What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-02-11 compared with 2021-02-12 · 155 added, 99 removed, 119 unchanged (68% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

In July 2006, the group of purported merchant class plaintiffs filed a supplemental complaint alleging that Mastercard’s initial public offering of its Class A Common Stock in May 2006 (the “IPO”) and certain purported agreements entered into between Mastercard and financial institutions in connection with the IPO:

(1) violate U.S.

antitrust laws and (2) constituted a fraudulent conveyance because the financial institutions allegedly attempted to release, without adequate consideration, Mastercard’s right to assess them for Mastercard’s litigation liabilities.

The class plaintiffs sought treble damages and injunctive relief including, but not limited to, an order reversing and unwinding the IPO.

In February 2011, Mastercard and Mastercard International entered into each of:

(1) an omnibus judgment sharing and settlement sharing agreement with Visa Inc., Visa U.S.A.

and Visa International Service Association and a number of financial institutions;

and (2) a Mastercard settlement and judgment sharing agreement with a number of financial institutions.

The agreements provide for the apportionment of certain costs and liabilities which Mastercard, the Visa parties and the financial institutions may incur, jointly and/or severally, in the event of an adverse judgment or settlement of one or all of the merchant litigation cases.

Among a number of scenarios addressed by the agreements, in the event of a global settlement involving the Visa parties, the financial institutions and Mastercard, Mastercard would pay 12 % of the monetary portion of the settlement.

In the event of a settlement involving only Mastercard and the financial institutions with respect to their issuance of Mastercard cards, Mastercard would pay 36 % of the monetary portion of such settlement.

In October 2012, the parties entered into a definitive settlement agreement with respect to the merchant class litigation (including with respect to the claims related to the IPO) and the defendants separately entered into a settlement agreement with the individual merchant plaintiffs.

The settlements included cash payments that were apportioned among the defendants pursuant to the omnibus judgment sharing and settlement sharing agreement described above.

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.

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 and oral argument on the appeal is scheduled for March 2022.

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.

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

In September 2021, the district court granted the Rules Relief Class’s motion for class certification.

As of December 31, 2021 and 2020, Mastercard had accrued a liability of $ 783 million as a reserve for both the Damages Class litigation and the opt-out merchant cases.

As of December 31, 2021 and 2020, Mastercard had $ 586 million in a qualified cash settlement fund related to the Damages Class litigation and classified as restricted cash on its consolidated balance sheet.

The reserve as of December 31, 2021 for both the Damages Class litigation and the opt-out merchants represents Mastercard’s best estimate of its probable liabilities in these matters.

1 unchanged sentence

Mastercard cannot estimate the potential liability if that were to occur.

In December 2010, a proposed class action complaint was commenced against Mastercard in Quebec on behalf of Canadian merchants.

The suit essentially repeated the allegations and arguments of a previously filed application by the Canadian Competition Bureau to the Canadian Competition Tribunal (dismissed in Mastercard’s favor) concerning certain Mastercard rules related to point-of-sale acceptance, including the “honor all cards” and “no surcharge” rules.

The Quebec suit sought compensatory and punitive damages in unspecified amounts, as well as injunctive relief.

In the first half of 2011, additional purported class action lawsuits were commenced in British Columbia and Ontario against Mastercard, Visa and a number of large Canadian financial institutions.

The British Columbia suit sought compensatory damages in unspecified amounts, and the Ontario suit sought compensatory damages of $ 5 billion on the basis of alleged conspiracy and various alleged breaches of the Canadian Competition Act.

Additional purported class action complaints were commenced in Saskatchewan and Alberta with claims that largely mirror those in the other suits.

In June 2017, Mastercard entered into a class settlement agreement to resolve all of the Canadian class action litigation.

The settlement, which requires Mastercard to make a cash payment and modify its “no surcharge” rule, has received court approval in each Canadian province.

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

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”).

The Statement of Objections, which followed an investigation opened in 2013, included preliminary conclusions concerning the alleged anticompetitive effects of these practices.

In December 2018, Mastercard announced the anticipated resolution of the EC’s investigation.

With respect to interregional interchange fees, Mastercard made a settlement proposal whereby it would make changes to its interregional interchange fees.

The EC issued a decision accepting the settlement in April 2019, with changes to interregional interchange fees going into effect in the fourth quarter of 2019.

In addition, with respect to Mastercard’s historic central acquiring rule, the EC issued a negative decision in January 2019.

The EC’s negative decision covers a period of time of less than two years before the rule’s modification.

The rule was modified in late 2015 to comply with the requirements of the EEA Interchange Fee Regulation.

