Hilton Worldwide Holdings Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. Management’s Report on Internal Control Over Financial Reporting 71 Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting 72 Report of Independent Registered Public Accounting Firm – Financial Statements 73 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2020 and 2019 78 Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 79 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018 80 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 81 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2020, 2019 and 2018 82 Notes to Consolidated Financial Statements 83 70 Management's Report on Internal Control Over Financial Reporting Management of Hilton Worldwide Holdings Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control—Integrated Framework (2013). Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2020. Ernst & Young LLP, the independent registered public accounting firm that has audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2020. The report is included herein. 71 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Hilton Worldwide Holdings Inc. Opinion on Internal Control Over Financial Reporting We have audited Hilton Worldwide Holdings Inc.'s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hilton Worldwide Holdings Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Hilton Worldwide Holdings Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended December 31, 2020 of the Company and the related notes, and our report dated February 17, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Tysons, Virginia February 17, 2021 72 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Hilton Worldwide Holdings Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Hilton Worldwide Holdings Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with US generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 17, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the 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 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. 73 Accounting for the Loyalty Program Description of the Matter The Company recognized $264 million of revenues during the year ended December 31, 2020 and had deferred revenues of $720 million and a liability for guest loyalty program of $2,469 million as of December 31, 2020 associated with the Hilton Honors guest loyalty and marketing program (the “Loyalty Program”). As discussed in Note 4 to the consolidated financial statements, the Company has a performance obligation to provide or arrange for the provision of goods or services, for free or at a discount, to Hilton Honors members in exchange for the redemption of points earned through participation in the Loyalty Program. The consideration for the Loyalty Program is received from hotel properties or other program partners at the time points are earned by Hilton Honors members. Such amounts are recognized as revenue when the related point obligation is satisfied based upon the estimated standalone selling price per point in excess of the related cost per point. Auditing Loyalty Program results is complex due to: (1) the complexity of models and high volume of data used to monitor and account for the Loyalty Program results, and (2) the complexity of estimating the standalone selling price per Loyalty Program point, including the estimated breakage rate of Loyalty Program points. Such estimates are complex given the significant estimation associated with redemption activity. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for the Loyalty Program during the year. For example, we tested controls over management’s review of the assumptions and data inputs utilized by outside actuaries to assist the Company in determining the fair value of the future award redemption obligation and breakage rate of Loyalty Program points and management’s review of activity and data inputs to their accounting model. To test the recognition of revenues and costs associated with the Loyalty Program, we involved specialists on our team and performed audit procedures that included, among others, testing the clerical accuracy and consistency with US GAAP of the accounting model developed by the Company to recognize revenue and costs associated with the Loyalty Program. We tested significant inputs into the accounting model, including the estimated standalone selling price and recognition of points earned and redeemed during the period. We involved our actuarial professionals to assist in our testing procedures with respect to the estimate of the breakage of Loyalty Program points and the ultimate estimated redemption cost. We evaluated management’s methodology for estimating the breakage of Loyalty Program points, as well as tested underlying data and assumptions used in estimating the breakage rate. Accounting for Income Taxes Description of the Matter The Company recognized an income tax benefit of $204 million during the year ended December 31, 2020, and unrecognized tax benefits of $451 million as of December 31, 2020. As discussed in Note 13 to the consolidated financial statements, changes to the Company’s unrecognized tax benefits relate to, among others, uncertainty regarding prior year tax returns in certain foreign jurisdictions where the Company operates, additional reserves related to Hilton Honors, and reductions and settlements related to the conclusion of certain state audits. Further, as discussed in Note 13 to the consolidated financial statements, the Company has recognized tax positions of $817 million as of December 31, 2020 for which the Internal Revenue Service has made proposed adjustments through the issuance of a Revenue Agents Report, for which the Company has reserved $97 million. Auditing the accounting for income taxes is complex as a result of: (1) operations in multiple foreign tax jurisdictions and international restructuring transactions, (2) the judgment and estimation associated with both the identification and measurement of the Company's unrecognized tax benefits, including its evaluation of the technical merits related to matters for which no reserves or partial reserves have been recorded, and (3) the significant estimation associated with the measurement of unrecognized tax benefits outstanding as of the balance sheet date. 74 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for income taxes, including unrecognized tax benefits, during the year. For example, we tested management’s controls over the review of tax positions taken by the Company to determine whether they met the threshold for recognition within the consolidated financial statements. To test the recognition of the Company’s unrecognized tax benefits and measurement of unrecognized tax benefits, we involved tax professionals with specialized skills and knowledge to assess the technical merits of the Company’s tax positions and performed audit procedures that included, among others, evaluation of communications with relevant taxing authorities, evaluation of whether management appropriately considered new information that could significantly change the recognition, measurement or disclosure of the unrecognized tax benefits, and testing the assumptions used by management in estimating the valuation of any associated liability. Accounting for Other Expenses from Managed and Franchised Properties and General and Administrative Expenses Description of the Matter The Company recognized Other expenses from managed and franchised properties of $3,104 million and General and administrative expenses of $311 million during the year ended December 31, 2020. As discussed in Note 2 to the consolidated financial statements, the Company incurs certain direct and indirect expenses that are for the benefit of, and contractually reimbursable from, hotel owners. Such amounts (“Cost Reimbursements”) are recorded in the period in which the expense is incurred as Other expenses from managed and franchised properties and the accounting for indirect cost reimbursements includes judgment with respect to the allocation of certain costs between reimbursable and non-reimbursable. Auditing the classification of indirect reimbursements recognized within Other expenses from managed and franchised properties and General and administrative expenses is complex as a result of: (1) judgment associated with testing management’s conclusions regarding the allocation of costs between reimbursable and non-reimbursable expenses, presented as Other expenses from managed and franchised properties and General and administrative expenses, respectively, (2) the complexity associated with allocating indirect expenses due to the high volume of data utilized by management in establishing and maintaining allocations for indirect expenses, and (3) incentives for management to limit the growth in General and administrative expenses due to the impact on publicly disclosed earnings metrics. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for Cost Reimbursements, General and administrative expenses, and the process for allocating indirect reimbursement expenses during the year. For example, we tested management’s controls over the review of the allocation of certain indirect costs to determine if they were appropriately classified. To test the recognition of Cost Reimbursements for appropriate classification, we performed audit procedures that included, among others: testing a sample of transactions that were classified within Other expenses from managed and franchised properties in order to evaluate the appropriate accounting treatment and reasonableness of classification; comparing budgeted amounts and initial allocations to actual activity and evaluating the reasonableness of any resulting material changes to allocations of indirect expenses; performing analytic procedures over Other expenses from managed and franchised properties and General and administrative expenses in order to identify indicators of material errors in the classification of expenses based on established trends and expectations; and testing material manual journal entries made to Other expenses from managed and franchised properties and General and administrative expenses. 75 Impairment of Goodwill, Property and Equipment and Intangible Assets with Finite Useful Lives Description of the Matter As of December 31, 2020, the Company’s net consolidated goodwill totaled $5,095 million, and property and equipment and intangible assets with finite useful lives (together, the “finite‑lived assets”), totaled $346 million and $1,691 million, respectively. As discussed in Notes 6 and 11 to the consolidated financial statements, the Company recorded impairment charges during the period of $104 million on goodwill and $154 million on finite‑lived assets. As discussed in Note 2 to the consolidated financial statements, the novel coronavirus (“COVID-19”) pandemic had a material adverse impact on the Company’s results for the year ended December 31, 2020. Further, as discussed in Note 2 to the consolidated financial statements, the Company evaluates the carrying value of its reporting units on an annual basis or at other times during the year if indicators of impairment are present, such as macroeconomic conditions including a deterioration in general economic conditions. For finite‑lived assets, the Company evaluates the carrying value either on an annual basis or at other times of the year if indicators of impairment are present, such as a significant decrease in the market price of a finite-lived asset, or a significant adverse change in the manner in which a finite-lived asset is being used. When such factors exist, as in the case of COVID-19 impacts on results, for goodwill, the Company performs an analysis to determine the fair value of its reporting units as compared to carrying values, to identify both the existence of impairment and to measure the amount of impairment loss. Impairment losses for goodwill are determined when the fair value of a reporting unit is less than its net carrying value. Impairment losses are measured and recorded as the excess of the carrying value of a reporting unit over its estimated fair value. For finite-lived assets, the Company evaluates recoverability of the asset group carrying value by comparing the expected undiscounted future cash flows to the net carrying value of the asset group. Impairment losses for finite‑lived assets are determined when the undiscounted cash flows are less than the net carrying value of the asset group. Impairment losses are measured and recorded as the excess of the net carrying value of the asset group over the estimated fair value of the assets within the asset group. Auditing management’s evaluation of goodwill and finite-lived assets for impairment and measurement of impairment is complex due to the judgment and significant estimation uncertainty in the identification of impairment indicators, determination of the estimated future discounted cash flows of reporting units and undiscounted cash flows of finite‑lived asset groups that exhibited indicators of impairment, and determination of the fair value of reporting units and finite‑lived asset groups in instances where impairment was measured. In particular, identification of impairment indicators is judgmental due to the subjectivity of management’s assumptions in determining how the current economic environment impacts the performance of their business in the future. Additionally, discounted and undiscounted cash flows and fair value estimates are subject to significant assumptions which include projected reporting unit, hotel and asset-level revenue and gross margin growth, estimated capital expenditures, terminal period assumptions, and the discount rate applied to cash flow forecasts, all of which can be affected by future market conditions including the longevity of the impact of COVID-19. These estimates are also affected by management’s assumptions regarding intent and ability to hold and use the finite-lived assets over the remaining useful lives and in the manner assumed in impairment evaluation and measurement analyses. 76 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to the Company’s process for evaluating goodwill and finite‑lived assets for impairment and measurement of impairment, including controls over management’s review of the significant assumptions described above. To test the Company’s evaluation of goodwill and finite‑lived assets for impairment, including fair value estimates for impairment measurement purposes, we performed audit procedures that included, among others, involving valuation specialists to assist in evaluating the significant assumptions discussed above for the reporting units and certain hotel related finite‑lived assets, assessing the methodologies, evaluating the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used by management in its analyses. We compared the significant assumptions used by management to historical operating results, relevant observable market information, current industry trends, Company strategic priorities and other relevant factors. As part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of certain assumptions, including revenue and gross margin growth rates, estimated capital expenditures, terminal period assumptions and the discount rate, to evaluate the changes in the fair value of reporting units and recoverability of certain finite‑lived assets and the change in measured impairment that would result from changes in the assumptions. We also inspected the minutes and materials of relevant committee and management meetings, observing those meetings when possible. /s/ Ernst & Young LLP We have served as the Company's auditor since 2002. Tysons, Virginia February 17, 2021 77 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED BALANCE SHEETS (in millions, except share data) December 31, 2020 2019 ASSETS Current Assets: Cash and cash equivalents $ 3,218 $ 538 Restricted cash and cash equivalents 45 92 Accounts receivable, net of allowance for credit losses of $ 132 and $ 44 771 1,261 Prepaid expenses 70 130 Other 98 72 Total current assets (variable interest entities – $ 53 and $ 100 ) 4,202 2,093 Intangibles and Other Assets: Goodwill 5,095 5,159 Brands 4,904 4,877 Management and franchise contracts, net 653 780 Other intangible assets, net 266 421 Operating lease right-of-use assets 772 867 Property and equipment, net 346 380 Deferred income tax assets 194 100 Other 323 280 Total intangibles and other assets (variable interest entities – $ 199 and $ 179 ) 12,553 12,864 TOTAL ASSETS $ 16,755 $ 14,957 LIABILITIES AND EQUITY (DEFICIT) Current Liabilities: Accounts payable, accrued expenses and other $ 1,302 $ 1,703 Current maturities of long-term debt 56 37 Current portion of deferred revenues 370 332 Current portion of liability for guest loyalty program 703 799 Total current liabilities (variable interest entities – $ 57 and $ 64 ) 2,431 2,871 Long-term debt 10,431 7,956 Operating lease liabilities 971 1,037 Deferred revenues 1,004 827 Deferred income tax liabilities 649 795 Liability for guest loyalty program 1,766 1,060 Other 989 883 Total liabilities (variable interest entities – $ 248 and $ 260 ) 18,241 15,429 Commitments and contingencies – see Note 19 Equity (Deficit): Preferred stock, $ 0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of December 31, 2020 and 2019 — — Common stock, $ 0.01 par value; 10,000,000,000 authorized shares, 330,511,254 issued and 277,590,904 outstanding as of December 31, 2020 and 333,159,770 issued and 278,985,125 outstanding as of December 31, 2019 3 3 Treasury stock, at cost; 52,920,350 shares as of December 31, 2020 and 54,174,645 shares as of December 31, 2019 ( 4,453 ) ( 4,169 ) Additional paid-in capital 10,552 10,489 Accumulated deficit ( 6,732 ) ( 5,965 ) Accumulated other comprehensive loss ( 860 ) ( 840 ) Total Hilton stockholders' deficit ( 1,490 ) ( 482 ) Noncontrolling interests 4 10 Total deficit ( 1,486 ) ( 472 ) TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 16,755 $ 14,957 See notes to consolidated financial statements. 