What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-12 compared with 2020-02-14 · 396 added, 381 removed, 1156 unchanged (40% of the section changed)

Quantitative and qualitative disclosures about market risk

Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in factors such as interest rates and foreign currency exchange rates.

Our exposure to market risk from changes in interest rates and foreign exchange rates is limited.

Management monitors risk exposures on an ongoing basis and establishes and oversees the implementation of policies governing our funding, investments and use of derivative financial instruments to manage these risks.

Foreign currency and interest rate exposures are managed through our risk management activities, which are discussed further in Note 23 (Derivative and Hedging Instruments) to the consolidated financial statements included in Part II, Item 8.

Foreign Exchange Risk

We enter into foreign exchange derivative contracts to manage transactional currency exposure associated with anticipated receipts and disbursements occurring in a currency other than the functional currency of the entity.

We enter into foreign exchange derivative contracts to manage currency exposure associated with anticipated receipts and disbursements occurring in a currency other than the functional currency of the entity.

We may also enter into foreign currency derivative contracts to offset possible changes in value of assets and liabilities due to foreign exchange fluctuations.

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dollar and euro.

The effect of a hypothetical 10% adverse change in foreign exchange rates could result in a fair value loss of approximately $144 million and $113 million on our foreign exchange derivative contracts outstanding at December 31, 2019 and 2018 , respectively, related to the hedging program.

The effect of a hypothetical 10% adverse change in the value of the functional currencies could result in a fair value loss of approximately $58 million and $144 million on our foreign exchange derivative contracts outstanding at December 31, 2020 and 2019, respectively, before considering the offsetting effect of the underlying hedged activity.

We are also subject to foreign exchange risk as part of our daily settlement activities.

To manage this risk, we enter into foreign exchange contracts based upon anticipated receipts and disbursements for the respective currency position.

This risk is typically limited to a few days between the timing of when a payment transaction takes place and the subsequent settlement with our customers.

To manage this risk, we enter into short duration foreign exchange contracts based upon anticipated receipts and disbursements for the respective currency position.

This risk is typically limited to a few days between when a payment transaction takes place and the subsequent settlement with our customers.

The effect of a hypothetical 10% adverse change in the value of the functional currencies could result in a fair value loss of approximately $23 million on our short duration foreign exchange derivative contracts outstanding at December 31, 2020.

The Company did not have any outstanding short duration foreign exchange derivative contracts related to this activity at December 31, 2019.

Interest Rate Risk

During the fourth quarter of 2019, we entered into interest rate derivative contracts that were designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted debt issuances.

At December 31, 2019 , the total notional amount of these contracts was $1 billion .

The maximum length of time over which we have hedged our exposure to the variability in future cash flows is 30 years.

The effect of a hypothetical 100 basis point adverse change in interest rates could result in a fair value loss of approximately $168 million on our interest rate derivative contracts outstanding at December 31, 2019 .

There were no similar contracts outstanding as of December 31, 2018 .

In addition, our available-for-sale debt investments include fixed and variable rate securities that are sensitive to interest rate fluctuations.

Our available-for-sale debt investments include fixed and variable rate securities that are sensitive to interest rate fluctuations.

Our policy is to invest in high quality securities, while providing adequate liquidity and maintaining diversification to avoid significant exposure.

A hypothetical 100 basis point adverse change in interest rates would not have a material impact on our investments at December 31, 2019 and 2018 .

A hypothetical 100 basis point adverse change in interest rates would not have a material impact to the fair value of our investments at December 31, 2020 and 2019.

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The Company has business agreements with certain customers that provide for rebates or other support when customers meet certain volume hurdles as well as other support incentives, which are tied to performance.

Rebates and incentives are recorded as a reduction to gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term.

Rebates and incentives are recorded as a reduction of gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term.

Rebates and incentives are calculated based upon estimated customer performance and the terms of the related business agreements.

Management considers various factors in estimating customer performance, including forecasted transactions, card issuance and card conversion volumes, expected payments and historical experience with that customer.

The principal considerations for our determination that performing procedures relating to rebates and incentives is a critical audit matter was the significant judgment of management when developing estimates related to rebates and incentives based on customer performance.

This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s estimates related to customer performance and the reasonableness of assumptions related to the forecasted transactions, card issuance and card conversion volumes, expected payments and historical experience with that customer.

As disclosed by management, various factors are considered in estimating customer performance, including forecasted transactions, card issuance and card conversion volumes, expected payments and historical experience with that customer.

The principal considerations for our determination that performing procedures relating to rebates and incentives is a critical audit matter are (i) the significant judgment by management when developing estimates related to rebates and incentives based on customer performance;

and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s estimates related to customer performance, including the reasonableness of the various applicable factors considered by management in the estimate.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to customer rebates and incentives, including controls over evaluating customer performance based upon historical experience with that customer, forecasted transactions, card issuance and card conversion volumes and expected payments.

These procedures included testing the effectiveness of controls relating to rebates and incentives, including controls over evaluating estimated customer performance.

These procedures also included, among others, evaluating the reasonableness of estimated customer performance for a sample of customer agreements, including (i) evaluating rebate and incentive contracts to identify whether all incentives are identified and recorded accurately;

(ii) testing management’s process for developing the estimated customer performance, including evaluating the reasonableness of the assumptions related to the forecasted transactions, card issuance and card conversion volumes, expected payments and historical customer experience;

and (iii) evaluating the estimated customer performance as compared to actual results in the period the customer reports actual performance.

(ii) testing management’s process for developing estimated customer performance, including evaluating the reasonableness of the various applicable factors considered by management;

and (iii) evaluating estimated customer performance as compared to actual results in the period the customer reports actual performance.

/s/ PricewaterhouseCoopers LLP

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For the Years Ended December 31,

2020 2019 2018

(in millions, except per share data)

Net Revenue $ 15,301 $ 16,883 $ 14,950

Operating Expenses

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Income tax expense 1,349 1,613 1,345

Net Income $ 6,411 $ 8,118 $ 5,859

Basic Earnings per Share $ 6.40 $ 7.98 $ 5.63

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For the Years Ended December 31,

2020 2019 2018

(in millions)

Net Income $ 6,411 $ 8,118 $ 5,859

Other comprehensive income (loss):

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Income tax effect 42 ( 3 ) —

Reclassification adjustment for cash flow hedges 4 — —

Income tax effect ( 1 ) — —

Cash flow hedges, net of income tax effect ( 144 ) 11 —

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Income tax effect 2 3 3

Reclassification adjustment for defined benefit pension and other postretirement plans ( 1 ) ( 1 ) ( 2 )

Income tax effect — — —

Defined benefit pension and other postretirement plans, net of income tax effect ( 11 ) ( 19 ) ( 15 )

Investment securities available-for-sale

( 1 ) 3 ( 3 )

Income tax effect — ( 1 ) 1

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Restricted cash for litigation settlement 586 584

Investments 483 688

Accounts receivable 2,646 2,514

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Deferred income taxes 491 543

Goodwill 4,960 4,021

Other intangible assets, net 1,753 1,417

Other assets 5,365 4,525

Total Assets $ 33,584 $ 29,236

Liabilities, Redeemable Non-controlling Interests and Equity

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Class A common stock, $ 0.0001 par value;

authorized 3,000 shares, 1,391 and 1,387 shares issued and 996 and 1,019 outstanding, respectively

authorized 3,000 shares, 1,396 and 1,391 shares issued and 987 and 996 shares outstanding, respectively

Class B common stock, $ 0.0001 par value;

authorized 1,200 shares, 11 and 12 issued and outstanding, respectively

authorized 1,200 shares, 8 and 11 shares issued and outstanding, respectively

Additional paid-in-capital 4,982 4,787

Class A treasury stock, at cost, 409 and 395 shares, respectively

( 36,658 ) ( 32,205 )

Retained earnings 38,747 33,984

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Non-controlling interests 97 24

Total Equity 6,488 5,917

Total Liabilities, Redeemable Non-controlling Interests and Equity $ 33,584 $ 29,236

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Stockholders’ Equity

Capital Class A

Stock Retained

Earnings Accumulated

Comprehensive

Income (Loss)

Mastercard Incorporated Stockholders' Equity

Income (Loss) Mastercard Incorporated Stockholders' Equity Non-

Interests Total

Class A Class B

(in millions, except per share data)

Balance at December 31, 2017 $ — $ — $ 4,365 $ ( 20,764 ) $ 22,364 $ ( 497 ) $ 5,468 $ 29 $ 5,497

Adoption of revenue standard — — — — 366 — 366 — 366

Adoption of intra-entity asset transfers standard — — — — ( 183 ) — ( 183 ) — ( 183 )

Net income — — — — 5,859 — 5,859 — 5,859

Activity related to non-controlling interests — — — — — — — ( 6 ) ( 6 )

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Other comprehensive income (loss) — — — — — ( 221 ) ( 221 ) — ( 221 )

Dividends — — — — ( 1,120 ) — ( 1,120 ) — ( 1,120 )

Purchases of treasury stock — — — ( 4,991 ) — — ( 4,991 ) — ( 4,991 )

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Balance at December 31, 2018 — — 4,580 ( 25,750 ) 27,283 ( 718 ) 5,395 23 5,418

Adoption of revenue standard

Adoption of intra-entity asset transfers standard

Net income — — — — 8,118 — 8,118 — 8,118

Activity related to non-controlling interests — — — — — — — 1 1

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Other comprehensive income (loss) — — — — — 45 45 — 45

Dividends — — — — ( 1,408 ) — ( 1,408 ) — ( 1,408 )

Purchases of treasury stock — — — ( 6,463 ) — — ( 6,463 ) — ( 6,463 )

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Stockholders’ Equity

Common Stock Additional

Earnings Accumulated

Comprehensive

Income (Loss)

Mastercard Incorporated Stockholders' Equity

Income (Loss) Mastercard Incorporated Stockholders' Equity Non-

Interests Total

Class A Class B

(in millions, except per share data)

Balance at December 31, 2019 — — 4,787 ( 32,205 ) 33,984 ( 673 ) 5,893 24 5,917

Net income — — — — 6,411 — 6,411 — 6,411

Activity related to non-controlling interests — — — — — — — 73 73

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Other comprehensive income (loss) — — — — — ( 7 ) ( 7 ) — ( 7 )

Dividends — — — — ( 1,641 ) — ( 1,641 ) — ( 1,641 )

Purchases of treasury stock — — — ( 4,459 ) — — ( 4,459 ) — ( 4,459 )

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For the Years Ended December 31,

2020 2019 2018

(in millions)

Operating Activities

Net income $ 6,411 $ 8,118 $ 5,859

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

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Deferred income taxes 73 ( 7 ) ( 244 )

Venezuela charge

Other 14 24 31

Changes in operating assets and liabilities:

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Acquisition of businesses, net of cash acquired ( 989 ) ( 1,440 ) —

Settlement of interest rate derivative contracts ( 175 ) — —

Other investing activities 3 ( 4 ) ( 14 )

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Dividends paid ( 1,605 ) ( 1,345 ) ( 1,044 )

Proceeds from debt

Proceeds from debt, net 3,959 2,724 991

Payment of debt — ( 500 ) —

Acquisition of redeemable non-controlling interests ( 49 ) — —

Contingent consideration paid — ( 199 ) —

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Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents 257 ( 44 ) ( 6 )

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents

Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents 3,450 632 745

Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 8,969 8,337 7,592

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The Company makes payments easier and more efficient by providing a wide range of payment solutions and services through its family of well-known brands, including Mastercard®, Maestro® and Cirrus®.