The decision does not require any modification of Mastercard’s current business practices but included a fine of € 571 million, which was paid in April 2019.

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

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.

Since May 2012, a number of United Kingdom (“U.K.”) merchants filed claims or threatened litigation against Mastercard seeking damages for excessive costs paid for 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.

1 unchanged sentence

In addition, Mastercard, has faced similar filed or threatened litigation by merchants with respect to interchange rates in other countries in Europe (the “Pan-European Merchant claimants”).

In aggregate, the alleged damages claims from the U.K.

and Pan-European Merchant claimants were in the amount of approximately £ 3 billion (approximately $ 4.5 billion as of December 31, 2020).

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

Mastercard has resolved a substantial amount of these damages claims through settlement or judgment.

Approximately £ 1 billion (approximately $ 1.2 billion as of December 31, 2021) of unresolved damages claims remain.

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

appellate court heard the appeals of

MASTERCARD 2021 FORM 10-K 105

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the four merchant claimants 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.

3 unchanged sentences

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.

Supreme Court sent three of the merchant cases back to the trial court solely for the purpose of determining damages issues which is scheduled to commence in January 2023.

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.

The majority of these merchant claims 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 one of the actions involving multiple merchant plaintiff claims, in November 2021 the trial court denied the plaintiffs’ motion for summary judgment on certain liability issues.

The plaintiffs were granted permission to appeal that ruling.

In 2021 and 2020, Mastercard incurred charges of $ 94 million and $ 28 million, respectively, to reflect both the litigation settlements and estimated attorneys’ fees with a number of U.K.

merchants 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.

7 unchanged sentences

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.

In March 2021, the trial court held a re-hearing on the plaintiffs’ collective action application, during which Mastercard sought to narrow the scope of the proposed class.

In August 2021, the trial court issued a decision in which it granted class certification but agreed with Mastercard’s argument and narrowed the scope of the class.

The plaintiffs did not appeal the trial court’s decision narrowing the class.

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 has opposed class certification.

Briefing on class certification is complete.

In August 2021, the trial court issued an order granting the plaintiffs’ request for class certification.

Visa and Mastercard’s request for permission to appeal the certification decision to the appellate court was granted.

Briefing on the appeal is expected to take place over the course of 2022.

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

106 MASTERCARD 2021 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liability Shift Litigation

8 unchanged sentences

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

The plaintiffs have submitted expert reports that allege aggregate damages in excess of $ 1 billion against the four Network Defendants.

The Network Defendants have submitted expert reports rebutting both liability and damages.

Briefing on summary judgment is expected to occur in 2022.

Telephone Consumer Protection Class Action

6 unchanged sentences

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.

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

In light of an appellate court decision, issued subsequent to the magistrate’s recommendation, the district court judge instructed the parties to re-brief the motion for class certification, and the motion has been fully briefed.

In December 2021, the trial court narrowed the scope of the potential class as it denied the plaintiffs’ motion for class certification of a class of all fax recipients (both stand-alone faxes and online faxes sent via email).

However, the court granted class certification for a narrower class of online fax recipients only.

Mastercard has filed a motion for reconsideration of the part of the trial court’s order granting partial certification.

Federal Trade Commission Investigation

4 unchanged sentences

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 2019, Mastercard was informed by the U.K.

Payment Systems Regulator (“PSR”) that Mastercard was a target of its investigation into alleged anti-competitive conduct by public sector prepaid card program managers in the U.K.

This matter focused exclusively on historic behavior.

In March 2021, the PSR announced the resolution and settlement of this investigation.

As part of the resolution, Mastercard agreed to pay a maximum fine of £ 32 million.

This matter 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.

In January 2022, the PSR issued a decision which concludes the matter and which requires that Mastercard pay its previously agreed fine in March 2022.

Settlement and Other Risk Management

3 unchanged sentences

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.

The Company has global risk management policies and procedures, which

MASTERCARD 2021 FORM 10-K 107

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

include risk standards, to provide a framework for managing the Company’s settlement risk and exposure.

In the event of a failed customer, Mastercard may pursue one or more remedies available under the Company’s rules to recover potential losses.

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, guarantees, or other risk mitigating arrangements.

As part of its policies, Mastercard requires certain customers that are not in compliance with the Company’s risk standards to enter into risk mitigation arrangements, including cash collateral and/or other forms of credit enhancement such as letters of credit and guarantees.

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

Mastercard monitors its credit risk portfolio on a regular basis and the adequacy of collateral on hand.

Mastercard monitors its credit risk portfolio and the adequacy of its risk mitigation arrangements on a regular basis.

Additionally, from time to time, the Company reviews its risk management methodology and standards.