78 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) Year Ended December 31, 2020 2019 2018 Revenues Franchise and licensing fees $ 945 $ 1,681 $ 1,530 Base and other management fees 123 332 321 Incentive management fees 38 230 235 Owned and leased hotels 421 1,422 1,484 Other revenues 73 101 98 1,600 3,766 3,668 Other revenues from managed and franchised properties 2,707 5,686 5,238 Total revenues 4,307 9,452 8,906 Expenses Owned and leased hotels 620 1,254 1,332 Depreciation and amortization 331 346 325 General and administrative 311 441 443 Reorganization costs 41 — — Impairment losses 258 — — Other expenses 60 72 51 1,621 2,113 2,151 Other expenses from managed and franchised properties 3,104 5,763 5,323 Total expenses 4,725 7,876 7,474 Gain on sale of assets, net — 81 — Operating income (loss) ( 418 ) 1,657 1,432 Interest expense ( 429 ) ( 414 ) ( 371 ) Loss on foreign currency transactions ( 27 ) ( 2 ) ( 11 ) Loss on debt extinguishments ( 48 ) — — Other non-operating income (loss), net ( 2 ) 3 28 Income (loss) before income taxes ( 924 ) 1,244 1,078 Income tax benefit (expense) 204 ( 358 ) ( 309 ) Net income (loss) ( 720 ) 886 769 Net loss (income) attributable to noncontrolling interests 5 ( 5 ) ( 5 ) Net income (loss) attributable to Hilton stockholders $ ( 715 ) $ 881 $ 764 Earnings (loss) per share: Basic $ ( 2.58 ) $ 3.07 $ 2.53 Diluted $ ( 2.56 ) $ 3.04 $ 2.50 Cash dividends declared per share $ 0.15 $ 0.60 $ 0.60 See notes to consolidated financial statements. 79 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) Year Ended December 31, 2020 2019 2018 Net income (loss) $ ( 720 ) $ 886 $ 769 Other comprehensive income (loss), net of tax benefit (expense): Currency translation adjustment, net of tax of $( 24 ), $( 8 ) and $ 6 38 ( 4 ) ( 70 ) Pension liability adjustment, net of tax of $ 7 , $ 3 and $ 3 ( 20 ) ( 9 ) ( 9 ) Cash flow hedge adjustment, net of tax of $ 13 , $ 15 and $( 8 ) ( 38 ) ( 45 ) 22 Total other comprehensive loss ( 20 ) ( 58 ) ( 57 ) Comprehensive income (loss) ( 740 ) 828 712 Comprehensive loss (income) attributable to noncontrolling interests 5 ( 5 ) ( 5 ) Comprehensive income (loss) attributable to Hilton stockholders $ ( 735 ) $ 823 $ 707 See notes to consolidated financial statements. 80 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2020 2019 2018 Operating Activities: Net income (loss) $ ( 720 ) $ 886 $ 769 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of contract acquisition costs 29 29 27 Depreciation and amortization 331 346 325 Impairment losses 258 — — Gain on sale of assets, net — ( 81 ) — Loss on foreign currency transactions 27 2 11 Share-based compensation 97 154 127 Amortization of deferred financing costs and other 17 16 16 Deferred income taxes ( 235 ) ( 20 ) ( 14 ) Contract acquisition costs ( 50 ) ( 90 ) ( 103 ) Changes in operating assets and liabilities: Accounts receivable, net 488 ( 105 ) ( 161 ) Prepaid expenses 60 6 ( 39 ) Other current assets ( 26 ) 15 13 Accounts payable, accrued expenses and other ( 414 ) 99 148 Change in operating lease right-of-use assets 94 43 — Change in operating lease liabilities ( 142 ) ( 80 ) — Change in deferred revenues 215 ( 17 ) ( 18 ) Change in liability for guest loyalty program 610 191 207 Change in other liabilities 8 ( 14 ) ( 53 ) Other 61 4 — Net cash provided by operating activities 708 1,384 1,255 Investing Activities: Capital expenditures for property and equipment ( 46 ) ( 81 ) ( 72 ) Payments received on other financing receivables 4 3 50 Proceeds from asset disposition — 120 — Capitalized software costs ( 46 ) ( 124 ) ( 87 ) Other ( 19 ) ( 41 ) ( 22 ) Net cash used in investing activities ( 107 ) ( 123 ) ( 131 ) Financing Activities: Borrowings 4,590 2,200 1,676 Repayment of debt ( 2,121 ) ( 1,547 ) ( 1,005 ) Debt issuance costs and redemption premiums ( 71 ) ( 29 ) ( 21 ) Dividends paid ( 42 ) ( 172 ) ( 181 ) Repurchases of common stock ( 296 ) ( 1,538 ) ( 1,721 ) Share-based compensation tax withholdings and other ( 27 ) ( 27 ) ( 44 ) Other ( 1 ) — ( 4 ) Net cash provided by (used in) financing activities 2,032 ( 1,113 ) ( 1,300 ) Effect of exchange rate changes on cash, restricted cash and cash equivalents — ( 2 ) ( 10 ) Net increase (decrease) in cash, restricted cash and cash equivalents 2,633 146 ( 186 ) Cash, restricted cash and cash equivalents, beginning of period 630 484 670 Cash, restricted cash and cash equivalents, end of period $ 3,263 $ 630 $ 484 See notes to consolidated financial statements. For supplemental disclosures, see Note 12: "Leases" and Note 20: "Supplemental Disclosures of Cash Flow Information." 81 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in millions) Equity (Deficit) Attributable to Hilton Stockholders Additional Paid-in Capital Accumulated Other Comprehensive Loss Common Stock Treasury Stock Accumulated Deficit Noncontrolling Interests Total Shares Amount Balance as of December 31, 2017 317 $ 3 $ ( 891 ) $ 10,298 $ ( 6,981 ) $ ( 741 ) $ 3 $ 1,691 Net income — — — — 764 — 5 769 Other comprehensive income (loss), net of taxes: Currency translation adjustment — — — — — ( 70 ) — ( 70 ) Pension liability adjustment — — — — — ( 9 ) — ( 9 ) Cash flow hedge adjustment — — — — — 22 — 22 Other comprehensive loss — — — — — ( 57 ) — ( 57 ) Dividends — — — — ( 184 ) — — ( 184 ) Repurchases of common stock ( 23 ) — ( 1,721 ) — — — — ( 1,721 ) Share-based compensation 1 — ( 13 ) 77 — — — 64 Distributions — — — — — — ( 1 ) ( 1 ) Acquisition of noncontrolling interest — — — ( 3 ) — — — ( 3 ) Cumulative effect of the adoption of ASU 2018-02 — — — — ( 16 ) 16 — — Balance as of December 31, 2018 295 3 ( 2,625 ) 10,372 ( 6,417 ) ( 782 ) 7 558 Net income — — — — 881 — 5 886 Other comprehensive loss, net of taxes: Currency translation adjustment — — — — — ( 4 ) — ( 4 ) Pension liability adjustment — — — — — ( 9 ) — ( 9 ) Cash flow hedge adjustment — — — — — ( 45 ) — ( 45 ) Other comprehensive loss — — — — — ( 58 ) — ( 58 ) Dividends — — — — ( 173 ) — — ( 173 ) Repurchases of common stock ( 17 ) — ( 1,544 ) — — — — ( 1,544 ) Share-based compensation 1 — — 117 — — — 117 Cumulative effect of the adoption of ASU 2016-02 — — — — ( 256 ) — — ( 256 ) Deconsolidation of a variable interest entity — — — — — — ( 2 ) ( 2 ) Balance as of December 31, 2019 279 3 ( 4,169 ) 10,489 ( 5,965 ) ( 840 ) 10 ( 472 ) Net loss — — — — ( 715 ) — ( 5 ) ( 720 ) Other comprehensive income (loss), net of taxes: Currency translation adjustment — — — — — 38 — 38 Pension liability adjustment — — — — — ( 20 ) — ( 20 ) Cash flow hedge adjustment — — — — — ( 38 ) — ( 38 ) Other comprehensive loss — — — — — ( 20 ) — ( 20 ) Dividends — — — — ( 42 ) — — ( 42 ) Repurchases of common stock ( 3 ) — ( 279 ) — — — — ( 279 ) Share-based compensation 2 — ( 5 ) 63 — — — 58 Distributions — — — — — — ( 1 ) ( 1 ) Cumulative effect of the adoption of ASU 2016-13 — — — — ( 10 ) — — ( 10 ) Balance as of December 31, 2020 278 $ 3 $ ( 4,453 ) $ 10,552 $ ( 6,732 ) $ ( 860 ) $ 4 $ ( 1,486 ) See notes to consolidated financial statements. 82 HILTON WORLDWIDE HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Organization Hilton Worldwide Holdings Inc. (the "Parent," or together with its subsidiaries, "Hilton," "we," "us," "our" or the "Company"), a Delaware corporation, is one of the largest hospitality companies in the world and is engaged in managing, franchising, owning and leasing hotels and resorts and licensing its brands and intellectual property ("IP"). As of December 31, 2020, we managed, franchised, owned or leased 6,478 hotels and resorts, including timeshare properties, totaling 1,019,287 rooms in 119 countries and territories. Note 2: Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation These consolidated financial statements present the consolidated financial position of Hilton as of December 31, 2020 and 2019 and results of operations for the years ended December 31, 2020, 2019 and 2018. Principles of Consolidation Our consolidated financial statements include the accounts of our wholly owned subsidiaries and other entities in which we have a controlling financial interest, including variable interest entities ("VIEs") for which we are the primary beneficiary. Non-wholly owned entities in which we have a controlling financial interest generally comprise majority owned real estate ownership enterprises. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of rights held by other ownership interests. If the entity is considered to be a VIE, we evaluate whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. We consolidate entities other than VIEs when we own more than 50 percent of the voting shares of a company or otherwise have a controlling financial interest. We hold interests in VIEs, for which we are not the primary beneficiary, that may provide us with the option to acquire an additional interest in such an entity at a predetermined amount, if certain contingent events occur. In a circumstance that we exercise our option to acquire an additional interest in a VIE, we would reassess whether we are the primary beneficiary of the VIE. If we determine that we are the primary beneficiary of the VIE, we would be required to consolidate the total assets, liabilities and results of operations of the VIE, which may be material upon consolidation. All material intercompany transactions and balances have been eliminated in consolidation. References in these financial statements to net income (loss) attributable to Hilton stockholders and Hilton stockholders' equity (deficit) do not include noncontrolling interests, which represent the third-party ownership interests of our consolidated, non-wholly owned entities and are reported separately. Use of Estimates The preparation of financial statements in conformity with United States ("U.S") generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. In particular, the novel coronavirus ("COVID-19") pandemic had a material adverse impact on our results for the year ended December 31, 2020, and we expect it to continue to have a material adverse impact on our results for an indeterminate length of time. Management is making estimates and judgments in light of these circumstances, and this period, as well as upcoming periods, are unlikely to be comparable to past performance or indicative of future performance. Reorganization During the year ended December 31, 2020, we recognized expenses related to organizational changes, including reductions in our workforce and the associated costs, as part of our efforts to reduce future costs for our corporate operations in response to the COVID-19 pandemic. Included in these expenses were $ 41 million of reorganization costs for our corporate operations and 83 $177 million related to amounts to be reimbursed by our third-party hotel owners, including those related to our managed hotels, which were included in other expenses from managed and franchised properties in our consolidated statement of operations. As of December 31, 2020, $35 million of reorganization costs were included in accounts payable, accrued expenses and other in our consolidated balance sheet, with related amounts in accounts receivable for reimbursements by our third-party hotel owners, as applicable. Summary of Significant Accounting Policies Revenue Recognition Revenues are primarily derived from management and franchise contracts with third-party hotel and resort owners, our owned and leased hotels, and from license agreements with Hilton Grand Vacations Inc. ("HGV") and strategic partnerships, including co-branded credit card arrangements. The majority of our performance obligations are a series of distinct goods or services, for which we receive variable consideration through our management and franchise fees or fixed consideration through our owned and leased hotels. We allocate the variable fees to the distinct services to which they relate applying the prescribed variable consideration allocation guidance, and we allocate fixed consideration to the related performance obligations based on their estimated standalone selling prices. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Additionally, we do not typically include extended payment terms in our contracts with customers. However, in response to cash flow deficiencies experienced by certain property owners resulting from the COVID-19 pandemic, we may amend certain contracts with customers to provide short-term payment relief, expecting that we collect most amounts outstanding in twelve months or less. Management and franchise revenues We identified the following performance obligations in connection with our management and franchise contracts: • IP licenses grant the right to access our hotel system IP, including brand IP, reservations systems and property management systems. • Hotel management services include providing day-to-day management services of the hotels for the property owners. • Development services include providing consultative services (e.g., design assistance and contractor selection) to the property owner to assist with the construction of the hotel prior to the hotel opening. • Pre-opening services include providing services (e.g., advertising, budgeting, e-commerce strategies and food and beverage testing) to the property owner to assist in preparing for the hotel opening. • Substantive rights for free or discounted goods or services to hotel guests are satisfied at the earlier point in time of either when the substantive right expires or the underlying free or discounted good or service is provided to the hotel guest. Each of the identified performance obligations is considered to be a series of distinct services transferred over time, except for the substantive rights for free or discounted goods or services to hotel guests performance obligation, which is satisfied at a point in time. While the underlying activities may vary from day to day, the nature of the commitments are the same each day, and the property owner can independently benefit from each day's services. Management and franchise fees are typically based on the sales or usage of the underlying hotel, with the exception of fixed upfront fees, which usually represent an insignificant portion of the transaction price. Franchise and licensing fees represent fees earned in connection with the licensing of one of our brands, usually under long-term contracts with the property owner, and may also include fees from a licensing agreement for the use of certain Hilton marks and IP, and include the following: • Royalty fees are generally based on a percentage of the hotel's monthly gross room revenue and, in some cases, may also include a percentage of gross food and beverage revenues and other revenues, as applicable. These fees are typically billed and collected monthly, and revenue is generally recognized as services are provided. 84 • Application, initiation and other fees are charged when: (i) new hotels enter our system; (ii) there is a change of ownership of a hotel; or (iii) contracts with properties already in our system are extended. These fees are typically fixed and collected upfront and are recognized as revenue over the term of the franchise contract. We do not consider this advance consideration to include a significant financing component, since it is used to protect us from the property owner failing to adequately complete some or all of its obligations under the contract, including establishing and maintaining the hotel in accordance with our standards. • Licensing fees are earned from: (i) a license agreement with HGV to use certain Hilton marks and IP in its timeshare business, which are typically billed monthly, and revenue is generally recognized at the same time the fees are billed and (ii) co-branded credit card arrangements, which are recognized as revenue when points for our guest loyalty program, Hilton Honors, are issued, generally as spend on the co-branded credit card occurs; see further discussion below under "Hilton Honors." Consideration paid or anticipated to be paid to incentivize hotel owners to enter into franchise contracts with us is amortized over the life of the applicable contract as a reduction to franchise and licensing fees. Management fees represent fees earned from hotels that we manage, usually under long-term contracts with the property owner, and include the following: • Base management fees are generally based on a percentage of the hotel's monthly gross revenue. Base fees are typically billed and collected monthly, and revenue is generally recognized as services are provided. • Incentive management fees are generally based on a percentage of the hotel's operating profits and, in some cases, may be subject to a stated return threshold to the property owner, normally over a one-calendar year period (the "incentive period"). Incentive fee revenue is recognized on a monthly basis, but only to the extent the cumulative fee earned does not exceed the probable fee for the incentive period. Incentive fee payment terms vary, but they are generally billed and collected monthly or annually upon completion of the incentive period. Consideration paid or anticipated to be paid to incentivize hotel owners to enter into management contracts with us is amortized over the life of the applicable contract as a reduction to base and other management fees. We do not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our: (i) royalty fees, since they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our brand names over the terms of the franchise contracts and (ii) base management fees and incentive management fees, since they are allocated entirely to the wholly unsatisfied promise to transfer management services, which form part of a single performance obligation in a series, over the term of the individual management contract. Other