The Company is a multi-rail network that offers customers one partner to turn to for their domestic and cross-border payment needs.

The Company operates a multi-rail network that offers customers one partner to turn to for their domestic and cross-border payment needs.

Through its unique and proprietary global payments network, which is referred to as the core network, the Company switches (authorizes, clears and settles) payment transactions and delivers related products and services.

Mastercard has additional payment capabilities that include automated clearing house (“ACH”) transactions (both batch and real-time account-based payments).

The Company also provides integrated value-added offerings such as cyber and intelligence products, information and analytics services, consulting, loyalty and reward programs and processing.

The Company also provides integrated value-added offerings such as cyber and intelligence products, information and analytics services, consulting, loyalty and reward programs, processing and open banking.

The Company’s payment solutions offer customers choice and flexibility and are designed to ensure safety and security for the global payments system.

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Intercompany transactions and balances have been eliminated in consolidation.

Certain prior period amounts have been reclassified to conform to the 2019 presentation.

The Company follows accounting principles generally accepted in the United States of America (“GAAP”).

Prior to December 31, 2017, the Company included the financial results from its Venezuela subsidiaries in the consolidated financial statements using the consolidation method of accounting.

In 2017, due to foreign exchange regulations restricting access to U.S.

dollars in Venezuela, an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S.

dollar impacted the Company’s ability to manage risk, process cross-border transactions and satisfy U.S.

dollar denominated liabilities related to operations in Venezuela.

As a result of these factors, Mastercard concluded that effective December 31, 2017, it did not meet the accounting criteria for consolidation of these Venezuelan subsidiaries, and therefore would transition to the measurement alternative method of accounting as of December 31, 2017.

This accounting change resulted in a pre-tax charge of $ 167 million ( $ 108 million after tax or $ 0.10 per diluted share) that was recorded in general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2017.

Non-controlling interests represent the equity interest not owned by the Company and are recorded for consolidated entities in which the Company owns less than 100 % of the interests.

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Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

Future events and their effects cannot be predicted with certainty;

Future events and their effects cannot be predicted with certainty, including the potential impacts and duration of the COVID-19 pandemic, as well as other factors;

accordingly, accounting estimates require the exercise of judgment.

The accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is

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acquired, as additional information is obtained and as the Company’s operating environment changes.

These financial statements were prepared using information reasonably available as of December 31, 2020 and through the date of this Report.

The accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

Actual results may differ from these estimates.

Revenue recognition - Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services.

Revenue is primarily generated by charging fees to issuers, acquirers and other stakeholders for providing switching services, as well as by assessing customers based primarily on the dollar volume of activity, or gross dollar volume, on the products that carry the Company’s brands.

Revenue is generally derived from transactional information accumulated by Mastercard’s systems or reported by customers.

Volume-based revenue (domestic assessments and cross-border volume fees) is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards.

Revenue is primarily generated from assessing customers based on the dollar volume of activity, or gross dollar volume, on the products that carry the Company’s brands, from fees to issuers, acquirers and other stakeholders for providing switching services, as well as from value-added products and services that are typically integrated and sold with the Company’s payment offerings.

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Volume-based revenue (domestic assessments and cross-border volume fees) is recorded as revenue in the period it is earned, which is primarily based on the related volume generated on the cards.

Certain volume-based revenue is based upon information reported by customers.

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Other payment-related products and services are recognized as revenue in the period in which the related services are performed or transactions occur.

For services provided to customers where delivery involves the use of a third-party, the Company recognizes revenue on a gross basis if it acts as the principal, controlling the service to the customer and on a net basis if it acts as the agent, arranging for the service to be provided.

Mastercard has business agreements with certain customers that provide for rebates or other support when the customers meet certain volume hurdles as well as other support incentives, which are tied to performance.

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Business combinations - The Company accounts for business combinations under the acquisition method of accounting.

The Company measures the tangible and intangible identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree, at fair value as of the acquisition date.

Acquisition-related costs are expensed as incurred and are included in general and administrative expenses.

The Company measures the tangible and intangible identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree and contingent consideration at fair value as of the acquisition date.

Acquisition-related costs are expensed as incurred and are included in general and administrative expenses on the consolidated statement of operations.

Any excess purchase price over the fair value of net assets acquired, including identifiable intangible assets, is recorded as goodwill.

Measurement period adjustments, if any, to the preliminary estimated fair value of the intangibles assets as of the acquisition date will be recorded in goodwill.

Measurement period adjustments, if any, to the preliminary estimated fair value of the intangibles assets as of the acquisition date are recorded in goodwill.

Goodwill and other intangible assets - Indefinite-lived intangible assets consist of goodwill, which represents the synergies expected to arise after the acquisition date and the assembled workforce, and customer relationships.

Finite-lived intangible assets consist of capitalized software costs, trademarks, tradenames, customer relationships and other intangible assets.

Finite-lived intangible assets consist of capitalized software costs, customer relationships and other intangible assets.

Intangible assets with finite useful lives are amortized over their estimated useful lives, on a straight-line basis, which range from one to twenty years .

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Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable.

If the carrying value of the asset cannot be recovered from estimated

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future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows.

If the carrying value of the asset cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows.

If the carrying amount of the asset exceeds its fair value, an impairment is recorded.

Impairment charges, if any, are recorded in general and administrative expenses on the consolidated statement of operations.

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Litigation - The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters.

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The Company classifies these recurring fair value measurements into a three-level hierarchy (“Valuation Hierarchy”).

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The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

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• Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets

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• Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets and inputs that are observable for the asset or liability

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Changes to projected performance milestones of the acquired businesses could result in a higher or lower contingent consideration liability.

The changes in fair value as a result of updated assumptions will be recorded in general and administrative expenses on the consolidated statement of operations.

The changes in fair value as a result of updated assumptions are recorded in general and administrative expenses on the consolidated statement of operations.

Investment securities - The Company classifies investments as available-for-sale or held-to-maturity at the date of acquisition.

• Available-for-sale debt securities:

Available-for-sale securities that are available to meet the Company’s current operational needs are classified as current assets and the securities that are not available for current operational needs are classified as non-current assets on the consolidated balance sheet.

The investments in debt securities are carried at fair value, with unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statement of comprehensive income.

◦ Investments in debt securities that are available to meet the Company’s current operational needs are classified as current assets and the securities that are not available for current operational needs are classified as non-current assets on the consolidated balance sheet.

The debt securities are carried at fair value, with unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statement of comprehensive income.

Net realized gains and losses on debt securities are recognized in investment income on the consolidated statement of operations.

The specific identification method is used to determine realized gains and losses.

The Company evaluates its debt securities for other-than-temporary impairment on an ongoing basis.

When there has been a decline in fair value of a debt security below the amortized cost basis, the Company recognizes an other-than-temporary impairment if:

The Company evaluates its debt securities for impairment on an ongoing basis.

When there has been a decline in fair value of a debt security below the amortized cost basis, the Company recognizes an impairment if:

(1) it has the intent to sell the security;

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or (3) it does not expect to recover the entire amortized cost basis of the security.

The credit loss component of the impairment would be recognized in other income (expense), net on the consolidated statement of operations while the non-credit loss would remain in accumulated other comprehensive income (loss) until realized from a sale or an other-than-temporary impairment.

The credit loss component of the impairment is recognized as an allowance and recorded in other income (expense), net on the consolidated statement of operations while the non-credit related loss remains in accumulated other comprehensive income (loss) until realized from a sale or subsequent impairment.

• Held-to-maturity securities:

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◦ Equity method - The Company accounts for investments in common stock or in-substance common stock under the equity method of accounting when it has the ability to exercise significant influence over the investee, generally when it holds between 20 % and 50 % ownership in the entity.

In addition, investments in flow-through entities such as limited partnerships and limited liability companies are also accounted for under the equity method when the Company has the ability to exercise significant influence over the investee, generally when the investment ownership percentage is equal to or greater than 5 % of the outstanding ownership interest.

The excess of the cost over the underlying net equity of investments accounted for under the equity method is allocated to identifiable tangible and intangible assets and liabilities based on fair values at the date of acquisition.

The amortization of the excess of the cost over the underlying net equity of investments and Mastercard’s share of net earnings or losses of entities accounted for under the equity method of accounting is included in other income (expense), net on the consolidated statement of operations.

The Company’s share of net earnings or losses for these investments are included in gains (losses) on equity investments, net on the consolidated statement of operations.

◦ Measurement alternative method - The Company accounts for investments in common stock or in-substance common stock under the measurement alternative method of accounting when it does not exercise significant influence, generally when it holds less than 20 % ownership in the entity or when the interest in a limited partnership or limited liability company is less than 5 % and the Company has no significant influence over the operation of the investee.

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The Company’s foreign exchange and interest rate derivative contracts are included in Level 2 of the Valuation Hierarchy as the fair value of the contracts are based on inputs, which are observable based on broker quotes for the same or similar instruments.

As the Company does not designate foreign exchange contracts as hedging instruments, realized and unrealized gains and losses from the change in fair value of the contracts are recognized immediately in current-period earnings.

The Company’s foreign exchange contracts are not entered into for trading or speculative purposes.

