What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-01-21 compared with 2021-01-15 · 282 added, 543 removed, 984 unchanged (46% of the section changed)

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All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and Notes thereto.

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CONSOLIDATED BALANCE SHEETS

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See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF INCOME

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See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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Shares Amount Shares Amount Total

Balances at December 1, 2017

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

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— — 48 ( 380 ) — 5 125 ( 207 )

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

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

Repurchases of common stock — — — — — ( 10 ) ( 2,750 ) ( 2,750 )

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

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

Impacts of adoption of the new revenue standard

— — — 442 — — — 442

Net income — — — 5,260 — — — 5,260

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— — ( 56 ) ( 478 ) — 4 123 ( 411 )

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

Repurchases of common stock — — — — — ( 8 ) ( 3,050 ) ( 3,050 )

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

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— — — ( 528 ) — 3 100 ( 428 )

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

Repurchases of common stock — — — — — ( 7 ) ( 3,950 ) ( 3,950 )

Equity awards assumed for acquisition — — 2 — — — — 2

Stock-based compensation — — 1,069 — — — — 1,069

Value of shares in deferred compensation plan — — — — — — ( 3 ) ( 3 )

Balances at November 27, 2020

Balances at December 3, 2021

601 $ — $ 8,428 $ 23,905 $ ( 137 ) ( 126 ) $ ( 17,399 ) $ 14,797

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

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Cash flows from financing activities:

Purchases of treasury stock ( 3,050 ) ( 2,750 ) ( 2,050 )

Repurchases of common stock ( 3,950 ) ( 3,050 ) ( 2,750 )

Proceeds from re-issuance of treasury stock 291 270 233

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Cash paid for interest $ 100 $ 88 $ 152

Non-cash investing activities:

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

See accompanying Notes to Consolidated Financial Statements.

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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Founded in 1982, Adobe Inc.

is one of the largest and most diversified software companies in the world.

We offer a line of products and services used by creative professionals, marketers, knowledge workers, students, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing, engaging and transacting with compelling content and experiences across personal computers, devices and media.

Founded in 1982, Adobe is one of the largest and most diversified software companies in the world.

We offer a line of products and services used by creative professionals, including photographers, video editors, graphic and experience designers and game developers;

communicators, including content creators, students, marketers and knowledge workers;

businesses of all sizes;

and consumers for creating, managing, delivering, measuring, optimizing, engaging and transacting with compelling content and experiences across personal computers, smartphones, other electronic devices and digital media formats.

We market our products and services directly to enterprise customers through our sales force and local field offices.

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We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as hosted or cloud-based) as well as through term subscription and pay-per-use models.

We also distribute certain products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, software developers and original equipment manufacturers (“OEMs”).

We also distribute certain products and services through a network of distributors, value-added resellers (“VARs”), systems integrators (“SIs”), independent software vendors (“ISVs”), retailers, software developers and original equipment manufacturers (“OEMs”).

In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions.

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

Our products run on desktop and laptop computers, smartphones, tablets, other devices and the web, depending on the product.

We have operations in the Americas;

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In preparing Consolidated Financial Statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes.

Estimates are used for, but not limited to, sales allowances and programs, bad debts, stock-based compensation, determining the fair value of acquired assets and assumed liabilities, impairment of goodwill and intangible assets, litigation and income taxes.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our financial results for fiscal 2021 benefited from an extra week in the first quarter of fiscal 2021 due to our 52/53 week financial calendar whereby fiscal 2021 is a 53 -week year compared with fiscal 2020 and 2019 which were 52 -week years.

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

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.

Certain prior year amounts, which are not material, have been reclassified to conform to current year presentation in the Notes to Consolidated Financial Statements.

Significant Accounting Policies

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Revenue is recognized when a contract exists between us and a customer and upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

We enter into contracts that can include various combinations of products and services, which may be capable of being distinct and accounted for as separate performance obligations, or in the case of offerings such as cloud-enabled Creative Cloud and Document Cloud, accounted for as a single performance obligation.

We enter into contracts that can include various combinations of products and services, which may be

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

capable of being distinct and accounted for as separate performance obligations, or in the case of offerings such as cloud-enabled Creative Cloud and Document Cloud, accounted for as a single performance obligation.

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

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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)

Certain revenue arrangements provide customers with unilateral cancellation rights, or options to either renew monthly on-premise term-based licenses or use committed funds to purchase other Adobe products or services.

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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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 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 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.

Revenue from non-cloud enabled on-premise licenses without unilateral cancellation rights or monthly renewal options 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.

Revenue from on-premise term license or term licensing arrangements with unilateral cancellation rights or monthly renewal options, and any 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 for certain on-premise licenses that are recognized at a point in time and our advertising offerings.

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

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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.

Most of our products are delivered electronically, however in instances where shipping and handling costs are incurred, we treat these amounts as costs to fulfill the contract and they are not considered a performance obligation and the associated fees are not included in the transaction price.

Our contracts with customers may include multiple goods and services.

For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services.

Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment.

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

Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

each other, and therefore part of a single performance obligation, may require significant judgment.

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.

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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On a quarterly basis, the amount of revenue that is reserved is calculated based on our historical trends and data specific to each reporting period.

The primary method of establishing these reserves is to review historical data from prior periods as a percent of revenue to determine a historical reserve rate.

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

The primary method of establishing these reserves is to review historical data from prior periods as a

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

requirements.

percent of revenue to determine a historical reserve rate.

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.

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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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.

As of December 3, 2021, our leases had remaining lease terms of up to 10 years, some of which included 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.

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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.

In accordance with accounting requirements, 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.

Goodwill, Intangibles and Other Long-Lived Assets

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We review our goodwill for impairment annually during our second quarter of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of any one of our reporting units below its respective carrying amount.

