and includes variable lease costs, both of which are not material.

Supplemental cash flow information for fiscal 2020 related to operating leases was as follows:

(in millions)

Cash paid for amounts included in the measurement of operating lease liabilities $ 99

Right-of-use assets obtained in exchange for operating lease liabilities $ 52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average remaining lease term and weighted-average discount rate for our operating lease liabilities as of November 27, 2020 were 9 years and 2.32 %, respectively.

As of November 27, 2020, the maturities of lease liabilities under operating leases are as follows:

(in millions)

Fiscal Year Operating Leases (1)

Thereafter 272

Total lease liabilities

Imputed interest 66

Present value of lease liabilities

_________________________________________

(1) Operating lease payments exclude $ 17 million of legally binding minimum lease payments for leases signed but not yet commenced.

Future minimum rental payments and future minimum sublease income for our operating leases as of November 29, 2019, prior to our adoption of the new leases standard, were as follows:

(in millions) Operating Leases

Fiscal Year Future

Payments Future

2020 $ 98 $ 10

Thereafter 338 —

Total $ 739 $ 27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense) for fiscal 2020, 2019 and 2018 included the following:

(in thousands)

Interest and other income (expense), net:

Interest income

Foreign exchange gains (losses)

Realized gains on fixed income investments

Realized losses on fixed income investments

Interest and other income (expense), net

(in millions) 2020 2019 2018

Interest expense $ ( 116 ) $ ( 157 ) $ ( 89 )

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Realized investment gains $ 5 $ 46 $ 6

Unrealized investment gains

Realized investment losses ( 1 ) — —

Unrealized investment losses

Unrealized investment gains (losses), net 9 6 ( 3 )

Investment gains (losses), net $ 13 $ 52 $ 3

Other income (expense), net:

Interest income $ 43 $ 68 $ 93

Foreign exchange gains (losses) ( 2 ) ( 26 ) ( 42 )

Realized gains on fixed income investments 1 — —

Realized losses on fixed income investments — — ( 11 )

Other income (expense), net $ 42 $ 42 $ 40

Non-operating income (expense), net $ ( 61 ) $ ( 63 ) $ ( 46 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SELECTED QUARTERLY FINANCIAL DATA (unaudited)

(in thousands, except per share data)

Quarter Ended

(in millions, except per share data) Quarter Ended

February 28 May 29 August 28 November 27

Revenue $ 3,091 $ 3,128 $ 3,225 $ 3,424

Gross profit $ 2,639 $ 2,713 $ 2,798 $ 2,996

Income before income taxes $ 919 $ 1,000 $ 1,060 $ 1,197

Net income $ 955 $ 1,100 $ 955 $ 2,250

Basic net income per share $ 1.98 $ 2.28 $ 1.99 $ 4.69

Diluted net income per share $ 1.96 $ 2.27 $ 1.97 $ 4.64

(in thousands, except per share data)

Quarter Ended

(in millions, except per share data) Quarter Ended

March 1 May 31 August 30 November 29

Revenue $ 2,601 $ 2,744 $ 2,834 $ 2,992

Gross profit $ 2,204 $ 2,337 $ 2,418 $ 2,540

Income before income taxes $ 702 $ 711 $ 835 $ 957

Net income $ 674 $ 633 $ 793 $ 852

Basic net income per share $ 1.38 $ 1.30 $ 1.63 $ 1.76

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We have audited the accompanying consolidated balance sheets of Adobe Inc.

and subsidiaries (the Company) as of November 29, 2019 and November 30, 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended November 29, 2019, and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of November 27, 2020 and November 29, 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the fiscal years in the three fiscal year period ended November 27, 2020, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of November 27, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 29, 2019 and November 30, 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended November 29, 2019, in conformity with U.S.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 27, 2020 and November 29, 2019, and the results of its operations and its cash flows for each of the fiscal years in the three fiscal year period ended November 27, 2020, in conformity with U.S.

generally accepted accounting principles.

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Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers and sales commissions as of December 1, 2018, due to the adoption of Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers .

As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of November 30, 2019 due to the adoption of Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2016-02, “ Leases (Topic 842),” and changed its method of accounting for revenue from contracts with customers and sales commissions as of December 1, 2018 due to the adoption of FASB’s Accounting Standards Codification (ASC) Topic 606, “ Revenue from Contracts with Customers (ASC 606),” and Subtopic 340-40, “ Other Assets and Deferred Costs - Contracts with Customers (ASC 340-40).”

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 Annual Report on Internal Controls over Financial Reporting under item 9A.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

A company’s internal control over financial reporting includes those policies and procedures

that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

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:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.

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

Assessment of performance obligations in cloud-enabled software subscriptions

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Performance obligations in cloud-enabled software subscriptions

As discussed in Note 1 to the consolidated financial statements, cloud-enabled services are highly integrated and interrelated with on-premise or on-device software licenses in the Company’s Creative Cloud and Document Cloud subscription offerings.

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A high degree of subjective auditor judgment was required to assess the nature of the Company’s Creative Cloud and Document Cloud offerings, their intended benefit to customers as an integrated offering, and the level of integration that exists between the cloud-enabled services and the on-premise/on-device licenses.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s revenue recognition process, including controls related to the assessment of distinct performance obligations.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of an internal control related to the assessment of distinct performance obligations.

We read the Creative Cloud and Document Cloud subscription offering agreements to understand the contractual terms and conditions.

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We evaluated the features and functionalities of the Creative Cloud and Document Cloud subscription that can be accessed only when using the on-premise/on-device software while connected to the Adobe Cloud to assess that customers receive the intended benefit from each solution only as an integrated offering.

Fair value of the intra-entity transfer of certain intellectual property rights

As discussed in Note 10 to the consolidated financial statements, the Company completed an intra-entity transfer of certain intangible property rights (“IP rights”) to one of its foreign subsidiaries during the fourth quarter of fiscal 2020.

As a result of this transaction, the Company recorded a deferred tax asset, net of valuation allowance, and related tax benefit of $1.13 billion as of and for the period ended November 27, 2020 based on the fair value of the IP rights transferred.

The tax-deductible amortization related to the transferred IP rights will be recognized over the period of economic benefit.

We identified the fair value of transferred IP rights as a critical audit matter.

We performed sensitivity analyses to determine the significant assumptions used to value the transferred IP rights.

Subjective auditor judgment was required to evaluate management’s estimates and assumptions used to determine the fair value of the transferred IP rights, including the near-term revenue growth rate, operating margin, terminal growth rate, and discount rate assumptions.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s income tax process.

This included controls related to the development of the near-term revenue growth rate, operating margin, terminal growth rate, and discount rate assumptions.

We assessed the near-term revenue growth rate by comparing it to historical

results and comparing it to third-party analyst expectations for the industry.

We assessed the operating margin assumption by comparing it to historical results.

We assessed the terminal growth rate by comparing it to third-party analyst expectations for the industry.

We involved valuation professionals with specialized skills and knowledge who assisted in assessing the discount rate assumption by comparing it to a discount rate range that was independently developed using publicly available market data for comparable entities.

(signed) KPMG LLP

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data