The Company does not enter into derivative contracts for trading or speculative purposes.

For derivative contracts that are not designated as hedging instruments, realized and unrealized gains and losses from the change in fair value of the contracts are recognized in current earnings.

The Company’s derivatives that are designated as hedging instruments are required to meet established accounting criteria.

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The method of assessing hedge effectiveness and measuring hedge results is formally documented at hedge inception and assessed at least quarterly throughout the designated hedge period.

For cash flow hedges, the fair value adjustments are recorded, net of tax, in other comprehensive income (loss).

Any gains and losses deferred in other comprehensive income (loss) are then recognized in current-period earnings when earnings are affected by the variability of cash flows of the hedged forecasted transaction.

For cash flow hedges, the fair value adjustments are recorded, net of tax, in other comprehensive income (loss) on the consolidated statement of comprehensive income.

Any gains and losses deferred in accumulated other comprehensive income (loss) are subsequently reclassified to the corresponding line item on the consolidated statement of operations when the underlying hedged transactions impact earnings.

For hedging instruments that are no longer deemed highly effective, hedge accounting is discontinued prospectively, and any gains and losses remaining in accumulated other comprehensive income (loss) are reclassified to earnings when the underlying forecasted transaction occurs.

If it is probable that the forecasted transaction will no longer occur, the associated gains or losses in accumulated other comprehensive income (loss) are reclassified to the corresponding line item on the consolidated statement of operations in current earnings.

The Company has numerous investments in its foreign subsidiaries.

The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates.

The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates.

The effective portion of the foreign currency gains and losses related to the foreign currency denominated debt are reported in accumulated other comprehensive income (loss) on the consolidated balance sheet as part of the cumulative translation adjustment component of equity.

The Company may use foreign currency denominated debt and/or derivative instruments to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates.

The effective portion of the foreign currency gains and losses related to the hedging instruments are reported in accumulated other comprehensive income (loss) on the consolidated balance sheet as a cumulative translation adjustment component of equity.

Amounts excluded from

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effectiveness testing of net investment hedges are recognized in earnings over the life of the hedging instrument.

The Company evaluates the effectiveness of the net investment hedge each quarter.

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However, some transactions may not settle until subsequent business days, resulting in amounts due from and due to customers.

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Property, equipment and right-of-use assets - Property and equipment are stated at cost less accumulated depreciation and amortization.

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The useful lives of the Company’s assets are as follows:

Asset Category

Estimated Useful Life

Building equipment

10 - 15 years

Furniture and fixtures and equipment

Leasehold improvements

Shorter of life of improvement or lease term

Right-of-use assets

Shorter of life of the asset or lease term

Asset Category Estimated Useful Life

Buildings 30 years

Building equipment 10 - 15 years

Furniture and fixtures and equipment 3 - 5 years

Leasehold improvements Shorter of life of improvement or lease term

Right-of-use assets Shorter of life of the asset or lease term

The Company determines if a contract is, or contains, a lease at contract inception.

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The charge is recorded in general and administrative expenses on the consolidated statement of operations.

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Advertising and marketing - Expenses incurred to promote Mastercard’s brand, products and services are recognized in advertising and marketing on the consolidated statement of operations.

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currency is the functional currency, translation from that functional currency to U.S.

dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-

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average exchange rate for the period.

dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate for the period.

Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss).

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If redemption value exceeds the fair value of the redeemable non-controlling interests, the excess would be a reduction to net income for the EPS calculation.

Accounting pronouncements adopted

Leases - In February 2016, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that changed how companies account for and present lease arrangements.

This guidance requires companies to recognize lease assets and liabilities for both finance and operating leases on the consolidated balance sheet.

The Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method with the available practical expedients.

The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases.

The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.

Balance at December 31, 2018

Impact of lease standard

January 1, 2019

(in millions)

Property, equipment and right-of-use assets, net

Other current liabilities

Other liabilities

For a more detailed discussion on lease arrangements, refer to Note 10 (Property, Equipment and Right-of-Use Assets) .

Comprehensive income - In February 2018, the FASB issued accounting guidance that allows for a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from U.S.

The Company adopted this guidance effective January 1, 2019, electing to retain the stranded tax effects in accumulated other comprehensive income (loss).

The adoption did not result in a material impact on the Company’s consolidated financial statements.

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue recognition - In May 2014, the FASB issued accounting guidance that provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most of the existing revenue recognition requirements.

Under this guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company adopted this guidance effective January 1, 2018 under the modified retrospective transition method, applying the standard to contracts not completed as of January 1, 2018 and considered the aggregate amount of modifications.

This revenue guidance impacts the timing of certain customer incentives recognized in the Company’s consolidated statement of operations, as they are recognized over the life of the contract.

Previously, such incentives were recognized when earned by the customer.

This revenue guidance also impacts the Company’s accounting recognition for certain market development fund contributions and expenditures.

Historically, these items were recorded on a net basis in net revenue and will now be recognized on a gross basis, resulting in an increase to both revenues and expenses.

The following tables summarize the impact of the revenue standard on the Company’s consolidated statement of operations and consolidated balance sheet:

Year Ended December 31, 2018

Balances excluding revenue standard

Impact of revenue standard

(in millions)

Operating Expenses

Advertising and marketing

Income before income taxes

Income tax expense

December 31, 2018

Balances excluding revenue standard

Impact of revenue standard

(in millions)

Accounts receivable

Prepaid expenses and other current assets

Deferred income taxes

Accounts payable

Accrued expenses

Other current liabilities

Other liabilities

Retained earnings

For a more detailed discussion on revenue recognition, refer to Note 3 (Revenue) .

Intra-entity asset transfers - In October 2016, the FASB issued accounting guidance to simplify the accounting for income tax consequences of intra-entity transfers of assets other than inventory.

Under this guidance, companies are required to recognize the income tax consequences of an intra-entity asset transfer when the transfer occurs.

This guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the period of adoption.

Accounting pronouncements not yet adopted

Simplifying the accounting for income taxes - In December 2019, the FASB issued accounting guidance to simplify the accounting for income taxes.

This guidance includes the removal of certain exceptions to the general income tax accounting principles and provides clarity and simplification to other areas of income tax accounting by amending the existing guidance.

The guidance is effective for periods beginning after December 15, 2020.

The Company adopted this guidance effective January 1, 2018.

See the section in this note entitled Cumulative Effect of the Adopted Accounting Pronouncements for a summary of the cumulative impact of adopting this standard as of January 1, 2018.

The Company will adopt this guidance effective January 1, 2021 and does not expect the impacts to be material.

Reference Rate Reform - In March 2020, the FASB issued accounting guidance to provide temporary optional expedients and exceptions to the current contract modifications and hedge accounting guidance in light of the expected market transition from LIBOR to alternative rates.

The new guidance provides optional expedients and exceptions to transactions affected by reference rate reform if certain criteria are met.

The transactions primarily include (1) contract modifications, (2) hedging relationships, and (3) sale or transfer of debt securities classified as held-to-maturity.

The amendments were effective immediately upon issuance of the update.

Companies may elect to adopt the amendments prospectively to transactions existing as of or entered from the date of adoption through December 31, 2022.

The Company does not expect the impacts to be material.

72 MASTERCARD 2020 FORM 10-K

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Cumulative effect of the 2018 adopted accounting pronouncements

The following table summarizes the cumulative impact of the changes made to the January 1, 2018 consolidated balance sheet for the adoption of the new accounting standards pertaining to revenue recognition and intra-entity asset transfers.

The prior periods have not been restated and have been reported under the accounting standards in effect for those periods.

Balance at December 31, 2017

Impact of revenue standard

Impact of intra-entity asset transfers standard

January 1, 2018

(in millions)

Accounts receivable

Prepaid expenses and other current assets

Deferred income taxes

Accounts payable

Accrued expenses

Other current liabilities

Other liabilities

Retained earnings

Accounting pronouncements not yet adopted

Implementation costs incurred in a hosting arrangement that is a service contract - In August 2018, the FASB issued accounting guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

This guidance is effective for periods beginning after December 15, 2019.

Companies are required to adopt this guidance either retrospectively or by prospectively applying the guidance to all implementation costs incurred after the date of adoption.

The Company will adopt this guidance effective January 1, 2020 by applying the prospective approach as of the date of adoption and this guidance will not have a material impact on its consolidated financial statements.

Disclosure requirements for fair value measurement - In August 2018, the FASB issued accounting guidance which modifies disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures.

This guidance is effective for periods beginning after December 15, 2019.

Companies are required to adopt the guidance for certain added disclosures prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption and all other amendments retrospectively to all periods presented upon their effective date.

The Company will adopt this guidance effective January 1, 2020 and the impact will not be material.

In 2019 and 2017 , the Company acquired several businesses in separate transactions for total consideration of $ 1.5 billion in each year, representing both cash and contingent consideration.

In 2020 and 2019, the Company acquired several businesses for total consideration of $ 1.1 billion and $ 1.5 billion, respectively, representing both cash and contingent consideration.

There were no acquisitions in 2018.

These acquisitions align with the Company’s strategy to grow, diversify and build the Company’s business.

Refer to Note 1 (Summary of Significant Accounting Policies) for the valuation techniques Mastercard utilizes to fair value the respective components of business combinations.

The residual value allocated to goodwill is primarily attributable to the synergies expected to arise after the acquisition date and a portion of the goodwill is expected to be deductible for tax purposes.

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The Company is evaluating and finalizing the purchase accounting for businesses acquired during 2019 .

In 2018 , the Company finalized the purchase accounting for businesses acquired during 2017 .

The preliminary estimated and final fair values of the purchase price allocations in aggregate, as of the acquisition dates, are noted below for 2019 and 2017 , respectively.

There were no acquisitions in 2018.

Refer to Note 1 (Summary of Significant Accounting Policies) for the valuation techniques Mastercard utilizes to fair value the respective components of business combinations and contingent consideration.

The residual value allocated to goodwill is primarily attributable to the synergies expected to arise after the acquisition date and a majority of the goodwill is not expected to be deductible for local tax purposes.

In 2020, the Company finalized the purchase accounting for businesses acquired during 2019 and $ 185 million of the businesses acquired in 2020.

The Company is evaluating and finalizing the purchase accounting for the remainder of the businesses acquired during 2020.

The preliminary estimated and final fair values of the purchase price allocations in aggregate, as of the acquisition dates, are noted below for the years ended December 31.