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 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.

In performing our goodwill impairment test, we first perform a qualitative assessment, which requires that we consider

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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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If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on any excess of the carrying amount over the fair value of the assets.

We did not recognize any intangible asset impairment charges in fiscal 2020, 2019 or 2018.

We did not recognize any intangible asset impairment charges for all periods presented.

During fiscal 2021, our intangible assets were amortized over their estimated useful lives ranging from 2 to 15 years.

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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

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Treasury Stock

Prepayments made for repurchases of our common stock are classified as treasury stock on our Consolidated Balance Sheets and only shares physically delivered to us at period ends are excluded from the computation of earnings per share.

We account for treasury stock under the cost method.

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We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty.

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.

We also enter into collateral security agreements with certain of our counterparties

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds.

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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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.

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

On June 16, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments-Credit Losses (Topic 326).

The FASB subsequently issued ASU No.

2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.

These updates require the measurement and recognition of expected credit losses for financial assets held at amortized cost, which include our trade receivables 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.

On November 28, 2020, the beginning of our fiscal year 2021, 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.

There have been no other new accounting pronouncements made effective during fiscal 2021 that have significance, or potential significance, to our Consolidated Financial Statements.

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 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.

Early adoption is permitted.

The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date.

The updated standard is effective for us beginning in the first quarter of fiscal 2021, and will not have a material impact on our Consolidated Financial Statements and related disclosures.

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)

To date, there have been no recent accounting pronouncements not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.

Segment Information

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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 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.

Our customers include content creators, experience designers, app developers, enthusiasts, students, social media users and creative professionals, as well as marketing departments and agencies, companies and publishers.

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 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 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.

Our business is organized into the following reportable segments:

• Digital Media —Our Digital Media segment provides products, services and solutions that enable individuals, teams and enterprises to create, publish and promote their content anywhere and accelerate their productivity by modernizing how they view, share, engage with and collaborate on documents and creative content.

Our customers include creative professionals, including photographers, video editors, graphic and experience designers and game developers, communicators, including content creators, students, marketers and knowledge workers, and consumers.

• Digital Experience —Our Digital Experience segment provides an integrated platform and set of applications and services that enable brands and businesses to create, manage, execute, measure, monetize and optimize customer

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:

experiences that span from analytics to commerce.

Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers and executives across the C-suite.

• Publishing and Advertising —Our Publishing and Advertising segment contains legacy products and services that address diverse market opportunities, including eLearning solutions, technical document publishing, web conferencing, document and forms platform, web application development, high-end printing and our Adobe Advertising Cloud offerings.

Our segment revenue and results for fiscal 2021, 2020 and 2019 were as follows:

(dollars in millions) Digital

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

We generally categorize revenue by geographic area based on where the customer manages their utilization of our offerings.

Revenue by geographic area for fiscal 2021, 2020 and 2019 were as follows:

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Total Americas 8,996 7,454 6,506

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

EMEA 4,252 3,400 2,975

APAC 2,537 2,014 1,690

Revenue $ 15,785 $ 12,868 $ 11,171

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Document Cloud 1,974 1,497 1,225

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

Total Digital Media revenue $ 11,520 $ 9,233 $ 7,707

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:

Subscription revenue by segment for fiscal 2021, 2020 and 2019 were as follows:

(in millions) 2021 2020 2019

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Publishing and Advertising 146 153 146

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

Total subscription revenue $ 14,573 $ 11,626 $ 9,634

Contract Balances

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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.

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.

As of December 3, 2021, the balance of trade receivables, net of allowances for doubtful accounts, was $ 1.88 billion, inclusive of unbilled receivables of $ 82 million.

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

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables.

The allowance is based on both specific and general reserves.

We regularly review our trade receivables allowance by considering factors such as historical experience, credit-worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to pay and we specifically reserve for those deemed uncollectible.

We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables and is based on both specific and general reserves.

We maintain general reserves on a collective basis by considering factors such as historical experience, credit-worthiness, the age of the trade receivable balances, current economic conditions and a reasonable and supportable forecast of future economic conditions.

During fiscal 2021, 2020 and 2019, our allowance for doubtful accounts activities were as follows:

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Increase due to acquisition 3 — —

Charged to operating expenses 31 5 6

Deductions (1)

( 20 ) ( 10 ) ( 6 )

Adjustments to reserve balance ( 3 ) 31 5

Write-offs, net of recoveries ( 5 ) ( 20 ) ( 10 )

Ending balance $ 16 $ 21 $ 10

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(1) Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance, less recoveries.

Contract Assets

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Contract asset impairments were not material in fiscal 2021.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Contract assets were $ 85 million and $ 81 million as of December 3, 2021 and November 27, 2020, respectively.

Deferred Revenue and Remaining Performance Obligations

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Customers are typically invoiced for these agreements in regular installments and revenue is recognized ratably over the contractual subscription period.

The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter.

The deferred revenue balance is influenced by several factors, including the compounding effects of renewals, invoice duration,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

invoice timing, size and new business linearity within the quarter.

Deferred revenue does not represent the total contract value of annual or multi-year non-cancellable subscription agreements.

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

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

As of December 3, 2021, the balance of deferred revenue was $ 4.88 billion, which includes $ 88 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.

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As of November 27, 2020, the balance of deferred revenue was $ 3.76 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.

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 acquisition, which were offset by decreases due to revenue recognized in the period.

During the year ended December 3, 2021, approximately $ 3.55 billion of revenue was recognized that was included in the balance of deferred revenue as of November 27, 2020.

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 term.

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

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.

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

Remaining performance obligations were approximately $ 13.99 billion as of December 3, 2021.