3 unchanged sentences

Gross settlement exposure $ 59,571 $ 52,360

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

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

Risk mitigation arrangements applied to settlement exposure ( 7,710 ) ( 6,021 )

Net settlement exposure

$ 51,861 $ 46,339

Mastercard also provides guarantees to customers and certain other counterparties indemnifying them from losses stemming from failures of third parties to perform duties.

This includes guarantees of Mastercard-branded travelers cheques issued, but not yet cashed of $ 370 million and $ 367 million at December 31, 2020 and 2019, respectively, of which $ 294 million and $ 290 million at December 31, 2020 and 2019, respectively, is mitigated by collateral arrangements.

This includes guarantees of Mastercard-branded travelers cheques issued, but not yet cashed of $ 361 million and $ 370 million at December 31, 2021 and 2020, respectively, of which the Company has risk mitigation arrangements for $ 287 million and $ 294 million at December 31, 2021 and 2020, respectively.

In addition, the Company enters into agreements in the ordinary course of business under which the Company agrees to indemnify third parties against damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company.

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

102 MASTERCARD 2020 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is not determinable.

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.

1 unchanged sentence

The Company monitors and manages its foreign currency and interest rate exposures as part of its overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

A primary objective of the Company’s risk management strategies is to reduce the financial impact that may arise from volatility in foreign currency exchange rates principally through the use of both foreign exchange derivative contracts (Derivatives) and foreign currency denominated debt (Net Investment Hedge).

In addition, the Company may enter into interest rate derivative contracts to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances (Cash Flow Hedges).

Foreign Exchange Risk

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.

Cash Flow Hedges

The Company may enter into foreign exchange derivative contracts, including forwards and options, to manage the impact of foreign currency variability on anticipated revenues and expenses, which fluctuate based on currencies other than the functional currency of the entity.

The objective of these hedging activities is to reduce the effect of movement in foreign exchange rates for a portion of revenues and expenses forecasted to occur.

As these contracts are designated as cash flow hedging instruments, gains and losses resulting from changes in fair value of these contracts are deferred in accumulated other comprehensive income (loss) and subsequently reclassified to the consolidated statement of operations when the underlying hedged transactions impact earnings.

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

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

As of December 31, 2021, a cumulative loss of $ 128 million, after tax, remains 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 due in March 2030 and March 2050.

108 MASTERCARD 2021 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Hedges

The Company may enter into interest rate derivative contracts, including interest rate swaps, to manage the effects of interest rate movements on the fair value of the Company's fixed-rate debt and designate such derivatives as hedging instruments in a fair value hedging relationship.

Changes in fair value of these contracts and changes in fair value of fixed-rate debt attributable to changes in the hedged benchmark interest rate generally offset each other and are recorded in interest expense on the consolidated statement of operations.

Gains or losses related to the net settlements of interest rate swaps are also recorded in interest expense on the consolidated statement of operations.

The periodic cash settlements are included in operating activities on the consolidated statement of cash flows.

During the fourth quarter of 2021, the Company entered into an interest rate swap designated as a fair value hedge related to $ 1.0 billion of the 3.850 % Senior Notes due March 2050.

In effect, the interest rate swap synthetically converts the fixed interest rate on this debt to a variable interest rate based on the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap Rate.

The net impact to interest expense for the year ended December 31, 2021 was not material.

Net Investment Hedges

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

The effective portion of the net investment hedge is recorded as a currency translation adjustment in accumulated other comprehensive income (loss).

Forward points are designated as an excluded component and recognized in general and administrative expenses on the consolidated statement of operations over the hedge period.

The amounts recognized in earnings related to forward points for 2021 were not material.

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 its European operations.

During 2021, 2020 and 2019 the Company recorded a pre-tax net foreign currency gain of $ 155 million, loss of $ 177 million and gain of $ 36 million, respectively, in other comprehensive income (loss).

As of December 31, 2021 and 2020, the Company had a net foreign currency gain of $ 34 million and loss of $ 175 million, after tax, respectively, in accumulated other comprehensive income (loss) associated with this hedging activity.

Non-designated Derivatives

The Company may also enter into foreign exchange derivative contracts to serve as economic hedges, such as to offset possible changes in the value of monetary assets and liabilities due to foreign exchange fluctuations, without designating these derivative contracts as hedging instruments.

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 derivative contracts are summarized below:

To manage this risk, the Company may enter 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 volatility arising from gains and losses resulting from fluctuations of foreign currencies against its functional currencies.

Gains and losses resulting from changes in fair value of these contracts are recorded in general and administrative expenses on the consolidated statement of operations, net, along with the foreign currency gains and losses on monetary assets and liabilities.