(in millions)

2 unchanged sentences

Other intangible assets 237 395

Goodwill 844 1,076

Other assets 11 48

Total assets 1,112 1,716

Other current liabilities 15 121

3 unchanged sentences

Net assets acquired $ 1,066 $ 1,511

The following table summarizes the identified intangible assets acquired for 2019 and 2017:

Acquisition Date Fair Value

Weighted-Average Useful Life

(in millions)

The following table summarizes the identified intangible assets acquired during the years ended December 31:

2020 2019 2020 2019

Acquisition Date Fair Value Weighted-Average Useful Life

(in millions) (in years)

Developed technologies $ 122 $ 199 6.3 7.7

Customer relationships 114 178 12.0 12.6

Other 1 18 1.0 5.0

Other intangible assets $ 237 $ 395 9.0 9.7

Pro forma information related to the acquisitions was not included because the impact on the Company's consolidated results of operations was not considered to be material.

Among the businesses acquired in 2020, the largest acquisition relates to Finicity Corporation (“Finicity”), an open-banking provider, headquartered in Salt Lake City, Utah.

On November 18, 2020, Mastercard acquired 100 % equity interest in Finicity for cash consideration of $ 809 million.

In addition, the Finicity sellers have the potential to earn contingent consideration of up to $ 160 million if certain revenue targets are met in 2021.

As of the acquisition date, the fair value of the contingent consideration was $ 71 million.

The businesses acquired in 2019 were not individually significant to Mastercard.

For the businesses acquired in 2017, the largest acquisition relates to Vocalink, a payment systems and ATM switching platform operator, located principally in the U.K.

On April 28, 2017, Mastercard acquired 92.4 % controlling interest in Vocalink for cash consideration of £ 719 million ( $ 929 million ).

In addition, the Vocalink sellers earned additional contingent consideration of £ 169 million ( $ 219 million ) upon meeting 2018 revenue targets in accordance with terms of the purchase agreement.

Refer to Note 8 (Fair Value Measurements) for additional information related to the fair value of contingent consideration.

A majority of Vocalink’s shareholders have retained a 7.6 % ownership for at least three years , which is recorded as redeemable non-controlling interests on the consolidated balance sheet.

These remaining shareholders have a put option to sell their ownership interest to Mastercard on the third and fifth anniversaries of the transaction and quarterly thereafter (the “Third Anniversary Option” and “Fifth Anniversary Option”, respectively).

The Third Anniversary Option is exercisable at a fixed price of £ 58 million (approximately $ 76 million as of December 31, 2019 ) (“Fixed Price”).

The Fifth Anniversary Option is exercisable at the greater of the Fixed Price or fair value.

Additionally, Mastercard has a call option to purchase the remaining interest from Vocalink’s shareholders on the fifth anniversary of the transaction and quarterly thereafter, which is exercisable at the greater of the Fixed Price or fair value.

The fair value of the redeemable non-controlling interests was determined utilizing a market approach, which extrapolated the consideration transferred that was discounted for lack of control and marketability.

Pending Acquisition

In August 2019, Mastercard entered into a definitive agreement to acquire the majority of the Corporate Services business of Nets Denmark A/S, for € 2.85 billion (approximately $ 3.5 billion as of December 31, 2020 ) after adjusting for cash and certain other

MASTERCARD 2020 FORM 10-K 73

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Pending Acquisition

In August 2019, Mastercard entered into a definitive agreement to acquire the majority of the Corporate Services business of Nets Denmark A/S, for € 2.85 billion (approximately $ 3.19 billion as of December 31, 2019 ) after adjusting for cash and certain other liabilities at closing.

liabilities at closing.

The pending acquisition primarily comprises the clearing and instant payment services, and e-billing solutions of Nets Denmark A/S’s Corporate Services business.

While the Company anticipates completing the acquisition in the first half of 2020, the transaction is subject to regulatory approval and other customary closing conditions.

Mastercard’s business model involves four participants in addition to the Company:

account holders, issuers (the account holders’ financial institutions), merchants and acquirers (the merchants’ financial institutions).

The Company has secured conditional approval from the European Commission and, subject to other closing conditions, anticipates completing the acquisition in the first quarter of 2021, or shortly thereafter.

Mastercard’s core network involves four participants in addition to the Company:

account holders (a person or entity who holds a card or uses another device enabled for payment), issuers (the account holders’ financial institutions), merchants and acquirers (the merchants’ financial institutions).

Revenue from contracts with customers is recognized when services are performed in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those services.

1 unchanged sentence

Revenue is generally derived from transactional information accumulated by Mastercard’s systems or reported by customers.

In addition, the Company recognizes revenue from other payment-related products and services in the period in which the related transactions occur or services are performed.

Revenue is generally derived from information accumulated by Mastercard’s systems or reported by customers.

In addition, the Company generates other revenues from value-added products and services that are typically integrated and sold with the Company’s payment offerings and are recognized as revenue in the period in which the related transactions occur or services are performed.

The price structure for Mastercard’s products and services is dependent on the nature of volumes, types of transactions and type of products and services offered to customers.

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other revenues consist of value-added service offerings that are typically sold with the Company’s payment service offerings and are recognized in the period in which the related services are performed or transactions occur.

Other revenues consist of value-added products and services that are typically sold with the Company’s payment service offerings and are recognized in the period in which the related services are performed or transactions occur.

Other revenues include the following:

5 unchanged sentences

• Batch and real-time account-based payment services relating to ACH transactions and other ACH related services.

Other payment-related products and services, including account and transaction enhancement services, rules compliance and publications.

• Other payment-related products and services and platforms, including account and transaction enhancement services, open banking solutions, rules compliance and publications.

Rebates and incentives (contra-revenue) are provided to customers that meet certain volume targets and can be in the form of a rebate or other support incentives, which are tied to performance.

2 unchanged sentences

The Company’s disaggregated net revenue by source and geographic region were as follows for the years ended December 31:

2020 2019 2018

(in millions)

6 unchanged sentences

Rebates and incentives (contra-revenue) ( 8,315 ) ( 8,097 ) ( 6,881 )

Net revenue $ 15,301 $ 16,883 $ 14,950

Net revenue by geographic region:

1 unchanged sentence

International Markets 9,701 10,869 9,514

Net revenue $ 15,301 $ 16,883 $ 14,950

1 Includes revenues managed by corporate functions.

5 unchanged sentences

Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at December 31, 2020 in the amounts of $ 355 million and $ 143 million, respectively.

The comparable amounts included in other current liabilities and other

The comparable amounts included in other current liabilities and

MASTERCARD 2020 FORM 10-K 75

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

liabilities at December 31, 2018 were $ 218 million and $ 101 million , respectively.

In 2019 and 2018 , revenue recognized from the satisfaction of such performance obligations was $ 904 million in each year.

other liabilities at December 31, 2019 were $ 238 million and $ 106 million, respectively.

In 2020, 2019 and 2018 revenue recognized from the satisfaction of such performance obligations was $ 1.1 billion, $ 994 million and $ 904 million, respectively.

The Company’s remaining performance periods for its contracts with customers for its payment network services are typically long-term in nature (generally up to 10 years).

As a payment network service provider, the Company provides its customers with continuous access to its global payment processing network and stands ready to provide transaction processing and related services over the contractual term.

Consideration is variable as the Company generates revenues from assessing its customers based on the GDV of activity on the products that carry the Company’s brands.

As a payment network service provider, the Company provides its customers with continuous access to its global payments network and stands ready to provide transaction processing and related services over the contractual term.

Consideration is variable as the Company generates volume- and transaction-based revenues from assessing its customers’ current period activity.

The Company has elected the optional exemption to not disclose the remaining performance obligations related to its payment network services.

The Company also earns revenues from other value-added services comprised of both batch and real-time account-based payment services, consulting fees, loyalty programs and other payment-related products and services.

The Company also earns revenues primarily from other value-added services comprised of both batch and real-time account-based payment services, consulting fees, gateway services, processing, loyalty programs and other payment-related products and services.

At December 31, 2020, the estimated aggregate consideration allocated to unsatisfied performance obligations for these other value-added services is $ 1.3 billion, which is expected to be recognized through 2023.

2 unchanged sentences

The components of basic and diluted EPS for common shares for each of the years ended December 31 were as follows:

2020 2019 2018

(in millions, except per share data)

Net income $ 6,411 $ 8,118 $ 5,859

Basic weighted-average shares outstanding 1,002 1,017 1,041

1 unchanged sentence

Diluted weighted-average shares outstanding 1

1,006 1,022 1,047

Earnings per Share

Basic $ 6.40 $ 7.98 $ 5.63

Diluted $ 6.37 $ 7.94 $ 5.60

Table may not sum due to rounding.

13 unchanged sentences

The following table includes supplemental cash flow disclosures for each of the years ended December 31:

2020 2019 2018

(in millions)

16 unchanged sentences

The major classes of the Company’s available-for-sale investment securities and their respective amortized cost basis and fair values were as follows:

December 31, 2019

December 31, 2018

Amortized Cost

Gross Unrealized Gain

Gross Unrealized Loss

Amortized Cost

Gross Unrealized Gain

Gross Unrealized Loss

December 31, 2020 December 31, 2019

Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value

(in millions)

3 unchanged sentences

Asset-backed securities — — — — 85 1 — 86

Total $ 320 $ 1 $ — $ 321 $ 589 $ 2 $ — $ 591

The Company’s available-for-sale investment securities held at December 31, 2020 and 2019, primarily carried a credit rating of A- or better with unrealized gains and losses recorded as a separate component of other comprehensive income (loss) on the consolidated statement of comprehensive income.

2 unchanged sentences

government bonds, U.S.

government sponsored agency bonds and foreign government bonds with similar credit quality to that of the U.S.

government bonds.

government sponsored agency bonds and foreign government bonds.

Corporate securities are comprised of commercial paper and corporate bonds.

4 unchanged sentences

Available-For-Sale

Cost Fair Value

(in millions)

1 unchanged sentence

Due after 1 year through 5 years 205 206

Total $ 320 $ 321

Investment income on the consolidated statement of operations primarily consists of interest income generated from cash, cash equivalents, time deposits, and realized gains and losses on the Company’s debt securities.