Non-cancellable and non-refundable committed funds related to some of our enterprise customer agreements referred to in the paragraph above comprised approximately 5 % of the total remaining performance obligations.

Approximately 72 % 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 did not incur any impairment losses in fiscal 2021 and 2020.

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.

Capitalized contract acquisition costs were $ 611 million and $ 530 million as of December 3, 2021 and November 27, 2020, of which $ 406 million and $ 352 million was long-term and included in other assets in the Consolidated Balance Sheets,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

respectively.

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

Revenue Reserve

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

(in millions) 2020 2019 2018

Beginning balance $ 7 $ 25 $ 22

Impacts of adoption of the new revenue standard — ( 15 ) —

Amount charged to revenue 24 19 65

Actual returns ( 21 ) ( 22 ) ( 62 )

Ending balance $ 10 $ 7 $ 25

Refund Liabilities

As part of our revenue reserves, we record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits.

We record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits.

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

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

Refund liabilities were $ 128 million and $ 127 million as of December 3, 2021 and November 27, 2020, respectively.

Significant Customers

For fiscal 2020, 2019 and 2018 there were no customers that represented at least 10% of net revenue.

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

On January 23, 2019, we completed the acquisition of Allegorithmic, a privately held 3D editing and authoring software company for gaming and entertainment, and integrated it into our Digital Media reportable segment.

Prior to the acquisition, we held an equity interest that was accounted for as an equity-method investment.

We acquired the remaining equity interest for approximately $ 106 million in cash consideration.

The total purchase price, inclusive of the acquisition-date fair-value of our pre-existing equity interest, was approximately $ 161 million.

In conjunction with the Allegorithmic acquisition, we separately recognized an investment gain of approximately $ 42 million, which represents the difference between the $ 55 million acquisition-date fair value of our pre-existing equity interest and our previous carrying amount.

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

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

Of the total purchase price, $ 126 million was allocated to goodwill that was non-deductible for tax purposes, $ 45 million to identifiable intangible assets and the remainder to net liabilities assumed.

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

On October 31, 2018, we completed the acquisition of Marketo, a privately held marketing cloud platform company, for approximately $ 4.73 billion of cash consideration.

Adding Marketo’s engagement platform to Adobe Experience Cloud furthers our long-term plan for strategic growth in the Digital Experience segment and enables us to offer a comprehensive set of solutions to enable customers across industries and companies automate and orchestrate their marketing activities.

Under the terms of the Share Purchase Agreement (“Purchase Agreement”), we acquired all of the issued and outstanding shares of capital stock of Milestone Topco, Inc., a Delaware corporation (“Topco”) and indirect parent company of Marketo, and other equity interests in Marketo.

In connection with the acquisition, each Marketo equity award that was issued and outstanding was cancelled and extinguished in exchange for cash consideration.

Also pursuant to the Purchase Agreement, upon closing of the transaction, cash was paid for the settlement of Marketo’s long-term incentive plan, the settlement of Marketo’s indebtedness and the acquisition of all remaining equity interests in Marketo K.K., a Japanese corporation and joint venture.

In connection with the acquisition, we entered into a credit agreement providing for a $ 2.25 billion senior unsecured term loan (“Term Loan”).

The proceeds of the Term Loan were used to fund a portion of the purchase price of the acquisition and pay fees and expenses incurred in connection with the acquisition.

The Term Loan funds were received on October 31, 2018 upon closing of the acquisition.

See Note 17 for further details regarding our Term Loan.

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.

The amounts of net revenue and net loss of Marketo included in our Consolidated Statements of Income from the acquisition date through November 30, 2018 were not material.

The direct transaction costs associated with the acquisition were also not material.

Purchase Price Allocation

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

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 millions) Amount Weighted Average Useful Life (years)

Customer contracts and relationships $ 578 11

For all periods presented, there were no customers that represented at least 10% of net revenue or that were responsible for over 10% of our trade receivables.

On October 7, 2021, we completed the acquisition of Frame.io, a privately held company that provides a cloud-based video collaboration platform, for approximately $ 1.18 billion, primarily in cash consideration.

The financial results of Frame.io have been included in our Consolidated Financial Statements since the date of the acquisition.

Frame.io is reported as part of our Digital Media reportable segment.

The table below represents the preliminary purchase price allocation to total identifiable intangible assets acquired and net liabilities assumed based on their respective estimated fair values as of October 7, 2021.

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date.

Fair values associated with the net tax liabilities assumed and their related impact to goodwill were pending finalization as of the reporting date.

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

Purchased technology $ 331 4

Backlog 105 2

Non-competition agreements 12 2

In-process research and development (1)

Trademarks 4 3

Customer contracts and relationships 3 10

Total identifiable intangible assets 357

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(1) Capitalized as purchased technology and considered indefinite lived until the completion or abandonment of the associated research and development efforts.

(2) Non-deductible for tax-purposes.

Identifiable intangible assets — Customer relationships consist of Marketo’s contractual relationships and customer loyalty related to their enterprise and commercial customers as well as technology partner relationships.

The estimated fair value of the customer contracts and relationships was determined based on projected cash flows attributable to the asset.

Purchased technology acquired primarily consists of Marketo’s cloud-based engagement marketing software platform.

The estimated fair value of the purchased technology was determined based on the expected future cost savings resulting from ownership of the asset.

Backlog relates to subscription contracts and professional services.

Non-compete agreements include agreements with key Marketo employees that preclude them from competing against Marketo for a period of two years from the acquisition date.

Trademarks include the Marketo trade name, which is well known in the marketing ecosystem.

We amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful lives.

Goodwill — Approximately $ 3.46 billion of goodwill has been allocated entirely to our Digital Experience reportable segment.

Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets.

