What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-12 compared with 2020-02-14 · 82 added, 88 removed, 136 unchanged (56% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

As of December 31, 2019 and 2018 , Mastercard had accrued a liability of $ 914 million as a reserve for both the Damages Class litigation and the filed and anticipated opt-out merchant cases.

As of December 31, 2020 and 2019, Mastercard had accrued a liability of $ 783 million and $ 914 million, respectively, as a reserve for both the Damages Class litigation and the opt-out merchant cases.

As of December 31, 2020 and 2019, Mastercard had $ 586 million and $ 584 million, respectively, in a qualified cash settlement fund related to the Damages Class litigation and classified as restricted cash on its consolidated balance sheet.

During the first quarter of 2019, Mastercard increased its qualified cash settlement fund by $ 108 million in accordance with a January 2019 preliminary approval of the settlement.

The Damages Class settlement agreement provided for a return to the defendants of a portion of the cash settlement fund, based upon the percentage of interchange volume represented by the opt out merchants.

During the fourth quarter of 2019, $ 84 million of the qualified cash settlement fund was reclassified from restricted cash to cash and cash equivalents in accordance with the December 2019 final approval of the settlement.

The reserve as of December 31, 2019 for both the Damages Class litigation and the filed opt-out merchants represents Mastercard’s best estimate of its probable liabilities in these matters.

The reserve as of December 31, 2020 for both the Damages Class litigation and the opt-out merchants represents Mastercard’s best estimate of its probable liabilities in these matters.

The portion of the accrued liability relating to both the opt-out merchants and the Damages Class litigation settlement does not represent an estimate of a loss, if any, if the matters were litigated to a final outcome.

9 unchanged sentences

Objectors to the settlement have sought to appeal the approval orders.

Certain appellate courts have rejected the objectors’ appeals, while outstanding appeals remain in a few provinces.

In 2017, Mastercard recorded a provision for litigation of $ 15 million related to this matter.

All appellate courts have rejected the objectors’ appeals.

In one of the appeals, the objectors have until April 2021 to request an appeal to the Supreme Court of Canada.

For the remainder of the appeals, the Supreme Court has previously denied such requests.

In July 2015, the European Commission (“EC”) issued a Statement of Objections related to Mastercard’s interregional interchange fees and central acquiring rule within the European Economic Area (the “EEA”).

8 unchanged sentences

Mastercard incurred a charge of $ 654 million in 2018 in relation to this matter.

Since May 2012, a number of United Kingdom (“U.K.”) retailers filed claims or threatened litigation against Mastercard seeking damages for alleged anti-competitive conduct with respect to Mastercard’s cross-border interchange fees and its U.K.

and Ireland domestic

MASTERCARD 2019 FORM 10-K 101

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interchange fees (the “U.K.

Since May 2012, a number of United Kingdom (“U.K.”) merchants filed claims or threatened litigation against Mastercard seeking damages for merchants allegedly paying excessive costs for the acceptance of Mastercard credit and debit cards arising out of alleged anti-competitive conduct with respect to, among other things, Mastercard’s cross-border interchange fees and its U.K.

and Ireland domestic interchange fees (the “U.K.

Merchant claimants”).

3 unchanged sentences

Mastercard has resolved over £ 2 billion (approximately $ 3 billion as of December 31, 2020) of these damages claims through settlement or judgment.

Since June 2015, Mastercard has recorded litigation provisions for settlements, judgments and legal fees relating to these claims, including charges of $ 237 million in 2018.

As detailed below, Mastercard continues to litigate with the remaining U.K.

and Pan-European Merchant claimants and it has submitted statements of defense disputing liability and damages claims.

In January 2017, Mastercard received a liability judgment in its favor on all significant matters in a separate action brought by ten of the U.K.

3 unchanged sentences

In July 2018, the U.K.

appellate court ruled against both Mastercard and Visa on two of the three legal issues being considered, concluding that U.K.

interchange rates restricted competition and that they were not objectively necessary for the payment networks.

The appellate court sent the cases back to trial for reconsideration on the remaining issue concerning the “lawful” level of interchange.

Supreme Court granted the parties permission to appeal the appellate court’s rulings and oral argument on the appeals was heard in January 2020.

Mastercard expects the litigation process to be delayed pending the decision of the U.K.