9 unchanged sentences

The following table is a summary of the activity related to the Company’s equity investments:

Balance at December 31, 2018

Purchases (Sales), net 1

Changes in Fair Value 2

Balance at December 31, 2019 Purchases (Sales), net Changes in Fair Value 1

Balance at December 31, 2020

3 unchanged sentences

Total equity investments $ 914 $ 205 $ 30 $ 23 $ 1,172

Includes impact of balance sheet foreign currency translation

1 Recorded in gains (losses) on equity investments, net on the consolidated statement of operations

2 Includes translational impact of currency

At December 31, 2020 , the total carrying value of Nonmarketable securities included $ 157 million of measurement alternative investments and $ 539 million of equity method investments.

At December 31, 2019, the total carrying value of Nonmarketable securities included $ 317 million of measurement alternative investments and $ 118 million of equity method investments.

Cumulative impairments and downward fair value adjustments on measurement alternative investments were $ 14 million and cumulative upward fair value adjustments were $ 86 million as of December 31, 2020 .

Fair Value Measurements

6 unchanged sentences

The distribution of the Company’s financial instruments measured at fair value on a recurring basis within the Valuation Hierarchy were as follows:

December 31, 2019

December 31, 2018

Quoted Prices

December 31, 2020 December 31, 2019

Quoted Prices

(Level 1) Significant

(Level 2) Significant

(Level 3) Total Quoted Prices

(Level 1) Significant

(Level 2) Significant

(Level 3) Total

(in millions)

41 unchanged sentences

These instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, settlement due from customers, restricted security deposits held for customers, accounts payable, settlement due to customers and other accrued liabilities.

Contingent Consideration

The contingent consideration attributable to acquisitions made in 2017 was primarily based on the achievement of 2018 revenue targets and was measured at fair value on a recurring basis.

This contingent consideration liability of $ 219 million was included in other current liabilities on the consolidated balance sheet at December 31, 2018 .

This liability was classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices and unobservable inputs used to measure fair value that require management’s judgment.

During 2019, the Company paid $ 219 million to settle the contingent consideration .

Prepaid Expenses and Other Assets

3 unchanged sentences

Prepaid income taxes 78 105

Other 719 786

Total prepaid expenses and other current assets $ 1,883 $ 1,763

4 unchanged sentences

Income taxes receivable 553 460

Other 420 313

Total other assets $ 5,365 $ 4,525

8 unchanged sentences

Building, building equipment and land $ 522 $ 505

Equipment 1,321 1,218

Furniture and fixtures 99 92

2 unchanged sentences

Property, equipment and right-of-use assets 3,292 2,928

Less accumulated depreciation and amortization

Accumulated depreciation and amortization ( 1,390 ) ( 1,100 )

Property, equipment and right-of-use assets, net $ 1,902 $ 1,828

Depreciation and amortization expense for the above property, equipment and right-of-use assets was $ 400 million, $ 336 million and $ 209 million for 2020, 2019 and 2018, respectively.

The increase in property, equipment and right-of-use assets at December 31, 2019 from December 31, 2018 was primarily due to the impact from the adoption of the new accounting standard pertaining to lease arrangements as of January 1, 2019 as well as leases that commenced in 2019 .

See Note 1 (Summary of Significant Accounting Policies) for additional information of the accounting policy under the new leasing standard.

Operating lease ROU assets and operating lease liabilities are recorded on the consolidated balance sheet as follows:

Operating lease ROU assets and operating lease liabilities are recorded on the consolidated balance sheet as follows at December 31:

(in millions)

3 unchanged sentences

Other liabilities 726 656

Operating lease amortization expense for 2019 was $ 99 million .

As of December 31, 2019 , weighted-average remaining lease term of operating leases was 9.5 years and weighted-average discount rate for operating leases was 2.9 % .

Operating lease amortization expense for 2020 and 2019 was $ 123 million and $ 99 million, respectively.

As of December 31, 2020 and 2019, the weighted-average remaining lease term of operating leases was 9.1 years and 9.5 years and the weighted-average discount rate for operating leases was 2.7 % and 2.9 %, respectively.

The following table summarizes the maturity of the Company’s operating lease liabilities at December 31, 2020 based on lease term:

1 unchanged sentence

(in millions)

Thereafter 383

Total operating lease payments 925

Interest ( 74 )

Present value of operating lease liabilities $ 851

As of December 31, 2019 , the Company has entered into additional operating leases as a lessee, primarily for real estate.

These leases have not yet commenced and will result in ROU assets and corresponding lease liabilities of approximately $ 23 million .

These operating leases are expected to commence in fiscal year 2020, with lease terms between one and ten years.

Prior to adoption of the lease accounting standard in 2019, consolidated rental expense for the Company’s leased office space was $ 94 million for 2018.

Consolidated lease expense for automobiles, computer equipment and office equipment was $ 20 million for 2018, respectively.

MASTERCARD 2020 FORM 10-K 81

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following disclosures relate to periods prior to adoption of the new lease accounting standard, including those operating leases entered into during 2018, but not yet commenced:

At December 31, 2018, the Company had the following future minimum payments due under non‐cancelable leases:

Operating Leases

(in millions)

Consolidated rental expense for the Company’s leased office space was $ 94 million and $ 77 million for 2018 and 2017 , respectively.

Consolidated lease expense for automobiles, computer equipment and office equipment was $ 20 million and $ 22 million for 2018 and 2017 , respectively.

The changes in the carrying amount of goodwill for the years ended December 31 were as follows:

1 unchanged sentence

Beginning balance $ 4,021 $ 2,904

Additions 844 1,076

Foreign currency translation 95 41

14 unchanged sentences

Customer relationships 743 ( 322 ) 421 621 ( 264 ) 357

Other 44 ( 41 ) 3 44 ( 44 ) —

Total 3,063 ( 1,489 ) 1,574 2,549 ( 1,296 ) 1,253

Indefinite-lived intangible assets

Customer relationships 179 — 179 164 — 164

The increase in the gross carrying amount of amortized intangible assets in 2019 was primarily related to the businesses acquired in 2019.

Total $ 3,242 $ ( 1,489 ) $ 1,753 $ 2,713 $ ( 1,296 ) $ 1,417

The increase in the gross carrying amount of amortized intangible assets in 2020 was primarily related to software additions and businesses acquired in 2020.

See Note 2 (Acquisitions) for further details.

2 unchanged sentences

Based on the qualitative assessment performed in 2020, it was determined that the Company’s indefinite-lived intangible assets were not impaired.

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Amortization on the assets above amounted to $ 303 million, $ 285 million and $ 250 million in 2020, 2019 and 2018, respectively.

2 unchanged sentences

2025 and thereafter 577

82 MASTERCARD 2020 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accrued Expenses and Accrued Litigation

4 unchanged sentences

Income and other taxes 208 332

Other 497 552

Total accrued expenses $ 5,430 $ 5,489

26 unchanged sentences

The following table sets forth the Plans’ funded status, key assumptions and amounts recognized in the Company’s consolidated balance sheet at December 31:

Pension Plans

Postretirement Plan

Pension Plans Postretirement Plan

2020 2019 2020 2019

($ in millions)

1 unchanged sentence

Benefit obligation at beginning of year $ 531 $ 438 $ 64 $ 57

Service cost 13 11 1 1

Interest cost 9 13 2 2

1 unchanged sentence

Benefits paid ( 18 ) ( 15 ) ( 4 ) ( 5 )

Transfers in 3 2 — —

Foreign currency translation 23 9 — —

5 unchanged sentences

Benefits paid ( 18 ) ( 15 ) ( 4 ) ( 5 )

Transfers in 5 2 — —

Foreign currency translation 22 10 — —

2 unchanged sentences

Amounts recognized on the consolidated balance sheet consist of:

Noncurrent assets $ 28 $ — $ — $ —

Other liabilities, short-term — — ( 4 ) ( 3 )

Other liabilities, long-term ( 15 ) ( 13 ) ( 66 ) ( 61 )

$ 13 $ ( 13 ) $ ( 70 ) $ ( 64 )

Accumulated other comprehensive income consists of:

4 unchanged sentences

Discount rate

Plans 0.70 % 0.70 % * *

Vocalink Plan 1.55 % 2.00 % * *

1 unchanged sentence

Rate of compensation increase

Plans 1.50 % 1.50 % * *

Vocalink Plan 2.75 % 2.50 % * *

3 unchanged sentences

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

All of the Pension Plans had benefit obligations in excess of plan assets at December 31, 2019 and 2018 .

Information on the Pension Plans were as follows:

At December 31, 2020, the Company’s aggregated Pension Plan assets exceed the benefit obligations.

For plans where the benefit obligations exceeded plan assets, the projected benefit obligation was $ 112 million, the accumulated benefit obligation was $ 111 million and plan assets were $ 97 million.

At December 31, 2019, all of the Pension Plans had benefit obligations in excess of plan assets.

Information on the Pension Plans were as follows as of December 31:

(in millions)

2 unchanged sentences

Fair value of plan assets 617 518

For the year ended December 31, 2019 , the Company’s projected benefit obligation related to its Pension Plans increased $ 93 million primarily attributable to actuarial losses related to lower discount rate assumptions.

For the year ended December 31, 2018 , the Company’s projected benefit obligation related to its Pension Plans decreased $ 30 million primarily attributable to foreign currency translation and benefits paid.

For the years ended December 31, 2020 and 2019, the Company’s projected benefit obligation related to its Pension Plans increased $ 73 million and $ 93 million, respectively, primarily attributable to actuarial losses related to lower discount rate assumptions.

Components of net periodic benefit cost recorded in earnings were as follows for the Plans for each of the years ended December 31:

Pension Plans

Postretirement Plan

Pension Plans Postretirement Plan

2020 2019 2018 2020 2019 2018

(in millions)

Service cost $ 13 $ 11 $ 9 $ 1 $ 1 $ 1

Interest cost 9 13 12 2 2 2

6 unchanged sentences

Other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31 were as follows:

Pension Plans

Postretirement Plan

Pension Plans Postretirement Plan

2020 2019 2018 2020 2019 2018

(in millions)

7 unchanged sentences

Weighted-average assumptions used to determine net periodic benefit cost were as follows for the years ended December 31:

Pension Plans

Postretirement Plan

Pension Plans Postretirement Plan

2020 2019 2018 2020 2019 2018

Discount rate

Plans 0.70 % 1.80 % 1.80 % * * *

Vocalink Plan 1.55 % 2.00 % 2.80 % * * *

1 unchanged sentence

Expected return on plan assets

Plans 1.60 % 2.10 % 3.00 % * * *

Vocalink Plan 3.20 % 3.75 % 4.75 % * * *

Rate of compensation increase

Plans 1.50 % 1.50 % 2.60 % * * *

Vocalink Plan 2.75 % 2.50 % 3.85 % * * *

5 unchanged sentences

The following additional assumptions were used at December 31 in accounting for the Postretirement Plan:

Health care cost trend rate assumed for next year

Healthcare cost trend rate assumed for next year 7.00 % 6.00 %

Ultimate trend rate 5.00 % 5.00 %

1 unchanged sentence

Plan assets are managed taking into account the timing and amount of future benefit payments.