MASTERCARD 2021 FORM 10-K 109

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the fair value of the Company’s derivative financial instruments and the related notional amounts:

December 31, 2021 December 31, 2020

Notional Fair

Value Notional Fair

Notional Fair Value Notional Fair Value

(in millions)

Commitments to purchase foreign currency $ 389 $ 17 $ 185 $ 3

Commitments to sell foreign currency 1,110 ( 26 ) 1,506 ( 25 )

Options to sell foreign currency — — 21 2

Balance sheet location

Prepaid expenses and other current assets 1

Other current liabilities 1

Derivative assets:

Derivatives designated as hedging instruments

Foreign exchange contracts in a cash flow hedge 1

$ 102 $ 7 $ — $ —

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

The amount of gain (loss) recognized on the consolidated statement of operations for the contracts to purchase and sell foreign currency is summarized below:

Interest rate contracts in a fair value hedge 2

Derivatives not designated as hedging instruments

Foreign exchange contracts 1

Total Derivative Assets $ 226 $ 14 $ 483 $ 19

Derivative liabilities:

Derivatives designated as hedging instruments

Foreign exchange contracts in a cash flow hedge 1

$ 104 $ 3 $ — $ —

Interest rate contracts in a fair value hedge 2

Foreign exchange contracts in a net investment hedge 1

Derivatives not designated as hedging instruments

Foreign exchange contracts 1

406 8 1,016 28

Total Derivative Liabilities $ 2,983 $ 23 $ 1,016 $ 28

1 Foreign exchange derivative assets and liabilities are recorded at fair value and are included within prepaid expenses and other current assets and other current liabilities, respectively, on the consolidated balance sheet.

2 Interest rate derivative assets and liabilities are recorded at fair value and are included within prepaid and other current assets and other liabilities, respectively, on the consolidated balance sheet.

** As of December 31, 2021, the total notional of interest rate contracts in a fair value hedge is $ 1.0 billion.

The pre-tax gain (loss) related to the Company's derivative financial instruments designated as hedging instruments are as follows:

Gain (Loss) Recognized in OCI Gain (Loss) Reclassified from AOCI

Year ended December 31, Location of Gain (Loss) Reclassified from AOCI into Earnings Year ended December 31,

2021 2020 2019 2021 2020 2019

(in millions) (in millions)

Derivative financial instruments in a cash flow hedge relationship:

Foreign exchange contracts $ 6 $ — $ — Net revenue $ 1 $ — $ —

Interest rate contracts $ — $ ( 189 ) $ 14 Interest expense $ ( 6 ) $ ( 4 ) $ —

Derivative financial instruments in a net investment hedge relationship:

Foreign exchange contracts $ 114 $ — $ —

The Company estimates that $ 1 million, pre-tax, of the net deferred loss on cash flow hedges recorded in accumulated other comprehensive income (loss) at December 31, 2021 will be reclassified into the consolidated statement of operations within the next 12 months.

The term of the foreign exchange derivative contracts designated in hedging relationships are generally less than 18 months.

110 MASTERCARD 2021 FORM 10-K

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amount of gain (loss) recognized on the consolidated statement of operations for non-designated derivative contracts is summarized below:

Year ended December 31,

Derivatives not designated as hedging instruments:

2021 2020 2019

2 unchanged sentences

General and administrative $ ( 10 ) $ 40 $ ( 39 )

The fair value of the foreign exchange derivative contracts generally reflects the estimated amounts that the Company would receive (or pay), on a pre-tax basis, to terminate the contracts.

The terms of the foreign exchange derivative contracts are generally less than 18 months.

The Company had no deferred gains or losses related to foreign exchange contracts in accumulated other comprehensive income as of December 31, 2020 and 2019, as these contracts were not designated as hedging instruments for accounting.

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

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.

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.

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

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

To mitigate counterparty credit risk, the Company enters into derivative contracts with a diversified group of selected financial institutions based upon their credit ratings and other factors.

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

Net Investment Hedge

The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates, with changes in the value of the debt recorded within currency translation adjustment in accumulated other comprehensive income (loss).

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, 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

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

2 unchanged sentences

Accordingly, all significant operating decisions are based upon analysis of Mastercard at the consolidated level.

Revenue by geographic market is based on the location of the Company’s customer that issued the card, as well as the location of the merchant acquirer where the card is being used.

Revenue by geographic market is based on the location of the Company’s customer that issued the card, the location of the merchant acquirer where the card is being used or the location of the customer receiving services.

Revenue generated in the U.S.

13 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