revenues from managed and franchised properties represent amounts that are contractually reimbursed to us by property owners, either directly as costs are incurred or indirectly through fees billed and collected in advance related to certain costs and expenses of the related properties, and include the following: • Direct reimbursements include payroll and related costs and certain other operating costs of the managed and franchised properties' operations, which are contractually reimbursed to us by the property owners as expenses are incurred. Revenue is recognized based on the amount of expenses incurred by Hilton, which are presented as other expenses from managed and franchised properties in our consolidated statements of operations, that are then reimbursed to us by the property owner typically on a monthly basis, which results in no net effect on operating income (loss) or net income (loss). • Indirect reimbursements include marketing expenses and other expenses associated with our brand programs and shared services, which are paid from fees collected by Hilton from the managed and franchised properties. Indirect reimbursements are typically billed and collected monthly, based on the underlying hotel's sales or usage (such as gross room revenue or number of reservations processed), and revenue is generally recognized as services are provided. System implementation fees charged to property owners are deferred and recognized as revenue over the term of the management or franchise contract. The corresponding expenses are expensed as incurred and are presented as other expenses from managed and franchised properties in our consolidated statements of operations and are expected to equal the revenues earned from indirect reimbursements over time. 85 The management and franchise fees and reimbursements from third-party hotel owners are allocated to the performance obligations and the distinct services to which they relate using their estimated standalone selling prices. The terms of the fees earned under the contract relate to a specific outcome of providing the services (e.g., hotel room sales) or to Hilton's efforts (e.g., costs) to satisfy the performance obligations. Using time as the measure of progress, we recognize fee revenue and indirect reimbursements in the period earned per the terms of the contract and revenue related to direct reimbursements in the period in which the cost is incurred. Owned and leased hotel revenues We identified the following performance obligations in connection with our owned and leased hotel revenues, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services: • Cancellable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs. • Noncancellable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the reservation. • Substantive rights for free or discounted goods or services are satisfied at the earlier of when: (i) the substantive right expires or (ii) the underlying free or discounted good or service is provided to the hotel guest. • Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest. • Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above. Owned and leased hotel revenues primarily consist of hotel room sales, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking) related to owned, leased and consolidated non-wholly owned hotel properties. Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. Owned and leased hotel revenues are reduced upon issuance of Hilton Honors points for Hilton Honors members' paid stay transactions and are recognized when Hilton Honors points are redeemed for a free stay at an owned or leased hotel (see the "Hilton Honors" section below for additional information). Although the transaction prices of hotel room sales, goods and other services are generally fixed and based on the respective room reservation or other agreement, an estimate to reduce the transaction price is required if a discount is expected to be provided to the customer. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component. On occasion, the hotel may also provide the customer with a substantive right to a free or discounted good or service in conjunction with a room reservation or banquet contract (e.g., free breakfast and free room night for every four nights booked). These substantive rights are considered separate performance obligations to which a portion of the transaction price is allocated based on the estimated standalone selling prices of the good or service, adjusted for the likelihood the hotel guest will exercise the right. Other revenues Other revenues include revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels, including purchasing operations, and other operating income. Purchasing revenues include any amounts received for vendor rebate arrangements that we participate in on behalf of the hotels in our system. Taxes and fees collected on behalf of governmental agencies We are required to collect certain taxes and fees from customers on behalf of governmental agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in our measurement of transaction prices. We have elected to 86 present revenue net of sales taxes and other similar taxes. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with original maturities, when purchased, of three months or less. Restricted Cash and Cash Equivalents Restricted cash and cash equivalents include cash balances established as security for certain guarantees, ground rent and property tax escrows, insurance, including self-insurance collateral, and furniture, fixtures and equipment replacement reserves required under certain lease agreements. Allowance for Credit Losses An allowance for credit losses is provided on our financial instruments, primarily accounts receivable. Our expected credit losses are based on historical collection activity, the nature of the financial instrument, geographic considerations and current and forecasted business conditions. Goodwill Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In connection with the October 24, 2007 transaction whereby we became a wholly owned subsidiary of affiliates of The Blackstone Group Inc. (the "Merger"), we recorded goodwill representing the excess purchase price over the fair value of the other identified assets and liabilities. We do not amortize goodwill, but rather evaluate goodwill for potential impairment on an annual basis or at other times during the year if indicators of impairment exist. We evaluate goodwill for potential impairment by comparing the carrying values of our reporting units to their fair values. Our reporting units are the same as our operating segments as described in Note 18: "Business Segments." At any time we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we cannot determine qualitatively that the fair value is not more likely than not less than its carrying value, or if we decide to bypass the qualitative assessment, we perform a quantitative analysis. The quantitative analysis is used to identify both the existence of impairment and the amount of the impairment loss by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. The estimated fair value is based on internal projections of expected future cash flows and operating plans, as well as market conditions relative to the operations of our reporting units. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired; otherwise, an impairment loss would be recognized in our consolidated statements of operations in an amount equal to the excess of the carrying value over the fair value, limited to the total amount of goodwill allocated to that reporting unit. Brands We manage, franchise, own and lease hotels under our portfolio of brands. There are no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of these brands and, accordingly, the useful lives of these brands are considered to be indefinite. At the time of the Merger, our portfolio consisted of Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, Hilton Hotels & Resorts, DoubleTree by Hilton, Embassy Suites by Hilton, Hilton Garden Inn, Hampton by Hilton, Homewood Suites by Hilton and our timeshare brand, Hilton Grand Vacations. As a result of the Merger, these brands were assigned a fair value using the relief from royalty valuation approach or the excess earnings method, depending on the contract type. All brands that were launched subsequent to the Merger, which include LXR Hotels & Resorts, Canopy by Hilton, Tempo by Hilton, Signia by Hilton, Curio Collection by Hilton, Tapestry Collection by Hilton, Motto by Hilton, Tru by Hilton, and Home2 Suites by Hilton, were not assigned fair values, and we do not have any intangible assets for these brands recorded in our consolidated balance sheets. We evaluate our indefinite-lived brands intangible assets for impairment on an annual basis or at other times during the year if indicators of impairment exist. At any time we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of the brand intangible asset is less than its carrying value. If we cannot determine qualitatively that the fair value is not more likely than not less than its carrying value, or if we decide to bypass the qualitative assessment, we perform a quantitative analysis. The estimated fair value is based on internal projections of expected future cash flows. If a brand intangible asset’s estimated current fair value is less 87 than its respective carrying value, the excess of the carrying value over the estimated fair value is recognized in our consolidated statements of operations as impairment losses. Intangible Assets with Finite Useful Lives We have certain finite-lived intangible assets that were initially recorded at their fair value at the time of the Merger. These intangible assets consist of management contracts, franchise contracts, leases, certain proprietary technologies and our Hilton Honors guest loyalty program. As of December 31, 2020, the intangible assets related to these franchise contracts, U.S. management contracts and certain proprietary technologies were fully amortized. Additionally, we capitalize consideration paid to incentivize hotel owners to enter into management and franchise contracts with us as contract acquisition costs and the incremental costs to obtain or fulfill the contracts as development commissions and other, both of which are generally fixed. We also capitalize costs incurred to develop internal-use computer software and costs to acquire software licenses, as well as internal and external costs incurred in connection with the development of upgrades or enhancements that result in additional information technology functionality. Intangible assets with finite useful lives are amortized using the straight-line method over their respective estimated useful lives, which for contract acquisition costs and development commissions is the contract term, including any renewal periods that are at our sole option. These estimated useful lives are generally as follows: management contracts recorded at the Merger ( 13 to 16 years); management contract acquisition costs and development commissions ( 20 to 30 years); franchise contracts recorded at the Merger ( 12 to 13 years); franchise contract acquisition costs and development commissions ( 10 to 20 years); leases ( 12 to 35 years); Hilton Honors ( 16 years); and capitalized software costs ( 3 years). In our consolidated statements of operations, the amortization of these intangible assets, excluding contract acquisition costs, is included in depreciation and amortization expense, and the amortization of contract acquisition costs is recognized as a reduction to franchise and licensing fees and base and other management fees, depending on the contract type. Costs incurred prior to the acquisition of a contract, such as external legal costs, are expensed as incurred and included in general and administrative expenses in our consolidated statements of operations. Cash flows for contract acquisition costs and development commissions are included as operating activities in our consolidated statements of cash flows, and cash flows for capitalized software costs are included as investing activities. We review all finite-lived intangible assets for impairment on an annual basis or at other times during the year when indicators of impairment exist. We perform an analysis to determine the recoverability of the asset group carrying value by comparing the expected undiscounted future cash flows to the net carrying value of the asset group. If the carrying value of the asset group is not recoverable, we recognize an impairment loss for the excess carrying value over the estimated fair value in our consolidated statements of operations. Property and Equipment Property and equipment are recorded at cost. Costs of improvements that extend the economic life or improve service potential are also capitalized. Capitalized costs are depreciated over their estimated useful lives. Costs for normal repairs and maintenance are expensed as incurred. Refer to "Leases" below for information on right-of-use ("ROU") assets of finance leases, which are included in property and equipment, net in our consolidated balance sheets. Depreciation is recorded using the straight-line method over the assets’ estimated useful lives, which are generally as follows: buildings and improvements ( 8 to 40 years), furniture and equipment ( 3 to 8 years) and computer equipment ( 3 to 5 years). Leasehold improvements are depreciated over the shorter of the estimated useful life, based on the estimates above, or the lease term. We evaluate the carrying value of our property and equipment if there are indicators of impairment and review the recoverability of the asset group by comparing the estimated future undiscounted cash flows to the net carrying value of the asset group. If the net carrying value of the asset group is determined to be less than its estimated future undiscounted cash flows and, therefore, is not considered to be recoverable and is in excess of the estimated fair value, we record an impairment loss in our consolidated statements of operations. We allocate the impairment loss related to an asset group among the various assets within the asset group pro rata based on the relative carrying value of the respective assets. If sufficient information exists to reasonably estimate the fair value of a conditional asset retirement obligation, including environmental remediation liabilities, we recognize the fair value of the obligation when the obligation is incurred, which is generally upon acquisition, construction or development or through the normal operation of the asset. 88 Leases We determine if a contract is or contains a lease at the inception of the contract, and we classify that lease as a finance lease if it meets certain criteria or as an operating lease when it does not. We reassess if a contract is or contains a leasing arrangement upon modification of the contract. For a contract, in which we are the lessee, that contains fixed payments for both lease and non-lease components, we have elected to account for the components as a single lease component, as permitted. At the commencement date of a lease, we recognize a lease liability for future fixed lease payments and a ROU asset representing our right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term. The lease term includes lessee options to extend the lease and periods occurring after a lessee early termination option, only to the extent it is reasonably certain that we will exercise such extension options and not exercise such early termination options, respectively. The future fixed lease payments are discounted using the rate implicit in the lease, if available, or our incremental borrowing rate. Current and long-term portions of operating lease liabilities are classified as accounts payable, accrued expenses and other and operating lease liabilities, respectively, and current and long-term portions of finance lease liabilities are classified as current maturities of long-term debt and long-term debt, respectively, in our consolidated balance sheets. The ROU asset is measured as the amount of the lease liability with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred by us, deferred rent and lease incentives. ROU assets of operating leases are included in operating lease right-of-use assets, and ROU assets of finance leases are included in property and equipment, net in our consolidated balance sheets. We evaluate the carrying value of ROU assets if there are indicators of impairment and review the recoverability of the related asset group by comparing the estimated future undiscounted cash flows to the net carrying value of the asset group. If the net carrying value of the asset group is determined to be less than its estimated future undiscounted cash flows and, therefore, is not considered to be recoverable and is in excess of the estimated fair value, we record an impairment loss in our consolidated statements of operations. We allocate the impairment loss related to an asset group among the various assets within the asset group pro rata based on the relative carrying value of the respective assets. Our operating leases require: (i) fixed lease payments, or minimum payments, as contractually stated in the lease agreement; (ii) variable lease payments, which, for our hotels, are generally based on a percentage of the underlying asset's revenues or profits, or are dependent on changes in an index; and/or (iii) lease payments equal to the greater of the fixed or variable lease payments. In addition, during the term of our hotel leases, we may be required to pay some, or all, of the capital costs for furniture, equipment and leasehold improvements in the hotel property. For operating leases, lease expense relating to fixed payments is recognized on a straight-line basis over the lease term, and lease expense related to variable payments is expensed as incurred, with amounts recognized in owned and leased hotel expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statements of operations. For operating leases for which the ROU asset has been impaired, the lease expense is determined as the sum of the amortization of the ROU asset remaining after impairment on a straight-line basis over the remaining term of the lease and the accretion of the lease liability based on the discount rate applied to the lease liability. For finance leases, the amortization of the asset is recognized over the shorter of the lease term or useful life of the underlying asset within depreciation and amortization expense and other expenses from managed and franchised properties in our consolidated statements of operations. The interest expense related to finance leases, including any variable lease payments, is recognized in interest expense in our consolidated statements of operations. Contract Liabilities Contract liabilities relate to: (i) advance consideration received from hotel owners at contract inception for services considered to be part of the contract's performance obligations, such as application, initiation and other fees; (ii) advance consideration received for certain indirect reimbursements, such as system implementation fees; (iii) amounts received when points are issued under Hilton Honors, but for which revenue is not yet recognized, since the related points are not yet redeemed; and (iv) a portion of the consideration received for the pre-sale of Hilton Honors points. Contract liabilities related to advance consideration received for fees and certain indirect reimbursements are recognized ratably as revenue over the term of the related contract. Contract liabilities related to amounts received for Hilton Honors are recognized as revenue when the points are redeemed for a free or discounted good or service by the Hilton Honors member. Contract liabilities related to the pre-sale of Hilton Honors points are recognized as revenue from licensing fees when the related points are issued to customers, and the remainder is recognized when customers redeem the Hilton Honors points. Contract liabilities are included in current and long-term deferred revenues in our consolidated balance sheets. 