Supreme Court on the appeals.

appellate court heard the appeals of the four merchants and ruled against both Mastercard and Visa on two of the three legal issues being considered.

The parties appealed the rulings to the U.K.

Supreme Court.

In June 2020, the U.K.

Supreme Court ruled against Mastercard and Visa with respect to one of the liability issues being considered by the Court related to U.K domestic interchange fees.

Additionally, the U.K Supreme Court set out the legal standard that should be applied by lower trial courts with respect to determining whether interchange was exemptible under applicable law, and provided guidance to lower courts with regard to the legal standard that should be applied in assessing merchants’ damages claims.

Supreme Court sent one of the four merchant cases back to the trial court for a determination of liability and damages issues and sent the remaining three merchant cases back to the trial court for a determination of damages issues only.

A hearing in one of these merchant cases on liability and damages issues is expected to be scheduled for the fourth quarter of 2021, while a trial on damages for the other three merchant claims is not expected to occur until 2023.

Since June 2015, Mastercard has recorded litigation provisions for settlements, judgments and legal fees relating to these claims, including charges of $ 237 million in 2018.

Mastercard continues to litigate with the remaining U.K.

and Pan-European Merchant claimants and it has submitted statements of defense disputing liability and damages claims.

The majority of these merchant claims

100 MASTERCARD 2020 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

generally had been stayed pending the decision of the U.K.

Supreme Court, and a number of those matters are now progressing with motion practice and discovery.

Mastercard incurred charges of $ 22 million in 2020 to reflect both the estimated attorneys’ fees incurred by the four merchant claimants in the U.K.

Supreme Court appeal, as well as settlements with a number of Pan-European merchants.

In September 2016, a proposed collective action was filed in the United Kingdom on behalf of U.K.

5 unchanged sentences

appellate court granted the plaintiffs’ appeal of the trial court’s decision and sent the case back to the trial court for a re-hearing on the plaintiffs’ collective action application.

Mastercard has been granted permission to appeal the appellate court ruling to the U.K.

Supreme Court and oral argument on that appeal is scheduled to occur in May 2020.

In December 2020, the U.K.

Supreme Court rejected Mastercard’s appeal of this ruling.

The case has been sent back to the trial court for a re-hearing on the plaintiffs’ collective action application in light of the Supreme Court decision.

The hearing is scheduled to occur in late March 2021.

ATM Non-Discrimination Rule Surcharge Complaints

12 unchanged sentences

In September 2019, the plaintiffs filed their motions for class certification in which the plaintiffs, in aggregate, allege over $ 1 billion in damages against all of the defendants.

Mastercard intends to vigorously defend against both the plaintiffs’ liability and damages claims and to oppose class certification.

Mastercard expects briefing on class certification to be completed in the second quarter of 2020.

102 MASTERCARD 2019 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mastercard intends to vigorously defend against both the plaintiffs’ liability and damages claims and has opposed class certification.

Briefing on class certification is complete.

Liability Shift Litigation

3 unchanged sentences

The plaintiffs seek treble damages, attorney’s fees and costs and an injunction against future violations of governing law, and the defendants have filed a motion to dismiss.

In September 2016, the court denied the Network Defendants’ motion to dismiss the complaint, but granted such a motion for EMVCo and the Bank Defendants.

In May 2017, the court transferred the case to New York so that discovery could be coordinated with the U.S.

In September 2016, the district court denied the Network Defendants’ motion to dismiss the complaint, but granted such a motion for EMVCo and the Bank Defendants.

In May 2017, the district court transferred the case to New York so that discovery could be coordinated with the U.S.

merchant class interchange litigation described above.

The plaintiffs have filed a renewed motion for class certification, following the district court’s denial of their initial motion.

In August 2020, the district court issued an order granting the plaintiffs’ request for class certification.

In January 2021, the Network Defendants’ request for permission to appeal the district court’s certification decision to the appellate court was denied.

The case is proceeding with substantive expert discovery.

MASTERCARD 2020 FORM 10-K 101

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Telephone Consumer Protection Class Action

3 unchanged sentences

Mastercard has asserted various defenses to the claims, and has notified FAB of an indemnity claim that it has (which FAB has disputed).