The Vocalink Plan assets are managed within the following target asset allocations:

The Vocalink Plan assets are managed with the following target asset allocations:

fixed income 35 %, U.K.

government securities 25 % , equity 25 % , real estate 9 % and cash and cash equivalents 5 % .

government securities 23 %, equity 22 %, cash and cash equivalents 12 % and real estate 8 %.

For the non-U.S.

5 unchanged sentences

The following tables set forth by level, within the Valuation Hierarchy, the Pension Plans’ assets at fair value:

December 31, 2019

December 31, 2018

Quoted Prices in Active Markets (Level 1)

Significant Other Observable Inputs (Level 2)

Quoted Prices in Active Markets (Level 1)

Significant Other Observable Inputs (Level 2)

December 31, 2020 December 31, 2019

Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant

(Level 3) Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant

(Level 3) Fair Value

(in millions)

Cash and cash equivalents 1

Government and agency securities 2

$ 59 $ — $ — $ 59 $ 16 $ — $ — $ 16

Mutual funds 2

270 117 — 387 153 193 — 346

Insurance contracts 3

Asset-backed securities 5

— 96 — 96 — 75 — 75

Total $ 329 $ 213 $ — $ 542 $ 169 $ 268 $ — $ 437

Investments at Net Asset Value (“NAV”) 4

1 unchanged sentence

1 Cash and cash equivalents are valued at quoted market prices, which represent the net asset value of the shares held by the Plans.

Governmental and agency securities are valued at unit values provided by investment managers, which are based on the fair value of the underlying investments utilizing public information, independent external valuation from third-party services or third-party advisors.

2 Certain mutual funds are valued at quoted market prices, which represent the value of the shares held by the Plans, and are therefore included in Level 1.

1 unchanged sentence

3 Insurance contracts are valued at unit values provided by investment managers, which are based on the fair value of the underlying investments utilizing public information, independent external valuation from third-party services or third-party advisors.

Asset-backed securities are classified as Level 3 due to a lack of observable inputs in measuring fair value.

These assets were sold during 2019.

Other represents hedge fund pooled vehicles which are based on the fair value of the underlying investments utilizing public information, independent external valuation from third-party services or third-party advisors, and are therefore included in Level 2.

Mutual funds (comprised primarily of credit investments) and other investments (comprised primarily of real estate investments) are valued using the NAV provided by the administrator as a practical expedient, and therefore these investments are not included in the valuation hierarchy.

4 Investments at NAV include mutual funds (comprised primarily of credit investments) and other investments (comprised primarily of real estate investments) and are valued using the net asset value provided by the administrator as a practical expedient, and therefore these investments are not included in the valuation hierarchy.

These investments have quarterly redemption frequencies with redemption notice periods ranging from 60 to 90 days.

1 unchanged sentence

Actual benefit payments may differ from expected benefit payments.

Pension Plans

Postretirement Plan

Pension Plans Postretirement Plan

(in millions)

2021 $ 19 $ 4

2026 - 2030 77 20

MASTERCARD 2020 FORM 10-K 87

1 unchanged sentence

Long-term debt consisted of the following at December 31:

Interest Payment Terms

Aggregate Principal Amount

Stated Interest Rate

2020 2019 Effective

Interest Rate

(in millions, except percentages)

2019 USD Notes

Semi-annually

December 2019

Semi-annually

2018 USD Notes

February 2018

Semi-annually

2016 USD Notes

November 2016

Semi-annually

2015 Euro Notes

December 2015

2014 USD Notes

Semi-annually

(in millions)

2020 USD Notes 3.300 % Senior Notes due March 2027 $ 1,000 $ — 3.420 %

3.350 % Senior Notes due March 2030 1,500 — 3.430 %

3.850 % Senior Notes due March 2050 1,500 — 3.896 %

2019 USD Notes 2.950 % Senior Notes due June 2029 1,000 1,000 3.030 %

3.650 % Senior Notes due June 2049 1,000 1,000 3.689 %

2.000 % Senior Notes due March 2025 750 750 2.147 %

2018 USD Notes 3.500 % Senior Notes due February 2028 500 500 3.598 %

3.950 % Senior Notes due February 2048 500 500 3.990 %

2016 USD Notes 2.000 % Senior Notes due November 2021 650 650 2.236 %

2.950 % Senior Notes due November 2026 750 750 3.044 %

3.800 % Senior Notes due November 2046 600 600 3.893 %

2015 EUR Notes 1

1.100 % Senior Notes due December 2022 859 785 1.265 %

2.100 % Senior Notes due December 2027 982 896 2.189 %

2.500 % Senior Notes due December 2030 184 169 2.562 %

2014 USD Notes 3.375 % Senior Notes due April 2024 1,000 1,000 3.484 %

Unamortized discount and debt issuance costs ( 103 ) ( 73 )

2 unchanged sentences

Long-term debt $ 12,023 $ 8,527

Relates to the 2014 USD Notes, which was classified in current liabilities as of December 31, 2018 , matured and was paid during 2019

1 Relates to euro-denominated debt issuance of € 1.650 billion in December 2015

2 Relates to current portion of the 2016 USD Notes, due in November 2021, classified as current portion of long-term debt on the consolidated balance sheet

In March 2020, the Company issued $ 1 billion principal amount of notes due March 2027, $ 1.5 billion principal amount of notes due March 2030 and $ 1.5 billion principal amount notes due March 2050 (collectively the “2020 USD Notes”).

The net proceeds from the issuance of the 2020 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $ 3.959 billion.

In May 2019, the Company issued $ 1 billion principal amount of notes due June 2029 and $ 1 billion principal amount of notes due June 2049 and in December 2019, the Company issued $ 750 million principal amount of notes due March 2025 (collectively the “2019 USD Notes”).

8 unchanged sentences

(in millions)

Thereafter 9,516

Total $ 12,775

On November 14, 2019, the Company increased its commercial paper program (the “Commercial Paper Program”) from $ 4.5 billion to $ 6 billion under which the Company is authorized to issue unsecured commercial paper notes with maturities of up to 397 days from the date of issuance.

1 unchanged sentence

In conjunction with the Commercial Paper Program, the Company entered into a committed five-year unsecured $ 6 billion revolving credit facility (the “Credit Facility”) on November 14, 2019.

The Credit Facility, which expires on November 14, 2024, amended and restated the Company’s prior $ 4.5 billion credit facility which was set to expire on November 15, 2023.

The Credit Facility, which previously expired on November 14, 2024, was extended on November 14, 2020 for an additional year and now expires on November 13, 2025.

The extension did not result in material changes to the terms and conditions of the Credit Facility.

Borrowings under the Credit Facility are available in U.S.

10 unchanged sentences

Mastercard’s amended and restated certificate of incorporation authorizes the following classes of capital stock:

Par Value Per Share

Authorized Shares

(in millions)

Dividend and Voting Rights

One vote per share

Class Par Value Per Share Authorized Shares

(in millions) Dividend and Voting Rights

A $ 0.0001 3,000 One vote per share

Dividend rights

B $ 0.0001 1,200 Non-voting

Dividend rights

No shares issued or outstanding at December 31, 2019 and 2018.

Preferred $ 0.0001 300 No shares issued or outstanding at December 31, 2020 and 2019.

Dividend and voting rights are to be determined by the Board of Directors of the Company upon issuance.

2 unchanged sentences

The Company declared a quarterly cash dividend on its Class A and Class B Common Stock during each of the four quarters of 2020, 2019 and 2018.

For the years ended December 31, 2019, 2018 and 2017 , the Company declared total per share dividends of $ 1.39 , $ 1.08 , and $ 0.91 , respectively, resulting in total annual dividends of $ 1,408 million , $ 1,120 million and $ 967 million , respectively.

The Company declared total per share dividends on its Class A and Class B Common Stock during the years ended December 31 as summarized below:

2020 2019 2018

(in millions, except per share data)

Dividends declared per share $ 1.64 $ 1.39 $ 1.08

Total dividends declared $ 1,641 $ 1,408 $ 1,120

Ownership and Governance Structure

Equity ownership and voting power of the Company’s shares were allocated as follows as of December 31:

Equity Ownership

General Voting Power

Equity Ownership

General Voting Power

Equity Ownership General Voting Power Equity Ownership General Voting Power

Public Investors (Class A stockholders) 88.2 % 88.9 % 87.8 % 88.8 %

8 unchanged sentences

Mastercard Foundation is a private charitable foundation incorporated in Canada that is controlled by directors who are independent of the Company and its principal customers.

Under the terms of the donation, Mastercard Foundation became able to resell the donated shares in May 2010 to the extent necessary to meet charitable disbursement requirements dictated by Canadian tax law.

Under Canadian tax law, Mastercard Foundation is generally required to disburse at least 3.5 % of its assets not used in administration each year for qualified charitable disbursements.

However, Mastercard Foundation obtained permission from the Canadian tax authorities to defer the giving requirements until 2021.

Mastercard Foundation, at its discretion, may decide to meet its disbursement obligations on an annual basis or to settle previously accumulated obligations during any given year.

Under such current law, Mastercard Foundation must annually disburse at least 3.5 % of its assets not used in its charitable activities and administration in the previous eight quarters (“Disbursement Quota”).

However, Mastercard Foundation obtained permission from the Canada Revenue Agency to, until December 31, 2021, meet its cumulative Disbursement Quota obligations over a period of time that, on average, demonstrates compliance with the requirement for such established time period.

Mastercard Foundation will be permitted to sell all of its remaining shares beginning May 1, 2027, subject to certain conditions.