89 Hilton Honors Hilton Honors is our guest loyalty program provided to our hotel and resort properties. Nearly all of our managed, franchised, owned and leased properties participate in the Hilton Honors program. Hilton Honors members earn points based on their spend at our participating properties and through participation in affiliated partner programs. When points are earned by Hilton Honors members, they are provided with a substantive right to free or discounted goods or services in the future upon accumulation of the required level of Hilton Honors points. Points may be redeemed for the right to stay at participating properties, as well as for other goods and services from third parties, including, but not limited to, airlines, car rentals, cruises, vacation packages, shopping and dining. As points are issued to a Hilton Honors member, the property or program partner pays Hilton Honors based on an estimated cost per point for the costs of operating the program, which include marketing, promotion, communication and administrative expenses, as well as the estimated cost of award redemptions. When these payments are received we record amounts equal to the estimated cost per point of the future redemption obligation within liability for guest loyalty program and any amounts received in excess of the estimated cost per point within deferred revenues in our consolidated balance sheets. For the Hilton Honors fees that are charged to the participating properties, we allocate such fees to the substantive right created by the Hilton Honors points that are issued using the variable consideration allocation guidance, since the fees are directly related to the issuance of Hilton Honors points to the Hilton Honors member and Hilton's efforts to satisfy the future redemption of those Hilton Honors points. We engage outside actuaries to assist in determining the fair value of the future redemption obligation using statistical formulas that project future point redemptions based on factors that include historical experience, an estimate of points that will eventually be redeemed, which includes an estimate of "breakage" for points that will never be redeemed, and the cost of reimbursing properties and other third parties with respect to other redemption opportunities available to Hilton Honors members. When points are issued as a result of a stay by a Hilton Honors member at an owned or leased hotel, we recognize a reduction in owned and leased hotel revenues, since we are also the program sponsor. The transaction prices for the Hilton Honors points issued are reduced by the expected payments to the third parties that will provide the free or discounted room or service using the actuarial projection of the cost per point. The remaining transaction price is then further allocated to the points that are expected to be redeemed, adjusting the points that are issued for estimated breakage, and recognized when those points are redeemed. While the points are outstanding, both the estimate of the expected payments to third parties (cost per point) and the estimated breakage are reevaluated, and the combined estimate that yields the amount of revenue recognized when our point obligation is satisfied is adjusted so that the final amount allocated to the substantive right of the customer to use the point is reflective of the amount retained by Hilton Honors for providing the free or discounted goods and services, net of the payments to third parties and points not redeemed. During 2020, we temporarily suspended the expiration of Hilton Honors points, and, as a result, our estimates of breakage include the anticipated point expirations that will occur at the end of the suspension. We also earn licensing fees from co-branded credit card arrangements (see "Management and franchise revenues" within the "Revenue Recognition" section above). The co-branded license fee is allocated between two performance obligations based on their estimated standalone selling prices: (i) an IP license using the relief-from-royalty valuation method and (ii) substantive rights for free or discounted goods or services to the credit card customers using a cost plus method based on an evaluation of other third-party administrators. We satisfy our performance obligation related to points issued under Hilton Honors when points are redeemed for a free or discounted good or service by the Hilton Honors member, and we satisfy our remaining performance obligation related to the IP license over time as the customer simultaneously receives and consumes the benefits of the goods or services provided. Hilton Honors reimburses participating properties and applicable third parties when points are redeemed by members for stays at the participating properties or for other services from the third-party providers, at which time the redemption obligation is reduced and the related deferred revenue is recognized in other revenues from managed and franchised properties in our consolidated statements of operations. Additionally, when Hilton Honors members redeem award certificates at our owned and leased hotels, we recognize room revenue, included in owned and leased hotel revenues in our consolidated statements of operations. Fair Value Measurements – Valuation Hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (i.e., an exit price). We use the three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent 90 sources. Unobservable inputs are inputs that reflect our own assumptions about the data market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below: • Level 1 – Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. • Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurement. The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Proper classification of fair value measurements within the valuation hierarchy is considered each reporting period. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. Estimates of the fair values of our financial instruments and nonfinancial assets are determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values. We have not elected the fair value measurement option for any of our financial assets or liabilities. Derivative Instruments We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for speculative purposes. We record all derivatives at fair value. On the date the derivative contract is entered into, we may designate the derivative as one of the following: (i) a hedge of a forecasted transaction or the variability of cash flows to be paid ("cash flow hedge"); (ii) a hedge of the fair value of a recognized asset or liability ("fair value hedge") or (iii) a hedge of our investment in a foreign operation ("net investment hedge"). Changes in the fair value of a derivative that is qualified and designated as a cash flow hedge or net investment hedge are recorded in other comprehensive income (loss) in our consolidated statements of comprehensive income (loss) until they are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified and designated as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. If we do not specifically designate a derivative as one of the above, changes in the fair value of the undesignated derivative instrument are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the consolidated statements of cash flows, while cash flows from undesignated derivative financial instruments are included as an investing activity. If we determine that we qualify for and will designate a derivative as a hedging instrument, we formally document all relationships between hedging activities, including the risk management objective and strategy for undertaking various hedge transactions. This process includes matching all derivatives that are designated as cash flow hedges to specific forecasted transactions, linking all derivatives designated as fair value hedges to specific assets and liabilities in the consolidated balance sheets and determining the foreign currency exposure of the net investment of the foreign operation for a net investment hedge. We perform an initial prospective assessment of hedge effectiveness on a quantitative basis between the inception date and the earlier of the first quarterly hedge effectiveness date or the issuance of the financial statements that include the hedged transaction. On a quarterly basis, we assess the effectiveness of our designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations using the Hypothetical Derivative Method. This method compares the cumulative change in fair value of each hedging instrument to the cumulative change in fair value of a hypothetical hedging instrument, which has terms that identically match the critical terms of the respective hedged transactions. Thus, the hypothetical hedging instrument is presumed to perfectly offset the hedged cash flows. Ineffectiveness results when the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical hedging instrument. We discontinue hedge accounting prospectively when the derivative is no longer highly effective as a hedge, the underlying hedged transaction is no longer probable or the hedging instrument expires, is sold, terminated or exercised. 91 Currency Translation The U.S. dollar ("USD") is our reporting currency and is the functional currency of our entities operating in the U.S. The functional currency for our entities operating outside of the U.S. is the currency of the primary economic environment in which the respective entity operates. Assets and liabilities measured in foreign currencies are translated into USD at the prevailing exchange rates in effect as of the financial statement date and the related gains and losses, net of applicable deferred income taxes, are reflected in accumulated other comprehensive income (loss) in our consolidated balance sheets. Income and expense accounts are translated at the average foreign currency exchange rate for the period. Gains and losses from foreign currency exchange rate changes related to transactions denominated in a currency other than an entity's functional currency or intercompany receivables and payables denominated in a currency other than an entity’s functional currency that are not of a long-term investment nature are recognized within gain (loss) on foreign currency transactions in our consolidated statements of operations. Where certain specific evidence indicates intercompany receivables and payables will not be settled in the foreseeable future and are of a long-term nature, gains and losses from foreign currency exchange rate changes are recognized within other comprehensive income (loss) in our consolidated statements of comprehensive income (loss). Insurance We are self-insured for losses up to our third-party insurance deductibles for general liability, auto liability and workers' compensation at our owned, leased and managed properties that participate in our insurance programs. We are also self-insured for health coverage for the employees of our U.S. corporate operations and some managed properties. In addition, through our captive insurance subsidiary, we participate in reinsurance arrangements that provide coverage and/or act as a financial intermediary for claim payments on our self-insurance program. These obligations and reinsurance arrangements can cause timing differences in the recognition of assets, liabilities, gains and losses between reporting periods, although we expect these amounts to ultimately offset when the related claims are settled. Our insurance reserves are accrued based on our deductibles related to the estimated ultimate cost of claims that occurred during the covered period, which includes claims incurred but not reported, for which we will be responsible. These estimates are prepared with the assistance of outside actuaries and consultants. The ultimate cost of claims for a covered period are reviewed at least annually and are adjusted based on the latest information available to us, which may differ from our original estimates. Share-Based Compensation As part of the Hilton 2017 Omnibus Incentive Plan (the "2017 Plan"), we award time-vesting restricted stock units and restricted stock (collectively, "RSUs"), nonqualified stock options ("options") and performance-vesting RSUs ("performance shares") to our eligible employees: • RSUs generally vest in equal annual installments over two or three years from the date of grant. Vested RSUs generally will be settled for the Company's common stock, with the exception of certain awards that will be settled in cash. The grant date fair value per share is equal to the closing stock price on the date of grant. • Options vest over three years from the date of grant in equal annual installments and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances. The exercise price is equal to the closing stock price on the date of grant. The grant date fair value per share is estimated using the Black-Scholes-Merton option-pricing model. • Performance shares are settled at the end of the defined performance period, and the grant date fair value per share is equal to the closing stock price on the date of grant. During the year ended December 31, 2020, the terms of all outstanding performance shares were modified such that participants would receive the greater of the payout under the original award or the modified award, with the exception of certain executives who will receive the number of shares achieved under the modified award, based on the fact that the performance conditions applicable to the original awards were no longer expected to be achieved due to the significant and unforeseen challenges related to the COVID-19 pandemic. Under the terms of the original awards: (i) 50 percent of the awards are subject to achievement based on the three-year compound annual growth rate ("CAGR") of the Company's earnings before interest expense, a provision for income tax benefit (expense) and depreciation and amortization ("EBITDA") , adjusted to exclude certain items ("Adjusted EBITDA"), referred to as EBITDA CAGR, and (ii) 50 percent of the awards are subject to achievement based on the Company’s three-year free cash flow ("FCF") per share CAGR , referred to as FCF CAGR. Under the terms of the modified awards, the outstanding 2018 awards and a portion of the outstanding 2019 awards were modified to vest based on performance prior to the pandemic and continued service, and the remaining portion of the outstanding 2019 awards and the outstanding 2020 awards were converted to performance awards that will vest based 92 on new performance measures. The terms of the performance awards that will vest based on new performance measures are as follows: (i) 25 percent of the awards are subject to the Company's Adjusted EBITDA at the end of the performance period ; (ii) 25 percent of the awards are subject to the Company's FCF per share at the end of the performance period ; (iii) 25 percent of the awards are subject to the Company's three-year net unit growth ("NUG") CAGR, referred to as NUG CAGR ; and (iv) 25 percent of the awards are subject to one-year revenue per available room ("RevPAR") index growth . The total number of performance shares that vest related to each performance measure is based on an achievement factor that ranges from zero percent to 200 percent, with 100 percent being the target. For additional information on the performance share modifications, see Note 15: "Share-Based Compensation." We recognize these share-based payment transactions when services from the employees are received and recognize either a corresponding increase in additional paid-in capital or accounts payable, accrued expenses and other in our consolidated balance sheets, depending on whether the instruments granted satisfy the equity or liability classification criteria, respectively. The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation expense for an award classified as an equity instrument is recognized ratably over the requisite service period, which is the period during which an employee is required to provide service in exchange for an award. Liability awards are measured based on the award’s fair value, and the fair value is remeasured at each reporting date until the date of settlement. Compensation expense for each period until settlement is based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered as of the reporting date) in the fair value of the instrument for each reporting period for such liability awards. Compensation expense for awards with performance conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is recognized, and any previously recognized expense is reversed. Additionally, we have a retirement provision whereby we recognize total compensation expense of the awards for eligible participants through the date their awards are fully vested. We recognize forfeitures of share-based compensation awards as they occur. Share-based compensation expense is recognized in owned and leased hotel expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statements of operations. Income Taxes We account for income taxes using the asset and liability method. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and to recognize the deferred tax assets and liabilities that relate to tax consequences in future years, which result from differences between the respective tax basis of assets and liabilities and their financial reporting amounts and tax attribute carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the respective temporary differences or operating loss or tax credit carryforwards are expected to be recovered or settled. The realization of deferred tax assets and tax loss and tax credit carryforwards is contingent upon the generation of future taxable income and other restrictions that may exist under the tax laws of the jurisdiction in which a deferred tax asset exists. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. In December 2017, H.R.1, known as the Tax Cuts and Jobs Act of 2017 (the "TCJ Act"), was signed into law and included widespread changes to the Internal Revenue Code including, among other items, the creation of new taxes on certain foreign earnings. The TCJ Act subjects a U.S. stockholder to current tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. In addition, the TCJ Act provides for foreign derived intangible income ("FDII") to be taxed at a lower effective rate than the statutory rate by allowing a tax deduction against the income. We recognize the current tax on GILTI as an expense in the period the tax is incurred. We include the current tax impact of both GILTI and the FDII deduction in our effective tax rate. See Note 13: "Income Taxes" for additional information on the effects of the TCJ Act on our consolidated financial statements. We use a prescribed recognition threshold for the financial statement recognition and measurement of a tax position taken in a tax return. For all income tax positions, we first determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If it is determined that a position meets the more-likely-than-not recognition threshold, the benefit recognized in the financial statements is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. 93 Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2016-13 ("ASU 2016-13"), Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which significantly changes how entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. On January 1, 2020, we adopted ASU 2016-13, and subsequent ASUs issued to clarify its application, on a prospective basis, and recognized a $ 10 million cumulative adjustment, net of taxes, in accumulated deficit. By applying ASU 2016-13 at the adoption date, the presentation of credit losses for periods prior to January 1, 2020 remains unchanged and in accordance with Receivables (Topic 310 ). The cumulative adjustment to accumulated deficit that we recognized upon adoption of this ASU did not include the impact of the COVID-19 pandemic as a forecasted business condition. However, during the year ended December 31, 2020, we revised our expected credit loss rates from those used at adoption, primarily for our accounts receivable balances, in light of business conditions in the current environment. In particular, we considered the expected impact on our hotel owners' and customers' ability to ultimately settle receivables that are or will be due to us and recorded a related provision for credit losses of $ 76 million during the year ended December 31, 2020. Note 3: Disposal In 2019, we completed the sale of the Hilton Odawara Resort & Spa for a price of 13 billion Japanese yen (equivalent to $ 122 million as of the closing date) and subsequently entered into a 30-year management contract with the purchaser of the hotel. As a result of the sale, we recognized a pre-tax gain of $ 81 million included in gain on sale of assets, net in our consolidated statement of operations for the year ended December 31, 2019. Note 4: Revenues from Contracts with Customers Contract Liabilities The following table summarizes the activity of our contract liabilities during the year ended December 31, 2020: (in millions) Balance as of December 31, 2019 $ 1,041 Cash received in advance and not recognized as revenue (1) 803 Revenue recognized (2)(3) ( 324 ) Other (4) ( 208 ) Balance as of December 31, 2020 $ 1,312 ____________ (1) Primarily related to Hilton Honors, our guest loyalty program, including $ 636 million related the Honors Points Pre-Sale; see below for additional information. (2) Primarily includes $ 264 million related to Hilton Honors, including amounts recognized as licensing fees from co-branded credit card arrangements. (3) During the years ended December 31, 2019 and 2018, revenue recognized was $ 288 million and $ 229 million, respectively. (4) Primarily represents changes in estimated transaction prices for our performance obligations related to points issued under Hilton Honors, which had no effect on revenues. In April 2020, we pre-sold Hilton Honors points to American Express for $ 1.0 billion in cash (the "Honors Points Pre-Sale"), of which $ 636 million was recorded in deferred revenues and the remainder was recorded in liability for guest loyalty program in our consolidated balance sheet. American Express and their respective designees may use the points in connection with Hilton Honors co-branded credit cards and for promotions, rewards and incentive programs or certain other activities as they may establish or engage in from time to time. Performance Obligations As of December 31, 2020, we had deferred revenues for unsatisfied performance obligations consisting of: (i) $ 249 million related to Hilton Honors that will be recognized as revenue when the points are redeemed, which we estimate will occur over approximately the next two years ; (ii) $ 471 million related to co-branded credit card arrangements, primarily consisting of deferred revenues for the Honors Points Pre-Sale of which a portion will be recognized as revenue when points are awarded, with the remaining portion recognized as revenues when the points are redeemed; and (iii) $ 592 million related to application, initiation and other fees that is expected to be recognized as revenue over the terms of the related contracts. 94 Note 5: Consolidated Variable Interest Entities As of December 31, 2020 and 2019, we consolidated two VIEs that lease hotel properties. We consolidated these VIEs since we are the primary beneficiary, having the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our consolidated VIEs are only available to settle the obligations of the respective entities. Our consolidated balance sheets included the assets and liabilities of the VIEs that we consolidated as of the respective periods, which primarily comprised the following: December 31, 2020 2019 (in millions) Cash and cash equivalents $ 40 $ 81 Property and equipment, net 76 69 Deferred income tax assets 57 48 Other non-current assets 66 61 Accounts payable, accrued expenses and other 27 49 Long-term debt (1) 203 194 Other long-term liabilities 17 17 ____________ (1) Includes finance lease liabilities of $ 184 million and $ 177 million as of December 31, 2020 and 2019, respectively. To provide financial flexibility in response to the business disruption caused by the COVID-19 pandemic, each of our consolidated VIEs entered into a revolving credit facility during the year ended December 31, 2020. These revolving credit facilities have borrowing capacities totaling 2.75 billion Japanese yen and 2.0 billion Japanese yen (equivalent to $ 27 million and $ 19 million, respectively, as of December 31, 2020), and mature in June 2021 and August 2021, respectively. As of December 31, 2020, no amounts have been drawn under these revolving credit facilities. We did not provide any financial or other support to any consolidated VIEs that we were not previously contractually required to provide during the years ended December 31, 2020, 2019 and 2018. Note 6: Goodwill and Intangible Assets Goodwill During the year ended December 31, 2020, we recognized impairment losses of $ 104 million of goodwill, as a result of the full impairment of the goodwill attributable to our ownership reporting unit. See Note 11: "Fair Value Measurements" for additional information on the impairment analysis performed on goodwill and the resulting impairment losses recognized. Our goodwill balances, by reporting unit, were as follows: Ownership Management and Franchise Total (in millions) Balance as of December 31, 2018 $ 99 $ 5,061 $ 5,160 Foreign currency translation ( 1 ) — ( 1 ) Balance as of December 31, 2019 98 5,061 5,159 Impairment losses ( 104 ) — ( 104 ) Foreign currency translation 6 34 40 Balance as of December 31, 2020 $ — $ 5,095 $ 5,095 95 There were no accumulated impairment losses for the management and franchise reporting unit as of December 31, 2020, 2019 and 2018. The gross carrying values and accumulated impairment losses for the ownership reporting unit are as follows: Gross Carrying Value Accumulated Impairment Losses Net Carrying Value (in millions) Balance as of December 31, 2018 $ 439 $ ( 340 ) $ 99 Foreign currency translation ( 1 ) — ( 1 ) Balance as of December 31, 2019 438 ( 340 ) 98 Impairment losses ( 444 ) 340 ( 104 ) Foreign currency translation 6 — 6 Balance as of December 31, 2020 $ — $ — $ — Intangible Assets Changes to our brands intangible assets from December 31, 2019 to December 31, 2020 were due to foreign currency translations. Finite-lived intangible assets were as follows: December 31, 2020 Gross Carrying Value Accumulated Amortization Net Carrying Value (in millions) Management and franchise contracts: Management and franchise contracts recorded at Merger (1)(2) $ 317 $ ( 261 ) $ 56 Contract acquisition costs (3) 632 ( 144 ) 488 Development commissions and other 132 ( 23 ) 109 $ 1,081 $ ( 428 ) $ 653 Other intangible assets: Leases (1)(4) $ 157 $ ( 95 ) $ 62 Capitalized software costs 522 ( 378 ) 144 Hilton Honors (1) 342 ( 282 ) 60 $ 1,021 $ ( 755 ) $ 266 96 December 31, 2019 Gross Carrying Value Accumulated Amortization Net Carrying Value (in millions) Management and franchise contracts: Management and franchise contracts recorded at Merger (1) $ 2,163 $ ( 1,974 ) $ 189 Contract acquisition costs 604 ( 121 ) 483 Development commissions and other 127 ( 19 ) 108 $ 2,894 $ ( 2,114 ) $ 780 Other intangible assets: Leases (1) $ 290 $ ( 176 ) $ 114 Capitalized software costs 625 ( 399 ) 226 Hilton Honors (1) 338 ( 257 ) 81 Other (1) 34 ( 34 ) — $ 1,287 $ ( 866 ) $ 421 ____________ (1) Represents intangible assets that were initially recorded at fair value as part of the Merger. (2) During the year ended December 31, 2020, certain of the assets became fully amortized and, as a result, the gross carrying values and related accumulated amortization were written-off. (3) During the year ended December 31, 2020, we recognized impairment losses of $ 15 million, which reduced the gross carrying value and accumulated amortization by $ 18 million and $ 3 million, respectively. (4) During the year ended December 31, 2020, we recognized impairment losses of $ 46 million, which reduced the gross carrying value and accumulated amortization by $ 138 million and $ 92 million, respectively. See Note 11: "Fair Value Measurements" for additional information. Amortization of our finite-lived intangible assets was as follows: Year Ended December 31, 2020 2019 2018 (in millions) Recognized in depreciation and amortization expense (1) $ 274 $ 286 $ 271 Recognized as a reduction of franchise and licensing fees and base and other management fees 29 29 27 ____________ (1) Includes amortization expense of $ 164 million, $ 202 million and $ 204 million for the years ended December 31, 2020, 2019 and 2018, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger. We estimate future amortization of our finite-lived intangible assets as of December 31, 2020 to be as follows: Recognized in Depreciation and Amortization Expense Recognized as a Reduction of Franchise and Licensing Fees and Base and Other Management Fees Year (in millions) 2021 $ 131 $ 29 2022 96 26 2023 63 26 2024 13 26 2025 9 25 Thereafter 119 356 $ 431 $ 488 97 Note 7: Property and Equipment Property and equipment were as follows: December 31, 2020 2019 (in millions) Land $ 11 $ 11 Buildings and leasehold improvements 381 382 Furniture and equipment 346 356 Construction-in-progress 7 20 Finance lease ROU assets 87 120 832 889 Accumulated depreciation and amortization (1) ( 486 ) ( 509 ) $ 346 $ 380 ____________ (1) During the years ended December 31, 2020, 2019 and 2018, depreciation and amortization expense on property and equipment was $ 57 million, $ 60 million and $ 54 million, respectively. During the year ended December 31, 2020, we recognized $ 28 million of impairment losses related to property and equipment, including $ 4 million for finance lease ROU assets, which reduced the gross carrying value of property and equipment by $ 119 million, including finance lease ROU assets by $ 42 million, and the accumulated depreciation and amortization by $ 91 million, including finance lease ROU assets by $ 38 million. See Note 11: "Fair Value Measurements" for additional information. Note 8: Accounts Payable, Accrued Expenses and Other Accounts payable, accrued expenses and other were as follows: December 31, 2020 2019 (in millions) Accrued employee compensation and benefits $ 404 $ 554 Accounts payable 224 303 Operating lease liabilities, current 170 133 Insurance reserves, current 68 95 Other liabilities and accrued expenses (1) 436 618 $ 1,302 $ 1,703 ____________ (1) Includes deposit liabilities related to hotel operations and application fees, promotional liabilities and income taxes payable, as well as accrued expenses related to taxes, interest and other. 98 Note 9: Debt Long-term Debt Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of December 31, 2020, were as follows: December 31, 2020 2019 (in millions) Senior secured revolving credit facility with a rate of 1.15 %, due 2024 $ 1,690 $ 195 Senior secured term loan facility with a rate of 1.90 %, due 2026 2,619 2,619 Senior notes with a rate of 4.250 %, due 2024 — 1,000 Senior notes with a rate of 4.625 %, due 2025 — 900 Senior notes with a rate of 5.375 %, due 2025 500 — Senior notes with a rate of 5.125 %, due 2026 1,500 1,500 Senior notes with a rate of 4.875 %, due 2027 600 600 Senior notes with a rate of 5.750 %, due 2028 500 — Senior notes with a rate of 3.750 %, due 2029 800 — Senior notes with a rate of 4.875 %, due 2030 1,000 1,000 Senior notes with a rate of 4.000 %, due 2031 1,100 — Finance lease liabilities with a weighted average rate of 5.85 %, due 2021 to 2030 252 245 Other debt with a rate of 3.08 %, due 2026 19 17 10,580 8,076 Less: unamortized deferred financing costs and discount ( 93 ) ( 83 ) Less: current maturities of long-term debt (1) ( 56 ) ( 37 ) $ 10,431 $ 7,956 ____________ (1) Represents current maturities of finance lease liabilities. Senior Notes As part of our response to the COVID-19 pandemic, we completed financing transactions during 2020 and early 2021, in an effort to extend the maturities and reduce the interest rates of our outstanding debt, as well as to bolster liquidity and add to our available cash. In February 2021, we issued $ 1.5 billion aggregate principal amount of 3.625 % Senior Notes due 2032 and used the net proceeds from the issuance, together with available cash, to redeem all $ 1.5 billion in aggregate principal amount of our outstanding 5.125 % Senior Notes due 2026 (the "2026 Senior Notes") and to pay the related redemption premium and all related fees and expenses; see Note 22: "Subsequent Events" for additional information. In December 2020, we issued $ 800 million aggregate principal amount of 3.750 % Senior Notes due 2029 (the "2029 Senior Notes") and $ 1.1 billion aggregate principal amount of 4.000 % Senior Notes due 2031 (the "2031 Senior Notes") and incurred $ 27 million of debt issuance costs. Interest on the 2029 Senior Notes and the 2031 Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning May 1, 2021. We used the net proceeds from the issuances, together with available cash, to redeem all $ 1.0 billion in aggregate principal amount of our outstanding 4.250 % Senior Notes due 2024 and all $ 900 million in aggregate principal amount of our outstanding 4.625 % Senior Notes due 2025, plus accrued and unpaid interest. In connection with these redemptions, we paid redemption premiums totaling $ 31 million and accelerated the recognition of unamortized deferred financing costs of $ 17 million, which were both included in loss on debt extinguishments in our consolidated statement of operations for the year ended