The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, acquiring a talented workforce and cost savings opportunities.

Net liabilities assumed — Marketo’s tangible assets and liabilities as of October 31, 2018 were reviewed and adjusted to their fair value as necessary.

The net liabilities assumed included, among other items, $ 103 million in accrued expenses, $ 75 million in deferred revenue and $ 183 million in deferred tax liabilities, which were partially offset by $ 55 million in cash and cash equivalents and $ 72 million in trade receivables acquired.

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 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.

The sum of the costs and assumed operating profit approximates, in theory, the amount that Marketo would be required to pay a third party to assume the obligation.

The estimated costs to fulfill the obligation were based on the near-term projected cost structure for subscription and professional services.

As a result, we recorded an adjustment to reduce Marketo’s carrying value of deferred revenue to $ 75 million, which represents our estimate of the fair value of the contractual obligations assumed.

Taxes — As part of our accounting for the Marketo acquisition, a portion of the overall purchase price was allocated to goodwill and acquired intangible assets.

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

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

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

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.

Unaudited Pro Forma Results

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 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.

The table below represents the final purchase price allocation to the acquired net assets of Magento based on their estimated fair values as of June 18, 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 net liabilities assumed and their related impact to goodwill.

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

On December 7, 2020, we completed the acquisition of Workfront, a privately held company that provides a workflow platform, for approximately $ 1.52 billion in cash consideration.

The financial results of Workfront have been included in our Consolidated Financial Statements since the date of the acquisition.

Workfront is reported as part of our Digital Experience reportable segment.

The table below represents the final purchase price allocation to total identifiable intangible assets acquired and net liabilities assumed based on their respective estimated fair values as of December 7, 2020.

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date.

During fiscal 2021, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to net tax liabilities assumed and their related impact to goodwill.

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

Customer contracts and relationships $ 290 10

Purchased technology 100 3

In-process research and development (1)

Trademarks 30 5

Other intangibles 44 3

Total identifiable intangible assets 460

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_________________________________________

(1) Capitalized as purchased technology and are considered indefinite lived until the completion or abandonment of the associated research and development efforts.

Subsequent to the acquisition, the associated in-process research and development efforts for certain projects were completed and the rest were abandoned.

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

(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.

(1) Non-deductible for tax-purposes.

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

Allegorithmic

Prior to the acquisition, we held an equity interest that was accounted for as an equity-method investment.

We acquired the remaining equity interest for approximately $ 106 million in cash consideration.

The total purchase price, inclusive of the acquisition-date fair-value of our pre-existing equity interest, was approximately $ 161 million.

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

Pro forma financial information has not been presented for the Allegorithmic 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.

Pro forma information has not been presented for these acquisitions as the impact to our Consolidated Financial Statements was not material.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of all highly liquid debt investments with remaining maturities of three months or less at the date of purchase.

Cash equivalents consist of highly liquid marketable securities with remaining maturities of three months or less at the date of purchase.

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 (loss), which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets.

Unrealized gains and unrealized non-credit-related losses of marketable debt securities are included in accumulated other comprehensive income, net of taxes, in our Consolidated Balance Sheets.

Unrealized credit-related losses are recorded to other income (expense), net in our Consolidated Statements of Income with a corresponding allowance for credit-related losses 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.

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

Cash, cash equivalents and short-term investments consisted of the following as of December 3, 2021:

(in millions)

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Corporate debt securities 5 — — 5

Money market mutual funds 3,483 — — 3,483

Money market funds 2,914 — — 2,914

Time deposits 175 — — 175

4 unchanged sentences

Corporate debt securities 1,426 2 ( 3 ) 1,425

Foreign government securities 3 — — 3

Municipal securities 28 — — 28

Treasury securities 378 — ( 1 ) 377

Total short-term investments 1,956 2 ( 4 ) 1,954

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Corporate debt securities 28 — — 28

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

Money market funds 3,483 — — 3,483

Time deposits 118 — — 118

4 unchanged sentences

Corporate debt securities 1,378 8 — 1,386

Foreign government securities 3 — — 3

Municipal securities 19 — — 19

Treasury securities 8 — — 8

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

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

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

Asset-backed securities 22 — 7 7

Municipal securities — — 3 —

Foreign government securities 3 — — —

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 millions) Amortized

Cost Estimated

The following table summarizes the estimated fair value of short-term fixed income debt securities classified as short-term investments based on stated effective maturities as of December 3, 2021:

(in millions) Estimated

Due within one year $ 772

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Total $ 1,954

We review our debt securities classified as short-term investments on a regular basis for impairment.

For debt securities in unrealized loss positions, we determine whether any portion of the decline in fair value below the amortized cost basis is due to credit-related factors if we neither intend to sell nor anticipate that it is more likely than not that we will be required to sell prior to recovery of the amortized cost basis.

We consider factors such as the extent to which the market value has been less than the cost, any noted failure of the issuer to make scheduled payments, changes to the rating of the security and other relevant credit-related factors in determining whether or not a credit loss exists.

During fiscal 2021, we did not recognize an allowance for credit-related losses on any of our investments.

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.

We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis.

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 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.

FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

We measure certain financial assets and liabilities at fair value on a recurring basis.

There have been no transfers between fair value measurement levels during the year ended November 27, 2020.