5 unchanged sentences

The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through December 31, 2020, as well as historical purchases:

Board authorization dates

Board authorization dates December 2020 December 2019 December

2018 December

Date program became effective

February 2016

2017 December

Date program became effective Not yet effective January 2020 January 2019 March 2018 April 2017 Total

(in millions, except average price data)

16 unchanged sentences

Outstanding Shares

Class A Class B

(in millions)

16 unchanged sentences

The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2020 and 2019 were as follows:

December 31, 2019 Increase / (Decrease) Reclassifications December 31, 2020

(in millions)

Foreign currency translation adjustments 1

$ ( 638 ) $ 286 $ — $ ( 352 )

Translation adjustments on net investment hedge 2

( 38 ) ( 137 ) — ( 175 )

Cash flow hedges

Interest rate contracts 3

11 ( 147 ) 3 ( 133 )

Defined benefit pension and other postretirement plans 4

( 9 ) ( 10 ) ( 1 ) ( 20 )

Investment securities available-for-sale 1 ( 1 ) — —

Accumulated Other Comprehensive Income (Loss) $ ( 673 ) $ ( 9 ) $ 2 $ ( 680 )

December 31, 2018 Increase / (Decrease) Reclassifications December 31, 2019

(in millions)

Balance at December 31, 2017

Other comprehensive income (loss)

Balance at December 31, 2018

Other comprehensive income (loss)

Balance at December 31, 2019

During 2018, the increase in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the depreciation of the euro, British pound and Brazilian real.

Foreign currency translation adjustments 1

$ ( 661 ) $ 23 $ — $ ( 638 )

Translation adjustments on net investment hedge 2

( 66 ) 28 — ( 38 )

Cash flow hedges

Interest rate contracts 3

Defined benefit pension and other postretirement plans 4

10 ( 17 ) ( 2 ) ( 9 )

Investment securities available-for-sale ( 1 ) 2 — 1

Accumulated Other Comprehensive Income (Loss) $ ( 718 ) $ 47 $ ( 2 ) $ ( 673 )

During 2020, the decrease in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the Euro and British pound partially offset by the depreciation of the Brazilian real.

During 2019, the decrease in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the British pound partially offset by the depreciation of the euro.

1 unchanged sentence

Changes in the value of the debt are recorded in accumulated other comprehensive income (loss).

During 2018 and 2019, the decreases in the accumulated other comprehensive loss related to the net investment hedge were driven by the depreciation of the euro.

During 2020, the increase in the accumulated other comprehensive loss related to the net investment hedge was driven by the appreciation of the euro.

During 2019, the decrease in the accumulated other comprehensive loss related to the net investment hedge was driven by the depreciation of the euro.

See Note 23 (Derivative and Hedging Instruments) for additional information.

In 2019, the Company entered into treasury rate locks which are accounted for as cash flow hedges.

During 2019, in connection with these cash flow hedges, the Company recorded unrealized gains, net of tax, of $ 11 million in accumulated other comprehensive income (loss).

In the first quarter of 2020, in connection with the issuance of the 2020 USD Notes, these contracts were settled for a loss of $ 175 million, or $ 136 million net of tax, recorded in accumulated other comprehensive income (loss).

The cumulative loss will be reclassified as an adjustment to interest expense over the respective terms of the 2020 USD Notes.

See Note 23 (Derivative and Hedging Instruments) for additional information.

During 2018, the decrease in the accumulated other comprehensive gain related to the Company’s Plans was driven primarily by an actuarial loss within the Vocalink Plan.

During 2020, the increase in the accumulated other comprehensive loss related to the Company’s Plans was driven primarily by an actuarial loss within the Postretirement Plan.

During 2019, the decrease in the accumulated other comprehensive gain related to the Company’s Plans was primarily driven by actuarial losses within the Vocalink and non-U.S.

During 2018 and 2019, amounts reclassified from accumulated other comprehensive income (loss) to earnings, were not material.

See Note 14 (Pension, Postretirement and Savings Plans) for additional information.

During 2018 and 2019, gains and losses on available-for-sale investment securities, reclassified from accumulated other comprehensive income (loss) to investment income, were not material.

See Note 7 (Investments) for additional information.

Share-Based Payments

4 unchanged sentences

Compensation expense is recorded net of estimated forfeitures, with estimates adjusted as appropriate.

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There are approximately 116 million shares of Class A common stock authorized for equity awards under the LTIP.

1 unchanged sentence

Shares issued as a result of Option exercises and the conversions of RSUs and PSUs were funded primarily with the issuance of new shares of Class A common stock.

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Stock Options

Stock Options expire ten years from the date of grant and vest ratably over four years .

Options expire ten years from the date of grant and vest ratably over four years .

For Options granted, a participant’s unvested awards are forfeited upon termination.

However, in the event a participant terminates employment due to disability or retirement more than six months ( seven months for those granted on or after March 1, 2017) after receiving the award, the participant retains all of their awards without providing additional service to the Company.

In the event a participant terminates employment due to disability or retirement more than seven months after receiving the award, however, the participant retains all of their awards without providing additional service to the Company.

Retirement eligibility is dependent upon age and years of service.

Compensation expense continues to be recognized over the vesting period as stated in the LTIP.

Compensation expense is recognized over the vesting period as stated in the LTIP.

The fair value of each Option is estimated on the date of grant using a Black-Scholes option pricing model.

The following table presents the weighted-average assumptions used in the valuation and the resulting weighted-average fair value per option granted for the years ended December 31:

2020 2019 2018

Risk-free rate of return 1.0 % 2.6 % 2.7 %

8 unchanged sentences

The following table summarizes the Company’s option activity for the year ended December 31, 2020:

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

(in millions)

Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value

(in millions) (in years) (in millions)

Outstanding at January 1, 2020 6.6 $ 117

Granted 0.4 $ 263

Exercised ( 1.3 ) $ 75

Forfeited/expired — $ 229

4 unchanged sentences

The cost is expected to be recognized over a weighted-average period of 2.1 years.

Restricted and Performance Stock Units

RSUs and PSUs generally vest after three years .

For all RSUs and PSUs granted prior to March 2017, a participant’s unvested awards are forfeited upon termination of employment.

For all RSUs and PSUs granted on or after March 1, 2017, in the event of termination due to job elimination (as defined by the Company), a participant will retain a pro-rata portion of the unvested awards for services performed through the date of termination.

In the event a participant terminates employment due to disability or retirement more than six months ( seven months for those granted on or after March 1, 2017) after receiving the award, the participant retains all of their awards without providing additional service to the Company.

Compensation expense is recognized over the shorter of the vesting periods stated in the LTIP or the date the individual becomes eligible to retire but not less than six months (or seven months for grants awarded on or after March 1, 2017).

Restricted Stock Units

For RSUs granted on or after March 1, 2020, the awards generally vest ratably over four years.

For RSUs granted before March 1, 2020, the awards generally vest after three years .

A participant’s unvested awards are forfeited upon termination of employment.

In the event of termination due to job elimination (as defined by the Company), however, a participant will retain a pro-rata portion of the unvested awards for services performed through the date of termination.

In the event a participant terminates employment due to disability or retirement more than seven months after receiving the award, the participant retains all of their awards without providing additional service to the Company.

Compensation expense is recognized over the shorter of the vesting periods stated in the LTIP or the date the individual becomes eligible to retire but not less than seven months .

MASTERCARD 2020 FORM 10-K 93

1 unchanged sentence

The following table summarizes the Company’s RSU activity for the year ended December 31, 2020:

Weighted-Average Grant-Date Fair Value

Aggregate Intrinsic Value

(in millions)

Units Weighted-Average Grant-Date Fair Value Aggregate Intrinsic Value

(in millions) (in millions)

Outstanding at January 1, 2020 2.9 $ 166

Granted 0.9 $ 288

Converted ( 1.2 ) $ 116

Forfeited ( 0.1 ) $ 218

Outstanding at December 31, 2020 2.5 $ 231 $ 898

5 unchanged sentences

The cost is expected to be recognized over a weighted-average period of 2.4 years.

Performance Stock Units

PSUs vest after three years , however, awards granted on or after March 1, 2019 are subject to a mandatory one-year post-vest hold.

A participant’s unvested awards are forfeited upon termination of employment.

The following table summarizes the Company’s PSU activity for the year ended December 31, 2020:

Weighted-Average

Grant-Date Fair Value

Aggregate Intrinsic Value

(in millions)

Units Weighted-Average

Grant-Date Fair Value Aggregate Intrinsic Value

(in millions) (in millions)

Outstanding at January 1, 2020 0.5 $ 167

Granted 0.2 $ 291

Converted ( 0.3 ) $ 126

Outstanding at December 31, 2020 0.4 $ 259 $ 148

PSUs expected to vest at December 31, 2020 0.4 $ 259 $ 148

Represents additional shares issued in March 2019 related to the 2016 PSU grant based on performance and market conditions achieved over the three-year measurement period.

These shares vested upon issuance.

Since 2013, PSUs containing performance and market conditions have been issued.

2 unchanged sentences

The Monte Carlo simulation valuation model is used to determine the grant-date fair value.

Compensation expenses for PSUs are recognized over the requisite service period if it is probable that the performance target will be achieved and subsequently adjusted if the probability assessment changes.

Compensation expense for PSUs is recognized over the requisite service period, or the date the individual becomes eligible to retire but not less than seven months , if it is probable that the performance target will be achieved and subsequently adjusted if the probability assessment changes.

During the year ended December 31, 2020, performance targets related to PSU awards granted in 2018, and scheduled to vest in 2021 (“2018 PSU Awards”), were adjusted to exclude certain pandemic-related financial impacts deemed outside of the Company’s control.

The adjustment required the Company to apply modification accounting to the 2018 PSU Awards.

The modification had an immaterial impact on compensation expense expected to be recognized over the remaining service period.

As of December 31, 2020, there was $ 38 million of total unrecognized compensation cost related to non-vested PSUs.

4 unchanged sentences

The following table includes additional share-based payment information for each of the years ended December 31:

2020 2019 2018

(in millions, except weighted-average fair value)

8 unchanged sentences

Total intrinsic value of PSUs converted into shares of Class A common stock 92 85 40

At December 31, 2019 , the Company had the following future minimum payments due under noncancelable agreements, primarily related to sponsorships to promote the Mastercard brand and licensing arrangements.

At December 31, 2020, the Company had the following future minimum payments due under noncancelable agreements, primarily related to sponsorships to promote the Mastercard brand and licensing arrangements and a commitment to purchase the remaining shares of a majority-owned joint venture.