December 31, 2020. In April 2020, we issued $ 500 million aggregate principal amount of 5.375 % Senior Notes due 2025 (the " 5.375 % 2025 Senior Notes") and $ 500 million aggregate principal amount of 5.750 % Senior Notes due 2028 (the "2028 Senior Notes") and incurred $ 14 million of debt issuance costs. Interest on the 5.375 % 2025 Senior Notes and the 2028 Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning November 1, 2020. In June 2019, we issued $ 1.0 billion aggregate principal amount of 4.875 % Senior Notes due 2030. We used a portion of the net proceeds from the issuance to repay $ 500 million outstanding on our senior secured term loan facility (the "Term 99 Loans") and to repay $ 225 million outstanding under our senior secured revolving credit facility (the "Revolving Credit Facility"). See "Senior Secured Credit Facilities" below for additional information. In April 2018, we issued the 2026 Senior Notes and used the net proceeds, together with borrowings under our Revolving Credit Facility and available cash, to repurchase $ 1,171 million of shares of our common stock from HNA Tourism Group Co., Ltd and repay $ 500 million outstanding on our Term Loans. See "Senior Secured Credit Facilities" below for additional information. The 5.375 % 2025 Senior Notes, the 2026 Senior Notes, the 4.875 % Senior Notes due 2027, the 2028 Senior Notes, the 2029 Senior Notes, the 4.875 % Senior Notes due 2030 and the 2031 Senior Notes are collectively referred to as the Senior Notes and are jointly and severally guaranteed on a senior unsecured basis by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries, other than Hilton Domestic Operating Company Inc. ("HOC"), an indirect wholly owned subsidiary of the Parent, which is the issuer of all of the series of Senior Notes. Senior Secured Credit Facilities Our senior secured credit facilities consist of the $ 1.75 billion Revolving Credit Facility and the Term Loans. The obligations of our senior secured credit facilities are unconditionally and irrevocably guaranteed by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries. In March 2020, as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic, we fully drew down on our Revolving Credit Facility. As of December 31, 2020, in addition to our outstanding debt balance of $ 1.69 billion, we also had $ 60 million of letters of credit outstanding under our Revolving Credit Facility. In January 2021, we repaid $ 250 million of the outstanding balance under our Revolving Credit Facility; see Note 22: "Subsequent Events" for additional information. In addition to the repayments of the Term Loans discussed above, we repaid $ 300 million outstanding under our Term Loans in 2018. During the years ended December 31, 2019 and 2018, we recognized $ 10 million and $ 8 million, respectively, of unamortized deferred financing costs and discount and fees, as applicable, related to amendments and repayments of the Term Loans, which were included in other non-operating income (loss), net in our consolidated statements of operations. Debt Maturities The contractual maturities of our long-term debt as of December 31, 2020 were as follows: Year (in millions) 2021 $ 56 2022 29 2023 23 2024 1,713 2025 524 Thereafter 8,235 $ 10,580 100 Note 10: Other Liabilities Other long-term liabilities were as follows: December 31, 2020 2019 (in millions) Other long-term tax liabilities $ 400 $ 369 Pension obligations 143 134 Deferred employee compensation and benefits 116 118 Insurance reserves (1) 189 178 Other 141 84 $ 989 $ 883 ____________ (1) The long-term portion of obligations related to insurance claims are expected to be satisfied, on average, over the next three years . Note 11: Fair Value Measurements The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below: December 31, 2020 Hierarchy Level Carrying Value Level 1 Level 2 Level 3 (in millions) Assets: Cash equivalents $ 2,270 $ — $ 2,270 $ — Restricted cash equivalents 9 — 9 — Liabilities: Long-term debt (1) 10,216 6,366 — 4,293 Interest rate swaps 82 — 82 — December 31, 2019 Hierarchy Level Carrying Value Level 1 Level 2 Level 3 (in millions) Assets: Cash equivalents $ 117 $ — $ 117 $ — Restricted cash equivalents 32 — 32 — Liabilities: Long-term debt (1) 7,731 5,230 — 2,834 Interest rate swaps 37 — 37 — ____________ (1) The carrying values include unamortized deferred financing costs and discount. The carrying values and fair values exclude finance lease liabilities and other debt of our VIEs. We measure our interest rate swaps at fair value, which was determined using a discounted cash flow analysis that reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs of similar instruments, including interest rate curves, as applicable. Our interest rate swaps are included in other long-term liabilities in our consolidated balance sheets. Our nonfinancial assets that were measured at fair value on a non-recurring basis during the year ended December 31, 2020, and for which we recorded impairment losses, were primarily related to certain hotel properties under operating and finance leases and goodwill, all of which were part of our ownership reporting unit. See Note 6: "Goodwill and Intangible 101 Assets" and Note 12: "Leases" for additional information on these impairment losses. The fair values, which were determined using significant Level 3 unobservable inputs, were as follows: (in millions) Goodwill (1) $ — Other intangible assets, net (2) — Operating lease right-of-use assets (3) 52 Property and equipment, net (4) 9 ____________ (1) Amount was measured at December 31, 2020. (2) Amount was measured at March 31, 2020. (3) Includes $ 24 million that was measured at March 31, 2020, $ 7 million that was measured at June 30, 2020 and $ 21 million that was measured at December 31, 2020. Amounts that were remeasured are excluded from the original measurement date and are included within the measurement date of their remeasurement. Additionally, certain of these assets were fully impaired at March 31, 2020, June 30, 2020 and December 31, 2020, which were the measurement dates. (4) Includes $ 4 million that was measured at March 31, 2020 and $ 5 million that was measured at December 31, 2020. Amounts that were remeasured are excluded from the original measurement date and are included within the measurement date of their remeasurement. Additionally, certain of these assets were fully impaired at March 31, 2020 and September 30, 2020, which were the measurement dates. The prolonged effects of the COVID-19 pandemic resulting from extended travel restrictions and continued declines in demand, including the re-emergence of government travel restrictions and hotel suspensions in late 2020, continued to adversely affect our expected future cash flows, most significantly for our ownership reporting unit, which includes hotel leases, many with fixed rent, and for which we are typically responsible for funding hotel operating losses. This caused us to reevaluate the cost structures for our lease agreements, including fixed rent terms, and the future operations of our ownership reporting unit. As such, during the fourth quarter of 2020, we performed a quantitative analysis of goodwill for potential impairment and we fully impaired the goodwill attributable to our ownership reporting unit by recognizing impairment losses of $ 104 million during the year ended December 31, 2020. We estimated the fair value of the reporting unit using discounted cash flow analyses, which included an estimate of the impact of the COVID-19 pandemic on the reporting unit's expected future cash flows, a stabilized growth rate of 2.5 percent after recovery and the present value of the reporting unit's terminal value. A discount rate of 12.0 percent was used for the fair value of the ownership reporting unit, which reflects a market rate of return. We recognized impairment losses related to certain hotel properties under operating and finance leases during each reporting period in 2020 as short-term expected results for certain leased hotels declined from estimates used in the previous period's assessment of recoverability, generally due to extensions of government restrictions and additional visibility into expected hotel customer engagement at such properties. We assessed recoverability of any related lease intangible asset, operating and finance lease ROU asset and property and equipment using estimates of undiscounted net cash flows, and concluded that the carrying values of the assets for these certain hotels were not fully recoverable. We then estimated the fair value of these assets using discounted cash flow analyses. Both our undiscounted cash flow estimates used for assessment of recoverability and our discounted cash flows included an estimate of the impact of the COVID-19 pandemic on each leased property based on the expected recovery term. The stabilized growth rates after recovery and discount rates used for the fair value of the assets reflect the risk profile of the underlying cash flows and the individual markets where the assets are located, and are not necessarily indicative of our hotel portfolio as a whole. Estimations of stabilized growth rates after the recovery period ranged from 1.7 percent to 4.8 percent , and discount rates ranged from 7.0 percent to 12.0 percent , with the weighted average, based on relative impairment losses, for both inputs being at the lower end of each of the ranges. As a result of these non-recurring fair value measurements, we recognized impairment losses on these assets of $ 139 million during the year ended December 31, 2020. The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of December 31, 2020 and 2019. Note 12: Leases We lease hotel properties, land, corporate office space and equipment used at hotels and corporate offices, with our most significant lease liabilities related to hotel properties. As of December 31, 2020, we leased 48 hotels under operating leases and six hotels under finance leases, two of which were the liabilities of consolidated VIEs and were non-recourse to us. Our hotel leases expire at various dates, with varying renewal and termination options. 102 During the year ended December 31, 2020, we recognized $ 65 million and $ 4 million of impairment losses related to certain operating lease and finance lease ROU assets, respectively; see Note 11: "Fair Value Measurements" for additional information. Supplemental balance sheet information related to leases was as follows: December 31, 2020 2019 (dollars in millions) Operating leases: Operating lease right-of-use assets $ 772 $ 867 Accounts payable, accrued expenses and other 170 133 Operating lease liabilities 971 1,037 Finance leases: Property and equipment, net $ 40 $ 52 Current maturities of long-term debt 56 37 Long-term debt 196 208 Weighted average remaining lease term: Operating leases 12.3 years 12.8 years Finance leases 7.8 years 8.6 years Weighted average discount rate: Operating leases 3.82 % 3.76 % Finance leases 5.85 % 5.83 % The components of lease expense were as follows: Year Ended December 31, 2020 2019 (in millions) Operating lease expense for fixed payments $ 129 $ 144 Finance lease expense: Amortization of ROU assets 26 30 Interest on lease liabilities 14 14 Variable lease expense (1) 17 168 ____________ (1) Includes amounts related to variable operating lease terms and interest payments on finance leases. Lease expense for our operating leases for the year ended December 31, 2018 included $ 225 million of fixed lease expense and $ 142 million of variable lease expense. Supplemental cash flow information related to leases was as follows: Year Ended December 31, 2020 2019 (in millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 149 $ 187 Financing cash flows from finance leases 26 42 ROU assets obtained in exchange for lease liabilities in non-cash transactions: Operating leases 33 48 Finance leases 20 61 103 Our future minimum lease payments as of December 31, 2020 were as follows: Operating Leases Finance Leases Year (in millions) 2021 $ 210 $ 68 2022 156 42 2023 140 33 2024 118 31 2025 117 32 Thereafter 724 111 Total minimum lease payments 1,465 317 Less: imputed interest ( 324 ) ( 65 ) Total lease liabilities $ 1,141 $ 252 Note 13: Income Taxes Income Tax Provision (Benefit) Our income tax provision (benefit) includes federal, state and foreign income taxes payable. The domestic and foreign components of income (loss) before income taxes were as follows: Year Ended December 31, 2020 2019 2018 (in millions) U.S. income (loss) before tax $ ( 267 ) $ 867 $ 881 Foreign income (loss) before tax ( 657 ) 377 197 Income (loss) before income taxes $ ( 924 ) $ 1,244 $ 1,078 The components of our provision (benefit) for income taxes were as follows: Year Ended December 31, 2020 2019 2018 (in millions) Current: Federal $ ( 6 ) $ 190 $ 210 State ( 32 ) 60 53 Foreign 69 128 60 Total current 31 378 323 Deferred: Federal ( 102 ) ( 61 ) ( 52 ) State ( 34 ) ( 5 ) ( 14 ) Foreign ( 99 ) 46 52 Total deferred ( 235 ) ( 20 ) ( 14 ) Total provision (benefit) for income taxes $ ( 204 ) $ 358 $ 309 104 Reconciliations of our tax provision (benefit) at the U.S. statutory rate to the provision (benefit) for income taxes were as follows: Year Ended December 31, 2020 2019 2018 (in millions) Statutory U.S. federal income tax provision (benefit) $ ( 194 ) $ 261 $ 226 State income taxes, net of U.S. federal income tax benefit ( 24 ) 47 37 Impact of foreign operations ( 106 ) 31 26 Goodwill impairment losses 22 — — Tax rate differential on U.S. federal net operating loss carryback ( 14 ) — — Changes in deferred tax asset valuation allowances 116 13 ( 6 ) Provision for uncertain tax positions 7 16 16 Effects of the TCJ Act — — 13 Corporate restructuring — — 9 Other, net ( 11 ) ( 10 ) ( 12 ) Provision (benefit) for income taxes $ ( 204 ) $ 358 $ 309 Corporate Restructuring During the year ended December 31, 2018, our controlled foreign corporations ("CFC") distributed the stock of certain subsidiaries (the "Distributions"). Subsequent to the Distributions, the distributed subsidiaries were included in our U.S. federal and state income tax filings. As a result of the Distributions, we incurred deferred income tax expense of $ 9 million for the year ended December 31, 2018, including: (i) recording U.S. deferred tax liabilities related to the distributed subsidiaries of $ 12 million and (ii) remeasuring our existing deferred tax assets and liabilities and other tax liabilities at the effective tax rates at which they will reverse in future periods, resulting in a reduction of liabilities of $ 3 million. Tax Cuts and Jobs Act of 2017 During the year ended December 31, 2018, we made adjustments to provisional amounts that were recorded for the TCJ Act as of December 31, 2017, which included a tax benefit of $ 10 million related to the remeasurement of U.S. deferred tax assets and liabilities, a tax benefit of $ 2 million related to the transition tax applied to foreign earnings and $ 31 million of deferred tax liabilities related to CFC outside basis. All adjustment amounts were recognized in income tax expense during the year ended December 31, 2018, and our accounting for the effects of the TCJ Act was complete as of December 31, 2018. 105 Deferred Income Taxes Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items. The tax effects of the temporary differences and carryforwards that give rise to our net deferred taxes were as follows: December 31, 2020 2019 (in millions) Deferred tax assets: Net tax loss carryforwards and carrybacks $ 593 $ 386 Compensation 135 138 Reserves 71 33 Operating and finance lease liabilities 382 404 Deferred income 271 260 Foreign tax credit carryforwards 48 49 Other 153 51 Total gross deferred tax assets 1,653 1,321 Less: valuation allowance ( 654 ) ( 501 ) Deferred tax assets 999 820 Deferred tax liabilities: Brands ( 1,147 ) ( 1,133 ) Finite-lived intangible assets ( 74 ) ( 140 ) Investment in foreign subsidiaries ( 26 ) ( 32 ) Operating and finance lease ROU assets ( 207 ) ( 210 ) Deferred tax liabilities ( 1,454 ) ( 1,515 ) Net deferred taxes $ ( 455 ) $ ( 695 ) As of December 31, 2020, we had: (i) a consolidated federal net operating loss carryback of $ 102 million, which resulted in deferred tax assets of $ 36 million; (ii) state net operating loss carryforwards and carrybacks of $ 27 million, which resulted in deferred tax assets of $ 2 million; (iii) separate return limitation year loss carryforwards of $ 125 million, which resulted in federal deferred tax assets of $ 25 million and state deferred tax assets of $ 6 million; and (iv) foreign net operating loss carryforwards and carrybacks of $ 2.1 billion and other foreign tax loss carryforwards of $ 101 million, resulting in deferred tax assets of $ 502 million and $ 22 million, respectively. Approximately $ 36 million of our deferred tax assets as of December 31, 2020 related to net operating loss carryforwards that will expire between 2021 and 2040 with less than $1 million of that amount expiring in 2021. Approximately $ 504 million of our deferred tax assets as of December 31, 2020 resulted from net operating loss carryforwards that are not subject to expiration. Approximately $ 53 million of our deferred tax assets as of December 31, 2020 resulted from other tax loss carryforwards that are not subject to expiration. We believe that it is more likely than not that the benefit from certain federal, state and foreign tax loss carryforwards will not be realized. In recognition of this assessment, we provided a valuation allowance of $ 451 million as of December 31, 2020 on the deferred tax assets relating to these tax loss carryforwards. During the year ended December 31, 2020, we generated net operating losses in various jurisdictions and recorded a deferred tax benefit of $ 157 million for net operating losses, reduced by valuation allowances of $ 31 million, which resulted in a net deferred tax benefit of $ 126 million. We have also provided valuation allowances of $ 62 million on other deferred tax assets generated during the year. These losses have also caused a change in the expected realizability of existing deferred tax assets and, as a result, we have provided valuation allowances of $ 23 million on deferred tax assets that existed at the beginning of the year. Management determined whether we were more likely than not to realize the benefit of these assets by considering all available positive and negative evidence to determine whether sufficient future taxable income will be generated to permit the use of the deferred tax assets. Additionally, revaluations of certain existing deferred tax assets and their associated valuation allowances due to tax rate changes, foreign currency exchange rate changes and other changes resulted in no net income tax expense or benefit in the current year, but increased total valuation allowances by $ 37 million. Overall, our total valuation allowance increased by $ 153 million during the year ended December 31, 2020. Tax Uncertainties We file income tax returns, including returns for our subsidiaries, with federal, state, local and foreign tax jurisdictions. We are under regular and recurring audit by the Internal Revenue Service ("IRS") and other taxing authorities on open tax positions. 