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

The fair value of our financial assets and liabilities at December 3, 2021 was determined using the following inputs:

(in millions) Fair Value Measurements at Reporting Date Using

5 unchanged sentences

Corporate debt securities $ 5 $ — $ 5 $ —

Money market mutual funds 3,483 3,483 — —

Money market funds 2,914 2,914 — —

Time deposits 175 175 — —

2 unchanged sentences

Corporate debt securities 1,425 — 1,425 —

Foreign government securities 3 — 3 —

Municipal securities 28 — 28 —

Treasury securities 377 — 377 —

Prepaid expenses and other current assets:

14 unchanged sentences

Corporate debt securities $ 28 $ — $ 28 $ —

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

Money market funds 3,483 3,483 — —

Time deposits 118 118 — —

2 unchanged sentences

Corporate debt securities 1,386 — 1,386 —

Foreign government securities 3 — 3 —

Municipal securities 19 — 19 —

Treasury securities 8 — 8 —

Prepaid expenses and other current assets:

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Accrued expenses:

Treasury lock derivatives $ 30 $ — $ 30 $ —

Foreign currency derivatives $ 4 $ — $ 4 $ —

Total liabilities $ 33 $ — $ 33 $ —

See Note 4 for further information regarding the fair value of our financial instruments.

Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of A+.

Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA-.

We value these securities based on pricing from independent pricing vendors who use matrix pricing valuation techniques including market approach methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies.

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Treasury or swap curves.

We therefore classify all of our fixed income available-for-sale securities as Level 2.

We therefore categorize all of our fixed income available-for-sale securities as Level 2.

We perform routine procedures such as comparing prices obtained from multiple independent sources to ensure that appropriate fair values are recorded.

The fair values of our money market mutual funds and time deposits are based on the closing price of these assets as of the reporting date.

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

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)

The fair values of our money market funds, time deposits and deferred compensation plan assets, which consist of money market and other mutual funds, are based on quoted prices in active markets at the measurement date.

Our 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.

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

The fair value of our senior notes was $ 4.48 billion as of November 27, 2020, based on observable market prices in less active markets and categorized as Level 2.

The fair value of our senior notes was $ 4.29 billion as of December 3, 2021, based on observable market prices in less active markets and categorized as Level 2.

See Note 17 for further details regarding our debt.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DERIVATIVE FINANCIAL INSTRUMENTS

10 unchanged sentences

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 (“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.

As of December 3, 2021 and November 27, 2020, total notional amounts of outstanding cash flow hedges were $ 2.06 billion and $ 1.53 billion, respectively, hedging exposures denominated in Euros, British Pounds, Japanese Yen and Australian Dollars.

In June 2019, 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.

2 unchanged sentences

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.

As of December 3, 2021, we had net derivative gains on our foreign exchange option contracts expected to be recognized within the next 18 months, of which $ 56 million of gains 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.

6 unchanged sentences

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

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.

Prior to this, we recorded the time value of purchased contracts in 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 not material.

For fiscal 2021, 2020 and 2019, there were no net gains or losses recognized in income relating to hedges of forecasted transactions that did not occur.

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

The changes in fair value of these

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

contracts are 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 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.

At November 27, 2020 and November 29, 2019, the outstanding balance sheet hedging derivatives had maturities of 180 days or less.

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

As of December 3, 2021, total notional amounts of outstanding foreign currency forward contracts were $ 973 million, primarily hedging exposures denominated in Euros, British Pounds, Australian Dollars and Canadian Dollars.

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

At December 3, 2021 and November 27, 2020, the outstanding balance sheet hedging derivatives had maturities of 180 days or less.

The fair value of derivative instruments on our Consolidated Balance Sheets as of December 3, 2021 and November 27, 2020 were as follows:

(in millions) 2021 2020

5 unchanged sentences

$ 91 $ — $ 12 $ —

Treasury lock (1)

Derivatives not designated as hedging instruments:

3 unchanged sentences

(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)

Gains (losses) on derivative instruments, net of tax, recognized in our Consolidated Statements of Comprehensive Income for fiscal 2021, 2020 and 2019 were as follows:

6 unchanged sentences

The effects of derivative instruments on our Consolidated Statements of Income for fiscal 2021, 2020 and 2019 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

(in millions) Financial Statement Classification 2021 2020 2019

Derivatives in cash flow hedging relationships:

Foreign exchange option contracts (1)

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

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

Net gain (loss) reclassified from accumulated OCI into income, net of tax Revenue $ ( 16 ) $ 3 $ 39

Amount excluded from effectiveness testing and ineffective portion Other income (expense), net $ — $ — $ ( 24 )

Treasury lock

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

Net gain (loss) reclassified from accumulated OCI into income, net of tax Interest expense $ ( 4 ) $ ( 3 ) $ ( 1 )

Derivatives not designated as hedging relationships:

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

Foreign exchange option contracts Revenue $ — $ — $ 1

Foreign exchange forward contracts

$ — $ — $ 5 $ — $ — $ 4 $ — $ 2

Other income (expense), net $ ( 3 ) $ 5 $ 4

_________________________________________

(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:

Net realized gain (loss) recognized in other income $ ( 2 ) $ ( 14 ) $ 1

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:

Net realized gain (loss) recognized in other income 6 7 ( 2 )

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

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)

PROPERTY AND EQUIPMENT

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

Property and equipment, net consisted of the following as of December 3, 2021 and November 27, 2020:

(in millions) 2021 2020

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Depreciation and amortization expense of property and equipment for fiscal 2021, 2020 and 2019 was $ 207 million, $ 192 million and $ 173 million, respectively.

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

Property and equipment, net, by geographic area as of December 3, 2021 and November 27, 2020 was as follows:

(in millions) 2021 2020

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Goodwill by reportable segment and activity for fiscal 2021 and 2020 was as follows:

(in millions) 2018 Acquisitions Other (1)

2019 Reclassification (2)

(in millions) 2019 Reclassification (2)

2020 Acquisitions Other (1)

Digital Media $ 2,865 $ — $ 3 $ 2,868 $ 865 $ ( 2 ) $ 3,731

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(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:

Other intangibles, net, as of December 3, 2021 and November 27, 2020 were as follows:

(in millions)

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Other intangibles, net $ 2,702 $ ( 882 ) $ 1,820 $ 2,182 $ ( 823 ) $ 1,359

In fiscal 2020, and 2019, certain intangibles associated with our acquisitions in prior years became fully amortized and were removed from the Consolidated Balance Sheets.