In June 2018, the court granted Mastercard’s motion to stay the proceedings until the Federal Communications Commission (“FCC”) makes a decision on the application of the TCPA to online fax services.

In June 2018, the district court granted Mastercard’s motion to stay the proceedings until the Federal Communications Commission makes a decision on the application of the TCPA to online fax services.

In December 2019, the FCC issued a declaratory ruling clarifying that the TCPA does not apply to faxes sent to online fax services that are received via e-mail.

As a result of the ruling, the stay of the litigation was lifted in January 2020.

In January 2021, the magistrate judge serving on the district court issued a decision recommending that the district court judge deny plaintiffs’ class certification motion.

The plaintiffs have the opportunity to file objections to this decision with the district court judge.

Federal Trade Commission Investigation

In June 2020, the U.S.

Federal Trade Commission’s Bureau of Competition (“FTC”) informed Mastercard that it has initiated a formal investigation into compliance with the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In particular, the investigation focuses on Mastercard’s compliance with the debit routing provisions of the Durbin Amendment.

The FTC has issued a subpoena and Mastercard is cooperating with it in the investigation.

Prepaid Cards Matter

Mastercard is subject to an ongoing confidential legal matter related to prepaid cards in the U.K.

This matter focuses exclusively on historic behavior, and has no prospective impact on Mastercard’s on-going business.

In connection with this matter, in the fourth quarter of 2020, Mastercard recorded a litigation charge of $ 45 million.

Settlement and Other Risk Management

2 unchanged sentences

While the term and amount of the guarantee are unlimited, the duration of settlement exposure is short term and typically limited to a few days.

Gross settlement exposure is estimated using the average daily payment volume during the three months ended December 31, 2019 multiplied by the estimated number of days of exposure.

Gross settlement exposure is estimated using the average daily payment volume during the three months prior to period end multiplied by the estimated number of days of exposure.

The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company’s settlement risk and exposure.

1 unchanged sentence

Historically, the Company has experienced a low level of losses from customer failures.

As part of its policies, Mastercard requires certain customers that are not in compliance with the Company’s risk standards to post collateral, such as cash, letters of credit, or guarantees.

As part of its policies, Mastercard requires certain customers that are not in compliance with the Company’s risk standards to post collateral, such as cash, letters of credit, guarantees, or other risk mitigating arrangements.

This requirement is based on a review of the individual risk circumstances for each customer.

5 unchanged sentences

Gross settlement exposure $ 52,360 $ 55,800

Collateral held for settlement exposure

Collateral applied to settlement exposure ( 6,021 ) ( 4,772 )

Net uncollateralized settlement exposure $ 46,339 $ 51,028

3 unchanged sentences

Certain indemnifications do not provide a stated maximum exposure.

As the extent of the Company’s obligations under these agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable.

Historically, payments made by the Company under these types of contractual arrangements have not been material.

As the extent of the Company’s obligations under these agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements

102 MASTERCARD 2020 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is not determinable.

Historically, payments made by the Company under these types of contractual arrangements have not been material.

Derivative and Hedging Instruments

3 unchanged sentences

Foreign Exchange Risk

The Company enters into foreign exchange derivative contracts to manage transactional currency exposure associated with anticipated receipts and disbursements which are valued based on currencies other than the functional currency of the entity.

The Company enters into foreign exchange derivative contracts to manage currency exposure associated with anticipated receipts and disbursements which are valued based on currencies other than the functional currency of the entity.

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

In addition, the Company is subject to foreign exchange risk as part of its daily settlement activities.

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

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

The objective of these activities is to reduce the Company’s exposure to gains and losses resulting from fluctuations of foreign currencies against its functional currencies.

The Company’s foreign exchange derivative contracts are summarized below:

December 31, 2019

December 31, 2018

Estimated Fair

The Company’s derivative contracts are summarized below:

December 31, 2020 December 31, 2019

Notional Fair

Value Notional Fair

(in millions)

5 unchanged sentences

Other current liabilities 1

( 28 ) ( 32 )

1 The derivative contracts are subject to enforceable master netting arrangements, which contain various netting and setoff provisions.

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

(in millions)

5 unchanged sentences

The Company’s derivative financial instruments are subject to both market and counterparty credit risk.

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

Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as

MASTERCARD 2020 FORM 10-K 103

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

foreign currency exchange rates, interest rates and other related variables.

Counterparty credit risk is the risk of loss due to failure of the counterparty to perform its obligations in accordance with contractual terms.

1 unchanged sentence

Generally, the Company does not obtain collateral related to derivatives because of the high credit ratings of the counterparties.

104 MASTERCARD 2019 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Investment Hedge

1 unchanged sentence

In 2015, the Company designated its € 1.65 billion euro-denominated debt as a net investment hedge for a portion of its net investment in European operations.

As of December 31, 2019 , the Company had a net foreign currency transaction pre-tax loss of $ 84 million in accumulated other comprehensive income (loss) associated with hedging activity.

As of December 31, 2020, the Company had a net foreign currency transaction loss of $ 175 million after tax, in accumulated other comprehensive income (loss) associated with hedging activity.

Interest Rate Risk

Cash Flow Hedges

The Company is exposed to interest rate volatility on future debt issuances.

To manage this risk, in the fourth quarter of 2019, the Company entered into treasury rate locks to lock the benchmark rate on a portion of the interest payments related to forecasted debt issuances.

These locks are linked to future interest payments on anticipated U.S.

dollar debt issuances forecasted to occur during 2020 and are accounted for as cash flow hedges.

The maximum length of time over which the Company has hedged its exposure to the variability in future cash flows is 30 years.

As of December 31, 2019 , the total notional amount of interest rate contracts outstanding was $ 1 billion .

The Company did not have any derivative instruments relating to this program outstanding as of December 31, 2018.

As of December 31, 2019 , in connection with these cash flow hedges, the Company recorded pre-tax net unrealized gains of $ 14 million in accumulated other comprehensive income.

As of December 31, 2019 , the fair value of these contracts was $ 14 million and is included in prepaid expenses and other current assets on the consolidated balance sheet.

During the fourth quarter of 2019, the Company entered into treasury rate locks for a total notional amount of $ 1 billion, which were accounted for as cash flow hedges.

These contracts were entered into to hedge a portion of the Company’s interest rate exposure attributable to changes in the treasury rates related to the forecasted debt issuance during 2020.

The maximum length of time over which the Company had hedged its exposure was 30 years.

In connection with the issuance of the 2020 USD Notes, these contracts were settled and the Company paid $ 175 million.

As of December 31, 2020, a cumulative loss of $ 133 million, after tax, was recorded in accumulated other comprehensive income (loss) associated with these contracts and will be reclassified as an adjustment to interest expense over the respective terms of the 2020 USD Notes.

As of December 31, 2019, the Company recorded a pre-tax net unrealized gain of $ 14 million ($ 11 million, after tax) in accumulated other comprehensive income (loss) associated with these contracts.

In 2020, the Company reclassified $ 4 million, pre-tax, of the deferred loss on cash flow derivative contracts recorded in accumulated other comprehensive income (loss) to interest expense on the statement of operations.

The Company estimates that $ 6 million, pre-tax, of the deferred loss will be reclassified into interest expense within the next 12 months.

Segment Reporting

Mastercard has concluded it has one reportable operating segment, “Payment Solutions.” Mastercard’s President and Chief Executive Officer has been identified as the chief operating decision-maker.

Mastercard has concluded it has one reportable operating segment, “Payment Solutions.” Mastercard’s Chief Executive Officer has been identified as the chief operating decision-maker.

All of the Company’s activities are interrelated, and each activity is dependent upon and supportive of the other.

6 unchanged sentences

The following table reflects the geographical location of the Company’s property, equipment and right-of-use assets, net, as of December 31:

2020 2019 2018

(in millions)

1 unchanged sentence

Other countries 717 681 308

MASTERCARD 2019 FORM 10-K 105

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Summary of Quarterly Data (Unaudited)

2019 Quarter Ended

(in millions, except per share data)

Operating income

Basic earnings per share

Basic weighted-average shares outstanding

Diluted earnings per share

Diluted weighted-average shares outstanding

2018 Quarter Ended

(in millions, except per share data)

Operating income

Basic earnings per share

Basic weighted-average shares outstanding

Diluted earnings per share

Diluted weighted-average shares outstanding

Tables may not sum due to rounding.

Total $ 1,902 $ 1,828 $ 921

104 MASTERCARD 2020 FORM 10-K

3 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data