106 The timing of the resolution of tax audits is highly uncertain, as are the amounts, if any, that may ultimately be paid upon such resolution. Changes may result from the conclusion of ongoing audits, appeals or litigation in federal, state, local and foreign tax jurisdictions or from the resolution of various proceedings between the U.S. and foreign tax authorities. As of December 31, 2020, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2019 and foreign examinations of our income tax returns for tax years from 1996 through 2019. Reconciliations of the beginning and ending amounts of unrecognized tax benefits were as follows: Year Ended December 31, 2020 2019 2018 (in millions) Balance at beginning of year $ 395 $ 318 $ 283 Additions for tax positions related to prior years 45 67 37 Additions for tax positions related to the current year 56 13 16 Reductions for tax positions related to prior years ( 13 ) ( 3 ) ( 15 ) Settlements ( 37 ) 1 — Lapse of statute of limitations ( 1 ) ( 2 ) ( 3 ) Currency translation adjustment 6 1 — Balance at end of year $ 451 $ 395 $ 318 The changes to our unrecognized tax benefits during the year ended December 31, 2020 primarily related to uncertainty regarding prior year income tax returns in certain foreign jurisdictions where we operate, as well as the addition of reserves related to Hilton Honors. These changes were partially offset by reductions and settlements, primarily relating to the conclusion of certain state audits. The changes to our unrecognized tax benefits during the year ended December 31, 2019 were primarily related to uncertainty regarding affirmative refund claims submitted to the IRS during 2019, as well as the addition of reserves related to Hilton Honors. The changes to our unrecognized tax benefits during the year ended December 31, 2018 were primarily related to uncertainty regarding the calculations of tax deductions claimed in income tax returns filed during the year, as well as the addition of reserves related to Hilton Honors. We recognize interest and penalties accrued related to uncertain tax positions in income tax benefit (expense) in our consolidated statements of operations. During the years ended December 31, 2020, 2019 and 2018, we recognized income tax expense related to interest and penalties of $ 13 million, $ 12 million and $ 6 million, respectively, in our consolidated statements of operations. As of December 31, 2020 and 2019, we had accrued approximately $ 65 million and $ 52 million, respectively, for interest and penalties related to our unrecognized tax benefits in our consolidated balance sheets. Included in the balances of unrecognized tax benefits as of December 31, 2020 and 2019 were $ 400 million and $ 380 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective income tax rate. As a result of the expected resolution of examination issues with federal, state and foreign tax authorities, we believe it is reasonably possible that during the next 12 months, the amount of unrecognized tax benefits will decrease by up to $ 82 million. In prior periods, we received 30-day Letters from the IRS and the Revenue Agents Report ("RARs") for the 2006 through the 2013 tax years. We disagreed with several of the proposed adjustments in the RARs and filed formal appeals protests with the IRS. The issues being protested in appeals relate to assertions by the IRS that: (i) certain foreign currency denominated intercompany loans from our foreign subsidiaries to certain U.S. subsidiaries should be recharacterized as equity for U.S. federal income tax purposes and constitute deemed dividends from such foreign subsidiaries to our U.S. subsidiaries and (ii) in calculating the amount of U.S. taxable income resulting from Hilton Honors, we should not reduce gross income by the estimated costs of future redemptions, but rather such costs would be deductible at the time the points are redeemed. The unsettled proposed adjustments sought by the IRS for the tax years with open audits would result in additional U.S. federal tax owed of approximately $ 817 million, excluding interest and penalties and potential state income taxes. The portion of this amount related to Hilton Honors would result in a decrease to our future tax liability when the points are redeemed. We disagree with the IRS's position on each of these assertions and intend to vigorously contest them. However, based on continuing appeals process discussions with the IRS, we believe that it is more likely than not that we will not recognize the full benefit related to certain of the issues being appealed. Accordingly, as of December 31, 2020, we had recorded $ 97 million of unrecognized tax benefits related to these issues. 107 Note 14: Employee Benefit Plans We sponsor multiple domestic and international employee benefit plans (the "pension plans"), and the benefits are based upon years of service and compensation. The employee benefit plan in the U.S. (the "Domestic Plan") covers certain employees not earning union benefits. This plan was frozen for participant benefit accruals in 1996; therefore, the projected benefit obligation is equal to the accumulated benefit obligation. The plan assets will be used to pay benefits due to employees for service through December 31, 1996. Since employees have not accrued additional benefits from that time, we do not utilize salary or pension inflation assumptions in calculating our benefit obligation for the Domestic Plan. The annual measurement date for the Domestic Plan is December 31. The employee benefit plans covering many of our international employees include: (i) a plan that covers workers in the United Kingdom (the "U.K. Plan"), which was frozen to further service accruals in 2013 and (ii) a number of smaller plans that cover workers in various countries around the world (the "International Plans"). The annual measurement date for all of these plans is December 31. We are required to recognize the funded status of our pension plans, which is the difference between the fair value of plan assets and the projected benefit obligations, in our consolidated balance sheets and make corresponding adjustments for changes in the value through accumulated other comprehensive income (loss), net of taxes. The following table presents the projected benefit obligation, fair value of plan assets, funded status and accumulated benefit obligation for the Domestic Plan, the U.K. Plan and the International Plans: Domestic Plan U.K. Plan International Plans 2020 2019 2020 2019 2020 2019 (in millions) Change in Projected Benefit Obligation: Benefit obligation at beginning of year $ 382 $ 357 $ 445 $ 375 $ 87 $ 83 Service cost — — 3 2 1 1 Interest cost 10 14 8 10 2 2 Prior service credit (1) — — — ( 3 ) — — Actuarial loss 31 37 78 62 2 6 Settlements and curtailments ( 1 ) ( 2 ) — — — ( 1 ) Effect of foreign currency exchange rates — — 22 13 3 — Benefits paid ( 23 ) ( 24 ) ( 15 ) ( 14 ) ( 5 ) ( 4 ) Benefit obligation at end of year $ 399 $ 382 $ 541 $ 445 $ 90 $ 87 Change in Plan Assets: Fair value of plan assets at beginning of year $ 318 $ 274 $ 404 $ 340 $ 68 $ 63 Actual return on plan assets, net of expenses 41 53 66 57 3 6 Employer contributions 8 17 10 9 2 4 Settlements ( 1 ) ( 2 ) — — — ( 1 ) Effect of foreign currency exchange rates — — 20 12 2 — Benefits paid ( 23 ) ( 24 ) ( 15 ) ( 14 ) ( 5 ) ( 4 ) Fair value of plan assets at end of year 343 318 485 404 70 68 Funded status at end of year (underfunded) ( 56 ) ( 64 ) ( 56 ) ( 41 ) ( 20 ) ( 19 ) Accumulated benefit obligation $ 399 $ 382 $ 541 $ 445 $ 90 $ 87 ____________ (1) Relates to U.K. pension equalization requirements. 108 Amounts recognized in the consolidated balance sheets consisted of the following: Domestic Plan U.K. Plan International Plans 2020 2019 2020 2019 2020 2019 (in millions) Other non-current assets $ — $ — $ — $ — $ 11 $ 10 Other liabilities ( 56 ) ( 64 ) ( 56 ) ( 41 ) ( 31 ) ( 29 ) Net amount recognized $ ( 56 ) $ ( 64 ) $ ( 56 ) $ ( 41 ) $ ( 20 ) $ ( 19 ) Amounts recognized in accumulated other comprehensive loss consisted of the following: Domestic Plan U.K. Plan International Plans 2020 2019 2018 2020 2019 2018 2020 2019 2018 (in millions) Net actuarial loss (gain) $ 4 $ ( 3 ) $ 22 $ 41 $ 29 $ ( 14 ) $ 3 $ 3 $ 3 Prior service cost (credit) ( 4 ) ( 4 ) ( 4 ) — ( 3 ) 4 — — — Amortization of net loss ( 4 ) ( 3 ) ( 3 ) ( 4 ) ( 3 ) ( 4 ) ( 1 ) ( 1 ) ( 1 ) Net amount recognized $ ( 4 ) $ ( 10 ) $ 15 $ 37 $ 23 $ ( 14 ) $ 2 $ 2 $ 2 The net periodic pension cost (credit) was as follows: Domestic Plan U.K. Plan International Plans 2020 2019 2018 2020 2019 2018 2020 2019 2018 (in millions) Service cost $ 3 $ 6 $ 6 $ 3 $ 2 $ 3 $ 1 $ 2 $ 2 Interest cost 10 14 12 8 10 9 2 2 2 Expected return on plan assets ( 17 ) ( 19 ) ( 19 ) ( 20 ) ( 19 ) ( 21 ) ( 3 ) ( 3 ) ( 3 ) Amortization of prior service cost 4 4 3 — — — — — — Amortization of net loss 4 3 3 4 3 4 1 1 1 Net periodic pension cost (credit) $ 4 $ 8 $ 5 $ ( 5 ) $ ( 4 ) $ ( 5 ) $ 1 $ 2 $ 2 The weighted-average assumptions used to determine benefit obligations were as follows: Domestic Plan U.K. Plan International Plans 2020 2019 2020 2019 2020 2019 Discount rate 2.4 % 3.2 % 1.3 % 2.1 % 1.8 % 2.2 % Salary inflation N/A N/A 2.1 1.6 2.2 2.2 Pension inflation N/A N/A 2.7 2.8 1.8 1.9 The weighted-average assumptions used to determine net periodic pension cost (credit) were as follows: Domestic Plan U.K. Plan International Plans 2020 2019 2018 2020 2019 2018 2020 2019 2018 Discount rate 3.2 % 4.3 % 3.6 % 2.1 % 3.1 % 2.6 % 2.0 % 3.1 % 2.9 % Expected return on plan assets 6.3 7.0 7.0 5.0 5.5 5.5 2.7 4.3 4.6 Salary inflation N/A N/A N/A 1.6 1.8 1.8 2.2 2.2 2.2 Pension inflation N/A N/A N/A 2.8 3.0 3.0 1.9 1.8 1.8 The investment objectives for the various plans are preservation of capital, current income and long-term growth of capital. All plan assets are managed by outside investment managers and do not include investments in Hilton stock. Asset allocations are reviewed periodically by the investment managers. Expected long-term returns on plan assets are determined using historical performance for debt and equity securities held by our plans, actual performance of plan assets and current and expected market conditions. Expected returns are formulated 109 based on the target asset allocation. The target asset allocation for the Domestic Plan, as a percentage of total plan assets, as of December 31, 2020 and 2019, was 80 percent in funds that invest in equity securities and 20 percent in funds that invest in debt securities. The target asset allocation for the U.K. Plan and the International Plans, as a percentage of total plan assets, as of December 31, 2020 and 2019, was 75 percent in funds that invest in equity and debt securities and 25 percent in bond funds. The following tables present the fair value hierarchy of total plan assets measured at fair value by asset category: December 31, 2020 Domestic Plan U.K. Plan International Plans (in millions) Level 1 Cash and cash equivalents $ — $ 45 $ 12 Equity funds — 75 3 Bond funds 2 43 — Alternative investments — 105 — Level 2 Equity funds — — 4 Bond funds — — 6 Net asset value (1) Bond funds — 74 — Common collective trusts 341 — 45 Alternative investments — 87 — Other — 56 — $ 343 $ 485 $ 70 December 31, 2019 Domestic Plan U.K. Plan International Plans (in millions) Level 1 Cash and cash equivalents $ — $ 25 $ 12 Equity funds — 61 2 Bond funds 2 40 — Alternative investments — 169 — Level 2 Equity funds — — 4 Bond funds — — 6 Net asset value (1) Bond funds — 54 — Common collective trusts 316 — 44 Other — 55 — $ 318 $ 404 $ 68 ____________ (1) Certain investments are measured at net asset value per share as a practical expedient and, therefore, have not been classified in the fair value hierarchy . We expect to contribute approximately $ 15 million, $ 10 million and $ 3 million to the Domestic Plan, the U.K. Plan and the International Plans, respectively, in 2021. 110 As of December 31, 2020, the benefits expected to be paid in the next five years and in the aggregate for the five years thereafter were as follows: Domestic Plan U.K. Plan International Plans Year (in millions) 2021 $ 33 $ 15 $ 13 2022 26 16 6 2023 26 16 6 2024 26 17 6 2025 26 17 5 2026-2030 118 88 26 $ 255 $ 169 $ 62 In January 2007, the Domestic Plan and plans maintained for certain domestic hotels currently or formerly managed by us were merged into a multiple employer plan. As of December 31, 2020 and 2019, the multiple employer plan had combined plan assets of $ 372 million and $ 345 million, respectively, and a projected benefit obligation of $ 426 million and $ 407 million, respectively. We also have various employee defined contribution investment plans whereby we contribute matching percentages of employee contributions. The aggregate expense under these plans totaled $ 16 million, $ 17 million and $ 16 million for the years ended December 31, 2020, 2019 and 2018, respectively. Note 15: Share-Based Compensation We recognized share-based compensation expense of $ 97 million, $ 154 million and $ 127 million during the years ended December 31, 2020, 2019 and 2018, respective ly, which included amounts reimbursed by hotel owners. The total tax benefit recognized related to share-based compensation expense was $ 35 million , $ 41 million and $ 42 million for the years ended December 31, 2020, 2019 and 2018, respectively . As of December 31, 2020 and 2019, we ac cr ued $ 12 million and $ 16 million, respectively, in accounts payable, accrued expenses and other in our consolidated balance sheets for certain awards settled in cash. The expense recognized for the year ended December 31, 2020 includes the expense recognized as a result of the modifications of our awards with performance conditions, as described in further detail below, and is net of the reversal of expenses recognized in prior periods for certain of the performance awards, as a result of the determination that they were no longer probable of achievement, prior to the modifications. As of December 31, 2020, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 136 million, which are expected to be recognized over a weighted-average period of 1.6 years on a straight-line basis. As of December 31, 2020, there were 12.9 million shares of common stock available for future issuance under the 2017 Plan, plus any shares subject to awards outstanding under the 2013 Omnibus Incentive Plan, which will become available for issuance under the 2017 Plan if such outstanding awards expire or are terminated or are canceled or forfeited. RSUs The following table provides information about our RSU grants: Year Ended December 31, 2020 2019 2018 Number of shares granted (in thousands) 942 963 912 Weighted average grant date fair value per share $ 93.48 $ 83.47 $ 79.31 Aggregate intrinsic value of shares vested (in millions) $ 97 $ 92 $ 123 111 The following table summarizes the activity of our RSUs during the year ended December 31, 2020: Number of Shares Weighted Average Grant Date Fair Value per Share (in thousands) Outstanding as of December 31, 2019 1,780 $ 77.35 Granted 942 93.48 Vested ( 984 ) 74.42 Forfeited ( 245 ) 86.99 Outstanding as of December 31, 2020 1,493 88.55 Options The following table provides information about our option grants: Year Ended December 31, 2020 2019 2018 (in thousands, except per share data) Number of options granted 755 758 612 Weighted average exercise price per share $ 93.33 $ 83.11 $ 79.36 Weighted average grant date fair value per share $ 21.47 $ 21.08 $ 23.72 The weighted average grant date fair value per share of each of these option grants was determined using the Black-Scholes-Merton option-pricing model with the following assumptions: Year Ended December 31, 2020 2019 2018 Expected volatility (1) 23.69 % 23.51 % 27.91 % Dividend yield (2) 0.55 % 0.81 % 0.74 % Risk-free rate (3) 0.96 % 2.47 % 2.73 % Expected term (in years) (4) 6.0 6.0 6.0 ____________ (1) Estimated using historical movement of Hilton's stock price . (2) Estimated based on the quarterly dividend and the three-month average stock price at the date of grant. (3) Based on the yields of U.S. Department of Treasury instruments with similar expected lives. (4) Estimated using the average of the vesting periods and the contractual terms of the options. The following table summarizes the activity of our options during the year ended December 31, 2020: Number of Shares Weighted Average Exercise Price per Share (in thousands) Outstanding as of December 31, 2019 2,828 $ 65.72 Granted 755 93.33 Exercised ( 355 ) 60.09 Forfeited ( 201 ) 86.55 Outstanding as of December 31, 2020 (1) 3,027 71.88 Exercisable as of December 31, 2020 (2) 1,764 60.31 ____________ (1) The aggregate intrinsic value was $ 107 million and the weighted average remaining contractual term was 7.0 years. (2) The aggregate intrinsic value was $ 83 million and the weighted average remaining contractual term was 5.8 years . 112 Performance Shares In December 2020, we modified our outstanding performance shares in response to the COVID-19 pandemic and its negative impact on the hospitality industry and, ultimately, the Company's performance. The modifications were structured to reward for results achieved prior to the COVID-19 pandemic, retain senior business leaders and incentivize for the recovery efforts via metrics most meaningful in assessing our performance during our recovery from the negative impact of the pandemic. Under the modified terms, which include new performance measures, eligible employees will receive the greater of the shares achieved based on the original or the modified terms, with the exception of certain executives who will receive the number of shares achieved under the modified terms. The modified terms did not change the vesting schedules of the original awards. A total of 1,020,000 performance shares were modified, including 392,000 from the 2018 grant, 340,000 from the 2019 grant and 288,000 from the 2020 grant, with a modification date fair value per share of $ 102.95 . Under the modified terms, a portion of the awards vests based on service conditions and the remaining portion of the awards were equally distributed to vest based on four new performance measures. As of December 31, 2020, these four new performance measures were probable of achievement and we recognized $ 44 million of compensation expense during the year ended December 31, 2020 based on the target achievement percentage. Further, we expect to recognize $ 62 million of additional expense from the modifications over the remaining terms of the awards. See Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" for additional information regarding the performance measures of the original grants and the new performance measures under the modified terms. The following table provides information about our original performance share grants: Year Ended December 31, 2020 2019 2018 (1) EBITDA CAGR: Number of shares granted (in thousands) 174 192 183 Weighted average grant date fair value per share $ 93.33 $ 83.11 $ 79.36 Aggregate intrinsic value of shares vested (in millions) $ 29 $ — $ — FCF CAGR: Number of shares granted (in thousands) 174 192 183 Weighted average grant date fair value per share $ 93.33 $ 83.11 $ 79.36 Aggregate intrinsic value of shares vested (in millions) 29 $ — $ — ____________ (1) The aggregate intrinsic value of performance shares vested was less than $1 million . The following table summarizes the activity of our performance shares during the year ended December 31, 2020: EBITDA CAGR (1) FCF CAGR (1) Number of Shares Weighted Average Grant Date Fair Value per Share Number of Shares Weighted Average Grant Date Fair Value per Share (in thousands) (in thousands) Outstanding as of December 31, 2019 527 $ 74.46 527 $ 74.46 Granted 174 93.33 174 93.33 Performance achievement share adjustments (2) 218 64.29 218 64.29 Vested ( 316 ) 58.45 ( 316 ) 58.45 Forfeited ( 93 ) 84.78 ( 93 ) 84.78 Outstanding as of December 31, 2020 510 84.57 510 84.57 ____________ (1) This performance measure relates to the original awards and, as discussed above and in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies," we modified our outstanding performance awards in December 2020 whereby the achievement for the performance-based portion of our outstanding awards will be measured under four new performance measures, which include: (i) Adjusted EBITDA, (ii) FCF per share, (iii) NUG CAGR and (iv) RevPAR index growth. (2) Reflects the number of shares achieved above target, based on actual performance, and includes the effect of the modifications; see above for further information. 113 Note 16: Earnings (Loss) Per Share The following table presents the calculation of basic and diluted earnings (loss) per share ("EPS"): Year Ended December 31, 2020 2019 2018 (in millions, except per share amounts) Basic EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ ( 715 ) $ 881 $ 764 Denominator: Weighted average shares outstanding 277 287 302 Basic EPS $ ( 2.58 ) $ 3.07 $ 2.53 Diluted EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ ( 715 ) $ 881 $ 764 Denominator: Weighted average shares outstanding (1) 279 290 305 Diluted EPS $ ( 2.56 ) $ 3.04 $ 2.50 ____________ (1) Approximately 2 million , 1 million and 1 million share-based compensation awards were excluded from the computation of diluted EPS for the years ended December 31, 2020, 2019 and 2018, respectively, because their effect would have been anti-dilutive under the treasury stock method. Note 17: Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, net of taxes, were as follows: Currency Translation Adjustment (1) Pension Liability Adjustment (2) Cash Flow Hedge Adjustment (3) Total (in millions) Balance as of December 31, 2017 $ ( 513 ) $ ( 229 ) $ 1 $ ( 741 ) Other comprehensive income (loss) before reclassifications ( 70 ) ( 18 ) 17 ( 71 ) Amounts reclassified from accumulated other comprehensive loss — 9 5 14 Net current period other comprehensive income (loss) ( 70 ) ( 9 ) 22 ( 57 ) Cumulative effect of the adoption of ASU 2018-02 38 ( 22 ) — 16 Balance as of December 31, 2018 ( 545 ) ( 260 ) 23 ( 782 ) Other comprehensive loss before reclassifications ( 5 ) ( 17 ) ( 35 ) ( 57 ) Amounts reclassified from accumulated other comprehensive loss 1 8 ( 10 ) ( 1 ) Net current period other comprehensive loss ( 4 ) ( 9 ) ( 45 ) ( 58 ) Balance as of December 31, 2019 ( 549 ) ( 269 ) ( 22 ) ( 840 ) Other comprehensive income (loss) before reclassifications 33 ( 30 ) ( 46 ) ( 43 ) Amounts reclassified from accumulated other comprehensive loss 5 10 8 23 Net current period other comprehensive income (loss) 38 ( 20 ) ( 38 ) ( 20 ) Balance as of December 31, 2020 $ ( 511 ) $ ( 289 ) $ ( 60 ) $ ( 860 ) ____________ (1) Includes net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature. Amounts reclassified related to the liquidation of investments in foreign entities and were recognized in loss on foreign currency transactions in our consolidated statements of operations. (2) Amounts reclassified related to the amortization of prior service costs and amortization of net loss and were recognized in other non-operating income (loss), net in our consolidated statements of operations. (3) Amounts reclassified related to interest rate swaps, including interest rate swaps that were dedesignated and subsequently settled, and forward contracts that hedge our foreign currency denominated fees and were recognized in interest expense and franchise and licensing fees, base and other management fees and other revenues from managed and franchised properties, respectively, in our consolidated statements of operations. Note 18: Business Segments We are a hospitality company with operations organized in two distinct operating segments: (i) management and franchise and (ii) ownership. These segments are managed and reported separately because of their distinct economic characteristics. 114 The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels that license our brands and where we provide other prescribed services, but where the day-to-day services of the hotels are operated or managed by someone other than us. This segment also earns licensing fees from HGV and strategic partnerships, including co-branded credit card arrangements, for the right to use certain Hilton marks and IP, as well as fees for managing properties in our ownership segment. As of December 31, 2020, this segment included 715 managed hotels and 5,646 franchised hotels consisting of 990,857 total rooms. As a result of the COVID-19 pandemic, approximately 1,245 hotels in our management and franchise segment had temporarily suspended operations at some point in time during the year ended December 31, 2020, of which, all but approximately 220 had reopened as of December 31, 2020. As of December 31, 2020, our ownership segment included 61 properties totaling 19,400 rooms. The segment comprised 53 hotels that we wholly owned or leased, one hotel owned by a consolidated non-wholly owned entity, two hotels leased by consolidated VIEs and five hotels owned or leased by unconsolidated affiliates. As a result of the COVID-19 pandemic, approximately 35 hotels in our ownership segment, the majority of which are located in Europe, had temporarily suspended operations at some point in time during the year ended December 31, 2020. Although all of these hotels had reopened at some point during the year, additional and reinstated restrictions in Europe during the fourth quarter of 2020, resulted in the re-suspension of operations at approximately 10 of these hotels. The performance of our operating segments is evaluated primarily on operating income (loss), without allocating other revenues and expenses or general and administrative expenses. The following table presents revenues for our reportable segments, reconciled to consolidated amounts: Year Ended December 31, 2020 2019 2018 (in millions) Franchise and licensing fees $ 956 $ 1,691 $ 1,537 Base and other management fees (1) 144 394 385 Incentive management fees 38 230 235 Management and franchise 1,138 2,315 2,157 Ownership 421 1,422 1,484 Segment revenues 1,559 3,737 3,641 Amortization of contract acquisition costs ( 29 ) ( 29 ) ( 27 ) Other revenues 73 101 98 Direct reimbursements from managed and franchised properties (2) 1,375 3,110 2,881 Indirect reimbursements from managed and franchised properties (2) 1,332 2,576 2,357 Intersegment fees elimination (1) ( 3 ) ( 43 ) ( 44 ) Total revenues $ 4,307 $ 9,452 $ 8,906 ____________ (1) Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our consolidated statements of operations. (2) Included in other revenues from managed and franchised properties in our consolidated statements of operations. 115 The following table presents operating income (loss) for our reportable segments, reconciled to consolidated income (loss) before income taxes: Year Ended December 31, 2020 2019 2018 (in millions) Management and franchise (1) $ 1,138 $ 2,315 $ 2,157 Ownership (1) ( 202 ) 125 108 Segment operating income 936 2,440 2,265 Amortization of contract acquisition costs ( 29 ) ( 29 ) ( 27 ) Other revenues, less other expenses 13 29 47 Net other expenses from managed and franchised properties ( 397 ) ( 77 ) ( 85 ) Depreciation and amortization ( 331 ) ( 346 ) ( 325 ) General and administrative ( 311 ) ( 441 ) ( 443 ) Reorganization costs ( 41 ) — — Impairment losses ( 258 ) — — Gain on sale of assets, net — 81 — Operating income (loss) ( 418 ) 1,657 1,432 Interest expense ( 429 ) ( 414 ) ( 371 ) Loss on foreign currency transactions ( 27 ) ( 2 ) ( 11 ) Loss on debt extinguishments ( 48 ) — — Other non-operating income (loss), net ( 2 ) 3 28 Income (loss) before income taxes $ ( 924 ) $ 1,244 $ 1,078 ____________ (1) Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our consolidated statements of operations. The following table presents total assets of our reportable segments, reconciled to consolidated amounts: December 31, 2020 2019 (in millions) Management and franchise $ 11,065 $ 11,455 Ownership 1,242 1,610 Corporate and other 4,448 1,892 $ 16,755 $ 14,957 Total revenues by country were as follows: Year Ended December 31, 2020 2019 2018 (in millions) U.S. $ 3,593 $ 7,423 $ 6,848 All other (1) 714 2,029 2,058 $ 4,307 $ 9,452 $ 8,906 ____________ (1) There are no countries included in this amount that individually represented more than 10 percent of total revenues for the years ended December 31, 2020, 2019 and 2018. 116 Property and equipment, net by country was as follows: December 31, 2020 2019 (in millions) U.S. $ 128 $ 145 United Kingdom 79 84 Japan 77 71 Germany 25 38 All other (1) 37 42 $ 346 $ 380 ____________ (1) There are no countries included in this amount that individually represented more than 10 percent of total property and equipment, net as of December 31, 2020 and 2019. Note 19: Commitments and Contingencies We provide performance guarantees to certain owners of hotels that we operate under management contracts. Most of these guarantees do not require us to fund shortfalls, but allow for termination of the contract, if specified operating performance levels are not achieved. However, in limited cases, we are obligated to fund performance shortfalls, creating variable interests in the ownership entities of the hotels, of which we are not the primary beneficiary. As of December 31, 2020, we had four performance guarantees, with expirations ranging from 2023 to 2039 , and possible cash outlays totaling approximately $ 18 million. Our obligations under these guarantees in future periods are dependent on the operating performance level of the related hotel over the remaining term of the performance guarantee, and we have included the impact of the COVID-19 pandemic on these hotels in our expectations of their future operating performance. As of December 31, 2020 and 2019, we accrued current liabilities of $ 7 million and $ 3 million, respectively, for our performance guarantees. We may enter into new contracts containing performance guarantees in the future, which could increase our possible cash outlays. As of December 31, 2020, we guaranteed a $ 10 million loan, which matures in 2023 , for two hotels that we will franchise. Additionally, we have an agreement with the owner of a hotel that we manage to finance capital expenditures at the hotel. As of December 31, 2020, we had remaining possible cash outlays related to this agreement of approximately $ 10 million; however, we cannot currently estimate the timing of the payments or if they will be made at all. We receive fees from managed and franchised properties to operate our marketing, sales and brand programs on behalf of hotel owners, which are based on the underlying hotel's sales or usage. As of December 31, 2020 and 2019, we had collected an aggregate of $ 5 million and $ 350 million in excess of amounts expended, respectively, across all programs. As a result of the adverse impact of the COVID-19 pandemic on our hotels' sales and, ultimately, the program fees we earn, our costs to operate these programs have outpaced the fees received, resulting in a material decline in our surplus position during the year ended December 31, 2020. We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of December 31, 2020 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Note 20: Supplemental Disclosures of Cash Flow Information Interest paid during the years ended December 31, 2020, 2019 and 2018 was $ 433 million, $ 360 million and $ 330 million, respectively. Income taxes, net of refunds, paid during the years ended December 31, 2020, 2019 and 2018 were $ 79 million , $ 363 million and $ 288 million, respectively. Refer to Note 12: "Leases" for supplemental disclosures of cash flow information related to operating and finance leases. 117 Note 21: Selected Quarterly Financial Information The following table sets forth the historical unaudited quarterly financial data for the periods indicated. The information for each of these periods has been prepared on the same basis as the audited consolidated financial statements and, in our opinion, reflects all adjustments, including normal recurring items, considered necessary for a fair presentation of our financial results. Operating results for previous periods do not necessarily indicate results that may be achieved in any future period. 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Year (in millions, except per share data) Revenues $ 1,920 $ 564 $ 933 $ 890 $ 4,307 Operating income (loss) 68 ( 302 ) 11 ( 195 ) ( 418 ) Net income (loss) 18 ( 432 ) ( 81 ) ( 225 ) ( 720 ) Net income (loss) attributable to Hilton stockholders 18 ( 430 ) ( 79 ) ( 224 ) ( 715 ) Basic earnings (loss) per share (1) $ 0.06 $ ( 1.55 ) $ ( 0.29 ) $ ( 0.81 ) $ ( 2.58 ) Diluted earnings (loss) per share (1) $ 0.06 $ ( 1.55 ) $ ( 0.28 ) $ ( 0.80 ) $ ( 2.56 ) 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Year (in millions, except per share data) Revenues $ 2,204 $ 2,484 $ 2,395 $ 2,369 $ 9,452 Operating income 312 478 519 348 1,657 Net income 159 261 290 176 886 Net income attributable to Hilton stockholders 158 260 288 175 881 Basic earnings per share (1) $ 0.54 $ 0.90 $ 1.01 $ 0.62 $ 3.07 Diluted earnings per share (1) $ 0.54 $ 0.89 $ 1.00 $ 0.61 $ 3.04 ____________ (1) The sum of the earnings per share for the four quarters may differ from annual earnings per share due to the required method of computing the weighted average shares outstanding in interim periods. Note 22: Subsequent Events Senior Notes Offering In February 2021, HOC issued $ 1.5 billion aggregate principal amount of 3.625 % Senior Notes due 2032, which are jointly and severally guaranteed on a senior unsecured basis by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries, other than HOC, the issuer. Interest on the 2032 Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2021. We used the net proceeds from the issuance, together with available cash, to pay all related fees and expenses, estimated to be approximately $ 22 million, and to redeem all $ 1.5 billion in aggregate principal amount of our outstanding 2026 Senior Notes and pay the related redemption premium of $ 55 million. Upon redemption of the 2026 Senior Notes, we also accelerated the recognition of $ 14 million of related unamortized deferred financing costs. Repayment of Revolving Credit Facility In January 2021, we repaid $ 250 million of the outstanding debt balance under our Revolving Credit Facility using available cash, resulting in an outstanding debt balance of $ 1,440 million under our Revolving Credit Facility. 118 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.