In fiscal 2021, other intangibles increased primarily due to identifiable intangible assets acquired through Workfront and Frame.io, partially offset by certain other intangibles associated with our previous acquisitions that became fully amortized and were removed from the Consolidated Balance Sheets.

Amortization expense related to other intangibles was $ 354 million, $ 367 million and $ 402 million for fiscal 2021, 2020 and 2019 respectively.

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Other intangibles are amortized over their estimated useful lives of 2 to 15 years.

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

As of December 3, 2021, the estimated aggregate amortization expense for each of the five succeeding fiscal years was as follows:

(in millions)

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Total expected amortization expense $ 1,801

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

_________________________________________

(1) Excludes $ 19 million of capitalized in-process research and development which is considered indefinite lived until the completion or abandonment of the associated research and development efforts.

ACCRUED EXPENSES

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

Accrued expenses as of December 3, 2021 and November 27, 2020 consisted of the following:

(in millions) 2021 2020

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Refund liabilities 128 127

Accrued corporate marketing 134 80

Accrued media costs 55 118

Taxes payable 119 95

Accrued hosting fees 66 36

Accrued corporate marketing 96 134

Royalties payable 40 34

Accrued hosting fees 37 66

Accrued interest expense 34 32

Fair value of derivatives 4 33

Accrued building rent — 99

Other 337 229

Accrued expenses $ 1,736 $ 1,422

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 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other primarily includes accrued media costs, collateral received related to master netting arrangements and general corporate accruals for local and regional expenses, including accruals for fees associated with the cancellation of corporate events.

Income before income taxes for fiscal 2021, 2020 and 2019 consisted of the following:

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Provision for (benefit from) income taxes $ 883 $ ( 1,084 ) $ 254

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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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.

As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits totaling $ 1.35 billion, based on the fair value of the IP rights transferred.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

federal statutory rate of 21 % in fiscal 2021, 2020 and 2019 by income before income taxes, as a result of the following:

(in millions) 2021 2020 2019

Computed “expected” tax expense $ 1,198 $ 877 $ 673

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 ( 23 ) ( 337 ) ( 224 )

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

Stock-based compensation ( 157 ) ( 154 ) ( 86 )

Tax credits ( 149 ) ( 101 ) ( 100 )

Resolution of income tax examinations ( 58 ) ( 23 ) ( 39 )

Impacts of the U.S.

Tax Act — 3 186

State tax expense, net of federal benefit 66 10 24

Provision for (benefit from) income taxes $ 883 $ ( 1,084 ) $ 254

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Tax Assets and Liabilities

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:

The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 3, 2021 and November 27, 2020 were as follows:

(in millions) 2021 2020

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Intangible assets $ 997 $ 1,368

Reserves and accruals 71 54

Stock-based compensation 92 107

Net operating loss carryforwards of acquired companies 54 137

Credit carryforwards 218 252

Capitalized expenses 355 292

Benefits relating to tax positions 44 47

Credit carryforwards 287 218

Operating lease liabilities 122 131

Net operating loss carryforwards of acquired companies 131 54

Stock-based compensation 91 92

Reserves and accruals 89 71

Benefits relating to tax positions 39 44

Total gross deferred tax assets 2,157 2,307

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Deferred tax liabilities:

Depreciation and amortization 52 36

Undistributed earnings of foreign subsidiaries 51 52

Prepaid expenses 107 86

Acquired intangible assets 447 330

Operating lease right-of-use assets 111 131

Prepaid expenses 123 107

Depreciation and amortization 49 52

Undistributed earnings of foreign subsidiaries 12 51

Total deferred tax liabilities 742 671

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

Net deferred tax assets $ 1,080 $ 1,360

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.

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.

The deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized.

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 further taxation.

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

tax liability may be reduced by any foreign income taxes paid on these earnings.

As of November 27, 2020, the cumulative amount of foreign earnings upon which U.S.

income taxes have not been provided, and the corresponding unrecognized deferred tax liability, is not material.

As of November 27, 2020, we have net operating loss carryforwards of approximately $ 39 million for federal, $ 367 million for state and $ 75 million for foreign.

We also have federal, state and foreign tax credit carryforwards of approximately $ 16 million, $ 236 million and $ 16 million, respectively.

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 can be carried forward indefinitely.

As of December 3, 2021, the cumulative amount of foreign earnings upon which U.S.

income taxes have not been provided, and the corresponding unrecognized deferred tax liability, was not material.

As of December 3, 2021, we had federal, state and foreign net operating loss carryforwards of approximately $ 395 million, $ 467 million and $ 61 million, respectively.

We also had federal, state and foreign tax credit carryforwards of approximately $ 35 million, $ 307 million and $ 9 million, respectively.

The majority of the federal net operating loss and state tax credit carryforwards can be carried forward indefinitely, and the remaining will expire in various years from fiscal 2022 through 2040.

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.

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.

As of December 3, 2021, a valuation allowance of $ 335 million was established for deferred tax assets related to certain state and foreign assets.

For fiscal 2021, the increase in the valuation allowance was $ 59 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:

During fiscal 2021 and 2020, the aggregate changes in our total gross amount of unrecognized tax benefits were as follows:

(in millions) 2021 2020

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Gross increases in unrecognized tax benefits – prior year tax positions 30 14

Gross decreases in unrecognized tax benefits – prior year tax positions — ( 2 )

Gross increases in unrecognized tax benefits – current year tax positions 86 44

Gross decreases in unrecognized tax benefits – current year tax positions — ( 3 )

Settlements with taxing authorities ( 11 ) —

Lapse of statute of limitations ( 21 ) ( 23 )

Settlements with taxing authorities ( 4 ) ( 11 )

Foreign exchange gains and losses ( 3 ) 4

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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.

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

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.

These tax examinations are expected to focus on our research and development tax credits, intercompany transfer pricing practices and other matters.

For Ireland, California and the United States, the earliest fiscal years open for examination are 2008, 2017 and 2018, respectively.

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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 $ 5 million over the next 12 months.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

BENEFIT PLANS

Retirement Savings Plan

In 1987, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a retirement savings plan covering substantially all of our U.S.

employees, now referred to as the Adobe Inc.

401(k) Retirement Savings Plan.

The Adobe Inc.

401(k) Retirement Savings Plan, qualified under Section 401(k) of the Internal Revenue Code, is a retirement savings plan covering substantially all of our U.S.

Under the plan, eligible employees may contribute up to 65 % of their pretax or after-tax salary, subject to the IRS annual contribution limits.

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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

On September 21, 2006, the Board of Directors approved the Adobe Inc.

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 are able to defer a portion of their annual compensation.

The Adobe Inc.

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 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.

As of November 27, 2020 and November 29, 2019, $ 137 million and $ 109 million, respectively, were recorded as long-term liabilities to recognize undistributed deferred compensation due to employees.

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, with respect to equity awards, vests.

Members of the Board of Directors are also eligible to participate 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 equity awards.

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

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

As of December 3, 2021 and November 27, 2020, the invested amounts under the plan total $ 151 million and $ 117 million, respectively and were recorded as other assets on our Consolidated Balance Sheets.

As of December 3, 2021 and November 27, 2020, $ 174 million and $ 137 million, respectively, were recorded as long-term liabilities to recognize undistributed deferred compensation due to participants.

STOCK-BASED COMPENSATION

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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”).

We grant restricted stock units and performance share 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.

As of December 3, 2021, we had reserved 46.0 million shares of our common stock for issuance under our 2019 Plan and had 37.9 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.

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

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.

In January 2021, the Executive Compensation Committee approved the 2021 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 December 3, 2021, the shares awarded under our 2021, 2020 and 2019 Performance Share Programs remained outstanding and were yet to be achieved.

Employee Stock Purchase Plan

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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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

As of December 3, 2021, we had reserved 103.0 million shares of our common stock for issuance under the ESPP and approximately 11.6 million shares remain available for future issuance.

Issuance of Shares

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Stock-based compensation cost is measured at the grant date based on the fair value of the award.

Our restricted stock units are valued based on the fair market value of the award on the grant date.

Our performance share awards are valued using a Monte Carlo Simulation model.

The fair value of the awards are fixed at grant date and amortized over the longer of the remaining performance or service period.

The fair value of the awards are fixed at the grant date and amortized over the longer of the remaining performance or service period.

We use the Black-Scholes option pricing model to determine the fair value of ESPP shares.

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Forfeited ( 0.7 ) $ 351.46

Increase due to acquisition 0.1 $ 548.91

Ending outstanding balance 6.6 $ 411.52 $ 4,039 1.25

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_________________________________________

(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 2020, 2019 and 2018 was $ 1.61 billion, $ 970 million and $ 837 million, respectively.

(1) The aggregate fair value is calculated using the closing stock price as of December 3, 2021 of $ 616.53 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted average grant date fair values of restricted stock units granted during fiscal 2021, 2020 and 2019 were $ 504.69 , $ 358.68 and $ 253.91 , respectively.

The total fair value of restricted stock units vested during fiscal 2021, 2020 and 2019 was $ 1.83 billion, $ 1.61 billion and $ 970 million, respectively.

Summary of Performance Shares

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_________________________________________

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

(1) The aggregate fair value is calculated using the closing stock price as of December 3, 2021 of $ 616.53 .

Shares awarded during fiscal 2021 include 0.2 million additional shares awarded for the final achievement of the 2018 Performance Share Program which was certified in the first quarter of fiscal 2021.

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We use historical data to estimate forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

As of November 27, 2020, there was $ 1.57 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards and purchase rights which will be recognized over a weighted average period of 2.04 years.

Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

As of December 3, 2021, there was $ 2.26 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards and purchase rights which will be recognized over a weighted average period of 2.23 years.

Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Total stock-based compensation costs included in our Consolidated Statements of Income for fiscal 2021, 2020 and 2019 were as follows:

(in millions) 2021 2020 2019

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(in millions) November 27,

2019 Increase / Decrease Reclassification Adjustments November 27,

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

2020 Increase / Decrease Reclassification Adjustments December 3,

Net unrealized gains / losses on available-for-sale securities $ 6 $ ( 8 ) $ — (1)

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

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STOCK REPURCHASE PROGRAM

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties.

In May 2018, our Board of Directors granted us an authority to repurchase up to $ 8 billion in common stock through the end of fiscal 2021.

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase our shares in the open market or enter into structured repurchase agreements with third parties.

In May 2018, our Board of Directors granted authority to repurchase up to $ 8 billion in common stock, which we fully utilized during fiscal 2021.

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

During fiscal 2021, 2020 and 2019, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $ 3.95 billion, $ 3.05 billion and $ 2.75 billion, respectively.

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Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The financial institutions agree to deliver shares to us at monthly intervals during the contract term.

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We repurchased approximately 7.2 million shares at an average price of $ 536.17 per share in fiscal 2021, 8.0 million shares at an average price of $ 376.38 per share in fiscal 2020, and 9.9 million shares at an average price of $ 270.23 per share in fiscal 2019.

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.

Subsequent to November 27, 2020, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $ 950 million.

This amount will be classified as treasury stock on our Consolidated Balance Sheets.

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

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.

For fiscal 2021, 2020 and 2019, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by December 3, 2021, November 27, 2020 and November 29, 2019 were excluded from the computation of earnings per share.

As of December 3, 2021, $ 334 million of prepayments remained under the agreement.

Subsequent to December 3, 2021, as part of the December 2020 stock repurchase authority, we entered into an accelerated share repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $ 2.4 billion and received an initial delivery of 3.2 million shares, which represents approximately 75% of our prepayment.

The remaining balance will be settled during our third quarter of fiscal 2022.

Upon completion of the $ 2.4 billion accelerated share repurchase agreement, $ 10.7 billion remains under our December 2020 authority.

NET INCOME PER SHARE

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Shares used to compute basic net income per share 477.3 480.9 486.3

Dilutive potential common shares 4.6 5.3 7.2

Dilutive potential common shares from stock plans and programs 3.7 4.6 5.3

Shares used to compute diluted net income per share 481.0 485.5 491.6

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Anti-dilutive potential common shares 0.2 0.5 0.2

_________________________________________

(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)

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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 for each of the next five years and thereafter as of November 27, 2020:

The following table summarizes our non-cancellable unconditional purchase obligations for each of the next five years and thereafter as of December 3, 2021:

(in millions)

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Royalty expense is generally based on a dollar amount per unit or a percentage of the underlying revenue.

Royalty expense, which was recorded under our cost of revenue on our Consolidated Statements of Income, was approximately $ 176 million, $ 154 million and $ 119 million in fiscal 2020, 2019 and 2018, respectively.

Royalty expense, which was recorded in our cost of revenue on our Consolidated Statements of Income, was approximately $ 202 million, $ 176 million and $ 154 million in fiscal 2021, 2020 and 2019, respectively.

Indemnifications

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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.

In addition to intellectual property disputes, we are also subject to legal proceedings, claims, including claims relating to commercial, employment and other matters, and investigations, including government investigations.

Some of these disputes, legal proceedings and investigations 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 or probable and estimable.

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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.

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

The carrying value of our borrowings as of December 3, 2021 and November 27, 2020 were as follows:

(dollars in millions) Issuance Date Due Date Effective Interest Rate 2021 2020

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

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2.30% 2030 Notes February 2020 February 2030 2.69 % 1,300 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 ( 27 ) ( 33 )

Carrying value of long-term debt $ 4,123 $ 4,117

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)

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.

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.

In January 2015, we issued $ 1 billion of senior notes due February 1, 2025.

The related discount and issuance costs are being amortized to interest expense over the term of the 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.

In February 2020, we issued $ 500 million of senior notes due February 1, 2023, $ 500 million of senior notes due February 1, 2025, $ 850 million of senior notes due February 1, 2027, and $ 1.30 billion of senior notes due February 1, 2030.

Our total proceeds of approximately $ 3.14 billion, net of issuance discount, were used for general corporate purposes including repayment of debt instruments due in fiscal 2020.

The related discount and issuance costs are amortized to interest expense over the respective terms of the notes using the effective interest method.

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

Our senior 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

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.

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.

The notes do not contain financial covenants but include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances.

Revolving Credit Agreement

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

As of December 3, 2021, we were in compliance with this covenant.

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.

As of December 3, 2021, there were no outstanding borrowings under this Credit Agreement .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Operating lease expense was $ 119 million for both fiscal 2021 and 2020.

Prior to our adoption of ASC 842 in fiscal 2020, operating lease expense was $ 170 million for fiscal 2019.

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:

Supplemental cash flow information for fiscal 2021 and 2020 related to operating leases was as follows:

(in millions) 2021 2020

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Right-of-use assets obtained in exchange for operating lease liabilities $ 60 $ 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:

The weighted-average remaining lease term and weighted-average discount rate for our operating lease liabilities as of December 3, 2021 were 8 years and 2.28 %, respectively.

As of December 3, 2021, the maturities of lease liabilities under operating leases were as follows:

(in millions)

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(1) Operating lease payments exclude $ 16 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)

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Realized gains on fixed income investments — 1 —

Realized losses on fixed income investments — — ( 11 )

Other income (expense), net $ — $ 42 $ 42

Non-operating income (expense), net $ ( 97 ) $ ( 61 ) $ ( 63 )

SELECTED QUARTERLY FINANCIAL DATA (unaudited)

(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 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

Diluted net income per share $ 1.36 $ 1.29 $ 1.61 $ 1.74

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

Each of the fiscal quarters presented were comprised of 13 weeks.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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We have audited the accompanying consolidated balance sheets of Adobe Inc.

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 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.

and subsidiaries (the Company) as of December 3, 2021 and November 27, 2020, 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 December 3, 2021, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of December 3, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 3, 2021 and November 27, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three fiscal year period ended December 3, 2021, in conformity with U.S.

generally accepted accounting principles.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 27, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principle

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).”

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 3, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

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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;

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit 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.

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 judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Performance obligations in cloud-enabled software subscriptions

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We read the Creative Cloud and Document Cloud subscription offering agreements to understand the contractual terms and conditions.

We participated in product demonstrations, examined marketing materials, and performed interviews with the Company’s product and engineering department to both understand and observe specific functionalities of the integrated offering and evaluate the nature of the promise made to the Company’s Creative Cloud and Document Cloud customers.

We participated in product demonstrations and performed interviews with the Company’s product and engineering department to both understand and observe specific functionalities of the integrated offering and evaluate the nature of the promise made to the Company’s Creative Cloud and Document Cloud customers.

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

We have served as the Company’s auditor since 1983.

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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