The Company has accrued $ 22 million of these future payments as of December 31, 2020.

(in millions)

Total $ 1,024

Components of Income and Income tax expense

The domestic and foreign components of income before income taxes for the years ended December 31 are as follows:

2020 2019 2018

(in millions)

United States $ 3,304 $ 4,213 $ 3,510

Foreign 4,456 5,518 3,694

Income before income taxes $ 7,760 $ 9,731 $ 7,204

2 unchanged sentences

The total income tax provision for the years ended December 31 is comprised of the following components:

2020 2019 2018

(in millions)

Federal $ 439 $ 642 $ 649

State and local 56 81 69

Foreign 781 897 871

1,276 1,620 1,589

Federal 106 40 ( 228 )

State and local 9 — ( 11 )

Foreign ( 42 ) ( 47 ) ( 5 )

73 ( 7 ) ( 244 )

Income tax expense $ 1,349 $ 1,613 $ 1,345

2 unchanged sentences

federal statutory income tax rate for the years ended December 31, is as follows:

2020 2019 2018

Amount Percent Amount Percent Amount Percent

(in millions, except percentages)

5 unchanged sentences

Foreign tax credits 1

Transition Tax

Remeasurement of deferred taxes

— — % ( 32 ) ( 0.3 ) % ( 110 ) ( 1.5 ) %

Windfall benefit ( 119 ) ( 1.5 ) % ( 129 ) ( 1.3 ) % ( 72 ) ( 1.0 ) %

Other, net ( 26 ) ( 0.3 ) % ( 127 ) ( 1.4 ) % ( 134 ) ( 1.8 ) %

Income tax expense $ 1,349 17.4 % $ 1,613 16.6 % $ 1,345 18.7 %

1 unchanged sentence

The effective income tax rates for the years ended December 31, 2020, 2019 and 2018 were 17.4 %, 16.6 % and 18.7 %, respectively.

The effective income tax rate for 2020 was higher than the effective income tax rate for 2019, primarily due to discrete tax benefits in 2019, partially offset by a more favorable geographic mix of earnings in 2020.

The 2019 discrete tax benefits related to a favorable court ruling, a reduction to the Company’s transition tax liability and additional foreign tax credits which can be carried back under U.S.

tax reform transition rules issued by the Department of the Treasury and the Internal Revenue Service.

The effective income tax rate for 2019 was lower than the effective income tax rate for 2018 primarily due to the nondeductible nature of the fine issued by the European Commission in 2018 and a discrete tax benefit related to a favorable court ruling in 2019.

1 unchanged sentence

tax reform, which can be carried back and utilized in 2017 under transition rules issued by the Department of the Treasury and the Internal Revenue Service.

The effective income tax rate for 2018 was lower than the effective income tax rate for 2017 primarily due to additional tax expense of $ 873 million in 2017 attributable to U.S.

tax reform (which included provisional amounts of $ 825 million related to the one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”), the remeasurement of the Company’s net deferred tax asset balance in the U.S.

and the recognition of a deferred tax liability related to a change in assertion regarding the indefinite reinvestment of a substantial amount of the Company’s foreign earnings, as well as $ 48 million due to a foregone foreign tax credit benefit on 2017 repatriations).

Additionally, the lower effective income tax rate in 2018 was due to a lower 2018 statutory tax rate in the U.S.

and Belgium, a more favorable geographic mix of earnings and discrete tax benefits, relating primarily to $ 90 million of foreign tax credits generated in 2018, which can be carried back and utilized in 2017 under transition rules issued by the Department of the Treasury and the Internal Revenue Service, along with provisions for legal matters in the United States.

These benefits were partially offset by the

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nondeductible nature of the fine issued by the European Commission.

See Note 21 (Legal and Regulatory Proceedings) for further discussion of the European Commission fine and U.S.

merchant class litigation.

Singapore Income Tax Rate

6 unchanged sentences

Indefinite Reinvestment

During 2019 and 2018 , the Company repatriated approximately $ 2.5 billion and $ 3.3 billion , respectively.

As of December 31, 2019 and 2018 the Company had approximately $ 3.5 billion and $ 2.5 billion , respectively, of accumulated earnings to be repatriated in the future, for which immaterial deferred tax benefits were recorded.

The tax effect is primarily related to the estimated foreign exchange impact recognized when earnings are repatriated.

The Company expects that foreign withholding taxes associated with these future repatriated earnings will not be material.

As of December 31, 2020 the Company had deferred tax liabilities of $ 61 million primarily related to the tax effect of the estimated foreign exchange impact on unremitted earnings.

The Company expects that foreign withholding taxes associated with future repatriation of these earnings will not be material.

Earnings of approximately $ 0.6 billion remain permanently reinvested and the Company estimates that immaterial U.S.

federal and state and local income tax benefit would result, primarily from foreign exchange, if these earnings were to be repatriated.

federal and state and local income tax expense would result, primarily from foreign exchange, if these earnings were to be repatriated.

Deferred Taxes

7 unchanged sentences

Net operating and capital losses 147 119

Unrealized gain/loss - 2015 EUR Notes 58 20

foreign tax credits 276 145

Intangible assets 182 157

Other items 142 74

Valuation allowance ( 353 ) ( 205 )

4 unchanged sentences

Property, plant and equipment 183 128

Previously taxed earnings and profits 61 —

Other items 98 63

Total Deferred Tax Liabilities 636 461

Net Deferred Tax Assets $ 405 $ 458

A deferred tax asset has been established in 2019 for $ 145 million related to foreign taxes paid in the current period, which are not expected to be utilized as credits in the current or future period, with a corresponding full valuation allowance.

The valuation allowance balance at December 31, 2019 primarily relates to the Company’s ability to recognize future tax benefits associated with the carry forward of U.S.

foreign tax credits generated in the current period and certain foreign net operating losses.

The valuation allowance balance at December 31, 2018 relates primarily to the Company’s ability to recognize tax benefits associated

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with certain foreign net operating losses.

The valuation allowance balance at December 31, 2020 and 2019 primarily relates to the Company’s ability to recognize future tax benefits associated with the carry forward of U.S.

foreign tax credits generated in the current and prior periods and certain foreign net operating losses.

The recognition of the foreign tax credits is dependent upon the realization of future foreign source income in the appropriate foreign tax credit basket in accordance with U.S.

federal income tax law.

The recognition of the foreign losses is dependent upon the future taxable income in such jurisdictions and the ability under tax law in these jurisdictions to utilize net operating losses following a change in control.

The recognition of the foreign losses is

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dependent upon the future taxable income in such jurisdictions and the ability under tax law in these jurisdictions to utilize net operating losses following a change in control.

A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the years ended December 31, is as follows:

2020 2019 2018

(in millions)

6 unchanged sentences

Ending balance $ 388 $ 203 $ 164

The unrecognized tax benefit of $ 203 million , if recognized, would reduce the effective income tax rate.

In 2019, there was an increase to the Company’s unrecognized tax benefits primarily due to various U.S.

tax issues, compared to a reduction in the prior year primarily due to a favorable court decision and settlements with tax authorities in multiple jurisdictions.

Further, the information gained related to these matters was considered in measuring uncertain tax benefits recognized for the periods subsequent to the periods settled.

As of December 31, 2020, the amount of unrecognized tax benefit was $ 388 million.

This amount, if recognized, would reduce the effective income tax rate.

The Company’s unrecognized tax benefits increased primarily due to a prior year tax issue resulting from a refund claim filed in 2020.

The Company is subject to tax in the U.S., Belgium, Singapore, the United Kingdom and various other foreign jurisdictions, as well as state and local jurisdictions.

8 unchanged sentences

In addition, as of December 31, 2020 and 2019, the amounts the Company has recognized for penalties payable in its consolidated balance sheet were not material.

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Legal and Regulatory Proceedings

10 unchanged sentences

Any of these events could have a material adverse effect on Mastercard’s results of operations, financial condition and overall business.

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Interchange Litigation and Regulatory Proceedings

4 unchanged sentences

Taken together, the claims in the complaints were generally brought under both Sections 1 and 2 of the Sherman Act, which prohibit monopolization and attempts or conspiracies to monopolize a particular industry, and some of these complaints contain unfair competition law claims under state law.

The complaints allege, among other things, that Mastercard, Visa, and certain financial institutions conspired to set the price of interchange fees, enacted point of sale acceptance rules (including the no surcharge rule) in violation of antitrust laws and engaged in unlawful tying and bundling of certain products and services.

The cases were consolidated for pre-trial proceedings in the U.S.

15 unchanged sentences

Mastercard also agreed to provide class members with a short-term reduction in default credit interchange rates and to modify certain of its business practices, including its “no surcharge” rule.

The court granted final approval of the settlement in December 2013, and objectors to the settlement appealed that decision to the U.S.

Court of Appeals for the Second Circuit.

In June 2016, the court of appeals vacated the class action certification, reversed the settlement approval and sent the case back to the district court for further proceedings.

The court of appeals’ ruling was based primarily on whether the merchants were adequately represented by counsel in the settlement.

As a result of the appellate court ruling, the district court divided the merchants’ claims into two separate classes - monetary damages claims (the “Damages Class”) and claims seeking changes to business practices (the “Rules Relief Class”).

The court appointed separate counsel for each class.

In September 2018, the parties to the Damages Class litigation entered into a class settlement agreement to resolve the Damages Class claims.

Mastercard increased its reserve by $ 237 million during 2018 to reflect both its expected financial obligation under the Damages Class settlement agreement and the filed and anticipated opt-out merchant cases.

The time period during which Damages Class members were permitted to opt out of the class settlement agreement ended in July 2019 with merchants representing slightly more than 25 % of the Damages Class interchange volume choosing to opt out of the settlement.

The district court granted final approval of the settlement in December 2019.

The district court’s settlement approval order has been appealed.

Mastercard has commenced settlement negotiations with a number of the opt-out merchants and has reached settlements and/or agreements in principle to settle a number of these claims.

The Damages Class settlement agreement does not relate to the Rules Relief Class claims.

Separate settlement negotiations with the Rules Relief Class are ongoing.

In December 2020, the Rules Relief Class filed a motion for class certification.

Briefing on summary judgment motions in the Rules Relief Class and opt-out merchant cases was completed in December 2020.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk