Mastercard Inc 10-K

Item 7A. 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 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. The objective of these activities is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against our functional currencies, principally the U.S. dollar and euro. The effect of a hypothetical 10% adverse change in the value of the functional currencies could result in a fair value loss of approximately $70 million and $58 million on our foreign exchange derivative contracts outstanding at December 31, 2021 and 2020, 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 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 $1 million and $23 million on our short duration foreign exchange derivative contracts outstanding at December 31, 2021 and 2020, respectively. We are further exposed to foreign exchange rate risk related to translation of our foreign operating results where the functional currency is different than our U.S. dollar reporting currency. To manage this risk, we may enter into foreign exchange derivative contracts to hedge a portion of our net investment in foreign subsidiaries. The effect of a hypothetical 10% adverse change in the value of the U.S. dollar could result in a fair value loss of approximately $165 million on our foreign exchange derivative contracts designated as a net investment hedge at December 31, 2021, before considering the offsetting effect of the underlying hedged activity. We did not have similar foreign exchange derivative contracts outstanding as of December 31, 2020. Interest Rate Risk 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 to the fair value of our investments at December 31, 2021 and 2020. We are also exposed to interest rate risk related to our fixed-rate debt. To manage this risk, we may enter into interest rate derivative contracts to hedge a portion of our fixed-rate debt that is exposed to changes in fair value attributable to changes in a benchmark interest rate. The effect of a hypothetical 100 basis point adverse change in interest rates could result in a fair value loss of $49 million on our interest rate derivative contracts designated as a fair value hedge of our fixed-rate debt at December 31, 2021, before considering the offsetting effect of the underlying hedged activity. We did not have similar interest rate derivative contracts outstanding as of December 31, 2020. 58 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item 8. Financial statements and supplementary data Mastercard Incorporated Index to consolidated financial statements Page As of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 Management’s report on internal control over financial reporting 60 Report of independent registered public accounting firm (PCAOB ID 238 ) 61 Consolidated Statement of Operations 63 Consolidated Statement of Comprehensive Income 64 Consolidated Balance Sheet 65 Consolidated Statement of Changes in Equity 66 Consolidated Statement of Cash Flows 68 Notes to consolidated financial statements 69 MASTERCARD 2021 FORM 10-K 59 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Management’s report on internal control over financial reporting The management of Mastercard Incorporated (“Mastercard”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of Mastercard’s internal control over financial reporting as of December 31, 2021. In making its assessment, management has utilized the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that, based on its assessment, Mastercard’s internal control over financial reporting was effective as of December 31, 2021. The effectiveness of Mastercard’s internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on the next page. 60 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Mastercard Incorporated Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet of Mastercard Incorporated and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on internal control over financial reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. MASTERCARD 2021 FORM 10-K 61 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition - Rebates and Incentives As described in Notes 1 and 3 to the consolidated financial statements, the Company provides certain customers with rebates and incentives which totaled $11.0 billion for the year ended December 31, 2021. The Company has business agreements with certain customers that provide for rebates and incentives that could be either fixed or variable-based. Variable rebates and incentives are recorded as a reduction of gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. Variable rebates and incentives are calculated based upon estimated customer performance, such as volume thresholds, and the terms of the related business agreements. 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 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 the agreements to identify whether all rebates and incentives are identified and recorded accurately; (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 New York, New York February 11, 2022 We have served as the Company’s auditor since 1989. 62 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Operations For the Years Ended December 31, 2021 2020 2019 (in millions, except per share data) Net Revenue $ 18,884 $ 15,301 $ 16,883 Operating Expenses: General and administrative 7,087 5,910 5,763 Advertising and marketing 895 657 934 Depreciation and amortization 726 580 522 Provision for litigation 94 73 — Total operating expenses 8,802 7,220 7,219 Operating income 10,082 8,081 9,664 Other Income (Expense): Investment income 11 24 97 Gains (losses) on equity investments, net 645 30 167 Interest expense ( 431 ) ( 380 ) ( 224 ) Other income (expense), net — 5 27 Total other income (expense) 225 ( 321 ) 67 Income before income taxes 10,307 7,760 9,731 Income tax expense 1,620 1,349 1,613 Net Income $ 8,687 $ 6,411 $ 8,118 Basic Earnings per Share $ 8.79 $ 6.40 $ 7.98 Basic weighted-average shares outstanding 988 1,002 1,017 Diluted Earnings per Share $ 8.76 $ 6.37 $ 7.94 Diluted weighted-average shares outstanding 992 1,006 1,022 The accompanying notes are an integral part of these consolidated financial statements. MASTERCARD 2021 FORM 10-K 63 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Comprehensive Income For the Years Ended December 31, 2021 2020 2019 (in millions) Net Income $ 8,687 $ 6,411 $ 8,118 Other comprehensive income (loss): Foreign currency translation adjustments ( 442 ) 345 10 Income tax effect 55 ( 59 ) 13 Foreign currency translation adjustments, net of income tax effect ( 387 ) 286 23 Translation adjustments on net investment hedges 269 ( 177 ) 36 Income tax effect ( 60 ) 40 ( 8 ) Translation adjustments on net investment hedges, net of income tax effect 209 ( 137 ) 28 Cash flow hedges 6 ( 189 ) 14 Income tax effect ( 1 ) 42 ( 3 ) Reclassification adjustment for cash flow hedges 5 4 — Income tax effect ( 1 ) ( 1 ) — Cash flow hedges, net of income tax effect 9 ( 144 ) 11 Defined benefit pension and other postretirement plans 57 ( 12 ) ( 21 ) Income tax effect ( 14 ) 2 3 Reclassification adjustment for defined benefit pension and other postretirement plans ( 2 ) ( 1 ) ( 1 ) Income tax effect — — — Defined benefit pension and other postretirement plans, net of income tax effect 41 ( 11 ) ( 19 ) Investment securities available-for-sale ( 1 ) ( 1 ) 3 Income tax effect — — ( 1 ) Investment securities available-for-sale, net of income tax effect ( 1 ) ( 1 ) 2 Other comprehensive income (loss), net of income tax effect ( 129 ) ( 7 ) 45 Comprehensive Income $ 8,558 $ 6,404 $ 8,163 The accompanying notes are an integral part of these consolidated financial statements. 64 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheet December 31, 2021 2020 (in millions, except per share data) Assets Current assets: Cash and cash equivalents $ 7,421 $ 10,113 Restricted cash for litigation settlement 586 586 Investments 473 483 Accounts receivable 3,006 2,646 Settlement assets 1,319 1,706 Restricted security deposits held for customers 1,873 1,696 Prepaid expenses and other current assets 2,271 1,883 Total current assets 16,949 19,113 Property, equipment and right-of-use assets, net 1,907 1,902 Deferred income taxes 486 491 Goodwill 7,662 4,960 Other intangible assets, net 3,671 1,753 Other assets 6,994 5,365 Total Assets $ 37,669 $ 33,584 Liabilities, Redeemable Non-controlling Interests and Equity Current liabilities: Accounts payable $ 738 $ 527 Settlement obligations 913 1,475 Restricted security deposits held for customers 1,873 1,696 Accrued litigation 840 842 Accrued expenses 6,642 5,430 Current portion of long-term debt 792 649 Other current liabilities 1,364 1,228 Total current liabilities 13,162 11,847 Long-term debt 13,109 12,023 Deferred income taxes 395 86 Other liabilities 3,591 3,111 Total Liabilities 30,257 27,067 Commitments and Contingencies Redeemable Non-controlling Interests 29 29 Stockholders’ Equity Class A common stock, $ 0.0001 par value; authorized 3,000 shares, 1,397 and 1,396 shares issued and 972 and 987 shares outstanding, respectively — — Class B common stock, $ 0.0001 par value; authorized 1,200 shares, 8 shares issued and outstanding — — Additional paid-in-capital 5,061 4,982 Class A treasury stock, at cost, 425 and 409 shares, respectively ( 42,588 ) ( 36,658 ) Retained earnings 45,648 38,747 Accumulated other comprehensive income (loss) ( 809 ) ( 680 ) Mastercard Incorporated Stockholders' Equity 7,312 6,391 Non-controlling interests 71 97 Total Equity 7,383 6,488 Total Liabilities, Redeemable Non-controlling Interests and Equity $ 37,669 $ 33,584 The accompanying notes are an integral part of these consolidated financial statements. MASTERCARD 2021 FORM 10-K 65 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Changes in Equity Stockholders’ Equity Common Stock Additional Paid-In Capital Class A Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Mastercard Incorporated Stockholders' Equity Non- Controlling Interests Total Equity Class A Class B (in millions, except per share data) Balance at December 31, 2018 $ — $ — $ 4,580 $ ( 25,750 ) $ 27,283 $ ( 718 ) $ 5,395 $ 23 $ 5,418 Net income — — — — 8,118 — 8,118 — 8,118 Activity related to non-controlling interests — — — — — — — 1 1 Redeemable non-controlling interest adjustments — — — — ( 9 ) — ( 9 ) — ( 9 ) Other comprehensive income (loss) — — — — — 45 45 — 45 Dividends — — — — ( 1,408 ) — ( 1,408 ) — ( 1,408 ) Purchases of treasury stock — — — ( 6,463 ) — — ( 6,463 ) — ( 6,463 ) Share-based payments — — 207 8 — — 215 — 215 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 Redeemable non-controlling interest adjustments — — — — ( 7 ) — ( 7 ) — ( 7 ) Other comprehensive income (loss) — — — — — ( 7 ) ( 7 ) — ( 7 ) Dividends — — — — ( 1,641 ) — ( 1,641 ) — ( 1,641 ) Purchases of treasury stock — — — ( 4,459 ) — — ( 4,459 ) — ( 4,459 ) Share-based payments — — 195 6 — — 201 — 201 Balance at December 31, 2020 — — 4,982 ( 36,658 ) 38,747 ( 680 ) 6,391 97 6,488 66 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Changes in Equity (Continued) Stockholders’ Equity Common Stock Additional Paid-In Capital Class A Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Mastercard Incorporated Stockholders' Equity Non- Controlling Interests Total Equity Class A Class B (in millions, except per share data) Balance at December 31, 2020 — — 4,982 ( 36,658 ) 38,747 ( 680 ) 6,391 97 6,488 Net income — — — — 8,687 — 8,687 — 8,687 Activity related to non-controlling interests — — — — — — — ( 9 ) ( 9 ) Acquisition of non-controlling interest — — ( 122 ) — — — ( 122 ) ( 17 ) ( 139 ) Redeemable non-controlling interest adjustments — — — — ( 5 ) — ( 5 ) ( 5 ) Other comprehensive income (loss) — — — — — ( 129 ) ( 129 ) — ( 129 ) Dividends — — — — ( 1,781 ) — ( 1,781 ) — ( 1,781 ) Purchases of treasury stock — — — ( 5,934 ) — — ( 5,934 ) — ( 5,934 ) Share-based payments — — 201 4 — — 205 — 205 Balance at December 31, 2021 $ — $ — $ 5,061 $ ( 42,588 ) $ 45,648 $ ( 809 ) $ 7,312 $ 71 $ 7,383 The accompanying notes are an integral part of these consolidated financial statements. MASTERCARD 2021 FORM 10-K 67 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Cash Flows For the Years Ended December 31, 2021 2020 2019 (in millions) Operating Activities Net income $ 8,687 $ 6,411 $ 8,118 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of customer and merchant incentives 1,371 1,072 1,141 Depreciation and amortization 726 580 522 (Gains) losses on equity investments, net ( 645 ) ( 30 ) ( 167 ) Share-based compensation 273 254 250 Deferred income taxes ( 69 ) 73 ( 7 ) Other 36 14 24 Changes in operating assets and liabilities: Accounts receivable ( 397 ) ( 86 ) ( 246 ) Income taxes receivable ( 87 ) ( 2 ) ( 202 ) Settlement assets 390 1,288 ( 444 ) Prepaid expenses ( 2,087 ) ( 1,552 ) ( 1,661 ) Accrued litigation and legal settlements ( 1 ) ( 73 ) ( 662 ) Restricted security deposits held for customers 177 326 290 Accounts payable 100 26 ( 42 ) Settlement obligations ( 568 ) ( 1,242 ) 477 Accrued expenses 1,355 ( 114 ) 657 Long-term taxes payable ( 52 ) ( 37 ) 2 Net change in other assets and liabilities 254 316 133 Net cash provided by operating activities 9,463 7,224 8,183 Investing Activities Purchases of investment securities available-for-sale ( 389 ) ( 220 ) ( 643 ) Purchases of investments held-to-maturity ( 294 ) ( 198 ) ( 215 ) Proceeds from sales of investment securities available-for-sale 83 361 1,098 Proceeds from maturities of investment securities available-for-sale 291 140 376 Proceeds from maturities of investments held-to-maturity 296 121 383 Purchases of property and equipment ( 407 ) ( 339 ) ( 422 ) Capitalized software ( 407 ) ( 369 ) ( 306 ) Purchases of equity investments ( 228 ) ( 214 ) ( 467 ) Proceeds from sales of equity investments 186 — — Acquisition of businesses, net of cash acquired ( 4,436 ) ( 989 ) ( 1,440 ) Settlement of interest rate derivative contracts — ( 175 ) — Other investing activities 33 3 ( 4 ) Net cash used in investing activities ( 5,272 ) ( 1,879 ) ( 1,640 ) Financing Activities Purchases of treasury stock ( 5,904 ) ( 4,473 ) ( 6,497 ) Dividends paid ( 1,741 ) ( 1,605 ) ( 1,345 ) Proceeds from debt, net 2,024 3,959 2,724 Payment of debt ( 650 ) — ( 500 ) Acquisition of redeemable non-controlling interests — ( 49 ) — Acquisition of non-controlling interest ( 133 ) — — Contingent consideration paid ( 64 ) — ( 199 ) Tax withholdings related to share-based payments ( 133 ) ( 150 ) ( 161 ) Cash proceeds from exercise of stock options 61 97 126 Other financing activities ( 15 ) 69 ( 15 ) Net cash used in financing activities ( 6,555 ) ( 2,152 ) ( 5,867 ) Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents ( 153 ) 257 ( 44 ) Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents ( 2,517 ) 3,450 632 Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 12,419 8,969 8,337 Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period $ 9,902 $ 12,419 $ 8,969 The accompanying notes are an integral part of these consolidated financial statements. 68 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Notes to consolidated financial statements Note 1. Summary of Significant Accounting Policies Organization Mastercard Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (“Mastercard International” and together with Mastercard Incorporated, “Mastercard” or the “Company”), is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks. The Company makes payments easier and more efficient by providing a wide range of payment solutions and services through its family of well-known and trusted brands, including Mastercard®, Maestro® and Cirrus®. The Company operates a multi-rail payments network that provides choice and flexibility for consumers and merchants. Through its unique and proprietary core global payments network, the Company switches (authorizes, clears and settles) payment transactions. The Company has additional payment capabilities that include automated clearing house (“ACH”) transactions (both batch and real-time account-based payments). Using these capabilities, the Company offers integrated payment products and services and captures new payment flows. The Company’s value-added services include, among others, cyber and intelligence solutions to allow all parties to transact easily and with confidence, as well as other services that provide proprietary insights, drawing on Mastercard’s principled use of consumer and merchant data. The Company’s franchise model sets the standards and ground-rules that balance value and risk across all stakeholders and allows for interoperability among them. The Company’s payment solutions are designed to ensure safety and security for the global payments ecosystem. Mastercard is not a financial institution. The Company does not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of the Company’s products. In most cases, account holder relationships belong to, and are managed by, the Company’s financial institution customers. Significant Accounting Policies Consolidation and basis of presentation - The consolidated financial statements include the accounts of Mastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Investments in VIEs for which the Company is not considered the primary beneficiary are not consolidated and are accounted for as marketable, equity method or measurement alternative method investments and recorded in other assets on the consolidated balance sheet. At December 31, 2021 and 2020, there were no significant VIEs which required consolidation and the investments were not considered material to the consolidated financial statements. The Company consolidates acquisitions as of the date on which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”). 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. Changes in a parent’s ownership interest while the parent retains its controlling interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are remeasured at fair value, with any gain or loss recognized in earnings. For 2021, 2020 and 2019, net losses from non-controlling interests were not material and, as a result, amounts are included on the consolidated statement of operations within other income (expense). 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; accordingly, accounting estimates require the exercise of judgment. These financial statements were prepared using information reasonably available as of December 31, 2021 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 from assessing customers based on the dollar volume of activity, or gross dollar volume (“GDV”), 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 often integrated and sold with the Company’s payment offerings. MASTERCARD 2021 FORM 10-K 69 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Transaction-based revenue (transaction processing) is primarily based on the number and type of transactions and is recognized as revenue in the same period in which the related transactions occur. 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 and incentives that could be either fixed or variable-based. Fixed incentives typically represent payments to a customer directly related to entering into an agreement, which are generally capitalized and amortized over the life of the agreement on a straight-line basis as a reduction of gross revenue. Variable rebates and incentives are recorded as a reduction of gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. Variable rebates and incentives are calculated based upon estimated customer performance, such as volume thresholds, and the terms of the related business agreements. Contract assets include unbilled consideration typically resulting from executed data analytic and consulting services performed for customers in connection with Mastercard’s payments network service arrangements. Collection for these services typically occurs over the contractual term. Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet. The Company defers the recognition of revenue when consideration has been received prior to the satisfaction of performance obligations. As these performance obligations are satisfied, revenue is subsequently recognized. Deferred revenue is primarily derived from data analytic and consulting services. Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet. 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, 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 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, 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 . Capitalized software includes internal and external costs incurred directly related to the design, development and testing phases of each capitalized software project. The valuation methods for goodwill and other intangible assets acquired in business combinations involve assumptions concerning comparable company multiples, discount rates, growth projections and other assumptions of future business conditions. The Company uses various valuation techniques to determine fair value, primarily discounted cash flows analysis, relief-from-royalty and multi-period excess earnings for estimating the fair value of its intangible assets. As the assumptions employed to measure these assets are based on management’s judgment using internal and external data, these fair value determinations are classified in Level 3 of the Valuation Hierarchy (as defined in Fair value subsection below). Impairment of assets - Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment at the reporting unit level in the fourth quarter, or sooner when circumstances indicate an impairment may exist. The impairment evaluation for goodwill utilizes a qualitative assessment to determine whether it is more likely than not that goodwill is impaired. The qualitative factors may include, but are not limited to, macroeconomic conditions, industry and market conditions, operating environment, financial performance and other relevant events. If it is determined that it is more likely than not that goodwill is impaired, then the Company is required to perform a quantitative goodwill impairment test. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying value, then goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment charge. The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate relevant events and circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. If the qualitative assessment indicates that it is more likely than not that indefinite-lived intangible assets are impaired, then a quantitative assessment is required. 70 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. Litigation - The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters. The Company evaluates the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable. Loss contingencies are recorded in provision for litigation on the consolidated statement of operations. These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. Legal costs are expensed as incurred and recorded in general and administrative expenses on the consolidated statement of operations. Settlement and other risk management - Mastercard’s rules guarantee the settlement of many of the transactions between its customers. Settlement exposure is the outstanding settlement risk to customers under Mastercard’s rules due to the difference in timing between the payment transaction date and subsequent settlement. 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. The Company also 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. 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. The Company accounts for each of its guarantees by recording the guarantee at its fair value at the inception or modification date through earnings. Income taxes - The Company follows an asset and liability based approach in accounting for income taxes as required under GAAP. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between the financial statement carrying amounts and income tax bases of assets and liabilities. Deferred income taxes are displayed separately as noncurrent assets and liabilities on the consolidated balance sheet. Valuation allowances are provided against assets which are not more likely than not to be realized. The Company recognizes all material tax positions, including uncertain tax positions in which it is more likely than not that the position will be sustained based on its technical merits and if challenged by the relevant taxing authorities. At each balance sheet date, unresolved uncertain tax positions are reassessed to determine whether subsequent developments require a change in the amount of recognized tax benefit. The allowance for uncertain tax positions is recorded in other current and noncurrent liabilities on the consolidated balance sheet. The Company records interest expense related to income tax matters as interest expense on the consolidated statement of operations. The Company includes penalties related to income tax matters in the income tax provision. Cash and cash equivalents - Cash and cash equivalents include certain investments with daily liquidity and with an original maturity of three months or less from the date of purchase. Cash equivalents are recorded at cost, which approximates fair value. Restricted cash - The Company classifies cash and cash equivalents as restricted when it is unavailable for withdrawal or use in its general operations. The Company has the following types of restricted cash and restricted cash equivalents which are included in the reconciliation of beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows: • Restricted cash for litigation settlement - The Company has restricted cash for litigation within a qualified settlement fund related to the settlement agreement for the U.S. merchant class litigation. The funds continue to be restricted for payments until the litigation matter is resolved. • Restricted security deposits held for customers - The Company requires certain customers to enter into risk mitigation arrangements, including cash collateral and/or other forms of credit enhancement such as letters of credit and guarantees, for settlement of their transactions. Certain risk mitigation arrangements for settlement, such as standby letters of credit and bank guarantees, are not recorded on the consolidated balance sheet. The Company also holds cash deposits and certificates of deposit from certain customers as collateral for settlement of their transactions, which are recorded as assets on the consolidated balance sheet. These assets are fully offset by corresponding liabilities included on the consolidated balance sheet. These security deposits are typically held for the duration of the agreement with the customers. • Other restricted cash balances - The Company has other restricted cash balances which include contractually restricted deposits, as well as cash balances that are restricted based on the Company’s intention with regard to usage. These funds are classified on the consolidated balance sheet within prepaid expenses and other current assets and other assets. MASTERCARD 2021 FORM 10-K 71 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair value - The Company measures certain financial assets and liabilities at fair value on a recurring basis by estimating the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The Company also measures certain financial and non-financial assets and liabilities at fair value on a non-recurring basis, when a change in fair value or impairment is evidenced. The Company classifies these recurring and non-recurring fair value measurements into a three-level hierarchy (“Valuation Hierarchy”). The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the Valuation Hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the Valuation Hierarchy are as follows: • Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets • 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 • Level 3 - inputs to the valuation methodology are unobservable and cannot be directly corroborated by observable market data The Company’s financial assets and liabilities measured at fair value on a recurring basis include investment securities available for sale, marketable securities, derivative instruments and deferred compensation. The Company’s financial assets and liabilities measured at fair value on a non-recurring basis include nonmarketable securities, debt and other financial instruments. The Company’s non-financial assets measured at fair value on a non-recurring basis include property, equipment and right-of-use assets, goodwill and other intangible assets and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Contingent consideration - Certain business combinations involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones. These liabilities are classified within Level 3 of the Valuation Hierarchy as the inputs used to measure fair value are unobservable and require management’s judgment. The fair value of the contingent consideration at the acquisition date and subsequent periods is determined utilizing an income approach based on a Monte Carlo technique and is recorded in other current liabilities and other liabilities on the consolidated balance sheet. 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 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: ◦ 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 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; (2) it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis; or (3) it does not expect to recover the entire amortized cost basis of the security. 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: ◦ Time deposits - The Company classifies time deposits with original maturities greater than three months as held-to-maturity. Held-to-maturity securities that mature within one year are classified as current assets within investments on the consolidated balance sheet while held-to-maturity securities with maturities of greater than one year are classified as other assets. Time deposits are carried at amortized cost on the consolidated balance sheet and are intended to be held until maturity. 72 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equity investments - The Company holds equity securities of publicly traded and privately held companies. • Marketable equity securities - Marketable equity securities are strategic investments in publicly traded companies and are measured at fair value using quoted prices in their respective active markets with changes recorded through gains (losses) on equity investments, net on the consolidated statement of operations. Securities that are not for use in current operations are classified in other assets on the consolidated balance sheet. • Nonmarketable equity investments - The Company’s nonmarketable equity investments, which are reported in other assets on the consolidated balance sheet, include investments in privately held companies without readily determinable market values. The Company uses discounted cash flows and market assumptions to estimate the fair value of its nonmarketable equity investments when certain events or circumstances indicate that impairment may exist. The Company’s nonmarketable equity investments are accounted for under the measurement alternative method or equity method. ◦ 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 operations of the investee. Investments in companies that Mastercard does not control, but that are not in the form of common stock or in-substance common stock, are also accounted for under the measurement alternative method of accounting. Measurement alternative investments are measured at cost, less any impairment and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. Fair value adjustments, as well as impairments, are included in gains (losses) on equity investments, net on the consolidated statement of operations. ◦ 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 operations of the investee, generally when it holds between 20 % and 50 % ownership in the entity. 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. 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 operations of the investee, generally when the investment ownership percentage is equal to or greater than 5 % of the outstanding ownership interest. 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. Derivative and hedging instruments - The Company’s derivative financial instruments are recorded as either assets or liabilities on the balance sheet and measured at fair value. 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. The Company does not enter into derivative instruments for trading or speculative purposes. For derivatives that are not designated as hedging instruments, realized and unrealized gains and losses from the change in fair value of the derivatives are recognized in current earnings. The Company’s derivatives that are designated as hedging instruments are required to meet established accounting criteria. In addition, an effectiveness assessment is required to demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value or cash flows of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. 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. The Company may designate derivative instruments as cash flow, fair value and net investment hedges, as follows: • Cash flow hedges - Fair value adjustments to derivative instruments 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 hedges 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. MASTERCARD 2021 FORM 10-K 73 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • Fair value hedges - Changes in the fair value of derivative instruments are recorded in current-period earnings, along with the gain or loss on the hedged asset or liability (“hedged item”) that is attributable to the hedged risk. All amounts recognized in earnings are recorded to the corresponding line item on the consolidated statement of operations as the earnings effect of the hedged item. Hedged items are measured on the consolidated balance sheet at their carrying amount adjusted for any changes in fair value attributable to the hedged risk (“basis adjustments”). The Company defers the amortization of any basis adjustments until the end of the derivative instrument’s term. If the hedge designation is discontinued for reasons other than derecognition of the hedged item, the remaining basis adjustments are amortized in accordance with applicable GAAP for the hedged item. • Net investment hedges - The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates. 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. Gains and losses in accumulated other comprehensive income (loss) are reclassified to earnings only if the Company sells or substantially liquidates its net investments in foreign subsidiaries. Amounts excluded from 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. Settlement assets/obligations - The Company operates systems for settling payment transactions among participants in the payments ecosystem in which the Company operates. Settlement is generally completed on a same-day basis, however, in some circumstances, funds may not settle until subsequent business days. In addition, the Company may receive or post funds in advance of transactions related to certain payment capabilities over its multi-rail payments network. The Company classifies the balances arising from these various activities as settlement assets and settlement obligations. Property, equipment and right-of-use assets - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements and amortization of finance leases is included in depreciation and amortization expense on the consolidated statement of operations. Operating lease amortization expense is included in general and administrative expenses on the consolidated statement of operations. The useful lives of the Company’s assets are as follows: 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. The Company’s right-of-use (“ROU”) assets are primarily related to operating leases for office space, automobiles and other equipment. Leases are included in property, equipment and right-of-use assets, other current liabilities and other liabilities on the consolidated balance sheet. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In addition, ROU assets include initial direct costs incurred by the lessee as well as any lease payments made at or before the commencement date, and exclude lease incentives. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is determined by using the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of one year or less are excluded from ROU assets and liabilities. The Company excludes variable lease payments in measuring ROU assets and lease liabilities, other than those that depend on an index, a rate or are in-substance fixed payments. Lease and nonlease components are generally accounted for separately. When available, consideration is allocated to the separate lease and nonlease components in a lease contract on a relative standalone price basis using observable standalone prices. 74 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pension and other postretirement plans - The Company recognizes the funded status of its single-employer defined benefit pension plans and postretirement plans as assets or liabilities on its consolidated balance sheet and recognizes changes in the funded status in the year in which the changes occur through accumulated other comprehensive income (loss). The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation at December 31, the measurement date. Overfunded plans, if any, are aggregated and recorded in other assets, while underfunded plans are aggregated and recorded as accrued expenses and other liabilities on the consolidated balance sheet. Net periodic pension and postretirement benefit cost/(income), excluding the service cost component, is recognized in other income (expense), net on the consolidated statement of operations. These costs include interest cost, expected return on plan assets, amortization of prior service costs or credits and gains or losses previously recognized as a component of accumulated other comprehensive income (loss). The service cost component is recognized in general and administrative expenses on the consolidated statement of operations. Defined contribution plans - The Company’s contributions to defined contribution plans are recorded as employees render service to the Company. The charge is recorded in general and administrative expenses on the consolidated statement of operations. 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. The timing of recognition is dependent on the type of advertising or marketing expense . Foreign currency remeasurement and translation - Monetary assets and liabilities are remeasured to functional currencies using current exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are recorded at historical exchange rates. Revenue and expense accounts are remeasured at the weighted-average exchange rate for the period. Resulting exchange gains and losses related to remeasurement are included in general and administrative expenses on the consolidated statement of operations. Where a non-U.S. 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-average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss). Treasury stock - The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares. Share-based payments - The Company measures share-based compensation expense at the grant date, based on the estimated fair value of the award and uses the straight-line method of attribution, net of estimated forfeitures, for expensing awards over the requisite employee service period. The Company estimates the fair value of its non-qualified stock option awards (“Options”) using a Black-Scholes valuation model. The fair value of restricted stock units (“RSUs”) is determined and fixed on the grant date based on the Company’s stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation model is used to determine the grant date fair value of performance stock units (“PSUs”) granted. All share-based compensation expenses are recorded in general and administrative expenses on the consolidated statement of operations. Redeemable non-controlling interests - The Company’s business combinations may include provisions allowing non-controlling equity owners the ability to require the Company to purchase additional interests in the subsidiary at their discretion. The interests are initially recorded at fair value and in subsequent reporting periods are accreted or adjusted to the estimated redemption value. The adjustments to the redemption value are recorded to retained earnings or additional paid-in capital on the consolidated balance sheet. The redeemable non-controlling interests are considered temporary and reported outside of permanent equity on the consolidated balance sheet at the greater of the carrying amount adjusted for the non-controlling interest’s share of net income (loss) or its redemption value. Earnings per share - The Company calculates basic earnings per share (“EPS”) by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares outstanding during the year, adjusted for the potentially dilutive effect of stock options and unvested stock units using the treasury stock method. The Company may be required to calculate EPS using the two-class method as a result of its redeemable non-controlling interests. 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. MASTERCARD 2021 FORM 10-K 75 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounting pronouncements not yet adopted Accounting for contract assets and contract liabilities in a business combination - In October 2021, the Financial Accounting Standards Board issued accounting guidance that requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers . The guidance is effective for periods beginning after December 15, 2022 with early adoption permitted. The Company will early adopt this guidance effective January 1, 2022 and does not expect the impacts to be material. Note 2. Acquisitions In 2021, 2020 and 2019, the Company acquired several businesses for total consideration of $ 4.7 billion, $ 1.1 billion and $ 1.5 billion, respectively, representing both cash and contingent consideration. 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 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. On March 5, 2021, Mastercard acquired a majority of the Corporate Services business of Nets Denmark A/S (“Nets”) for € 3.0 billion (approximately $ 3.6 billion as of the date of acquisition) in cash consideration based on a € 2.85 billion enterprise value, adjusted for cash and net working capital at closing. The business acquired is primarily comprised of clearing and instant payment services and e-billing solutions. In relation to this acquisition, the Company’s preliminary estimate of net assets acquired primarily relates to intangible assets, including goodwill of $ 2.1 billion, of which $ 0.8 billion is expected to be deductible for local tax purposes. The goodwill arising from this acquisition is primarily attributable to the synergies expected to arise through geographic, product and customer expansion, the underlying technology and workforce acquired. On June 9, 2021, Mastercard acquired a 100 % equity interest in Ekata, Inc. (“Ekata”) for cash consideration of $ 861 million, based on an $ 850 million enterprise value, adjusted for cash and net working capital at closing. The acquisition of Ekata is expected to broaden the Company’s digital identity verification capabilities. The residual value allocated to goodwill is primarily attributable to the synergies expected to arise after the acquisition date and none of the goodwill is expected to be deductible for local tax purposes. Mastercard acquired additional businesses in 2021 for consideration of $ 272 million. These businesses were not considered individually material to Mastercard. 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 earned additional contingent consideration of $ 64 million upon meeting 2021 revenue targets in accordance with terms of the purchase agreement. The additional businesses acquired in 2020 and the businesses acquired in 2019 were not considered individually material to Mastercard. 76 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company is evaluating and finalizing the purchase accounting for the businesses acquired during 2021. In 2021, the Company finalized the purchase accounting for businesses acquired during 2020. The 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. 2021 2020 2019 (in millions) Assets: Cash and cash equivalents $ 253 $ 6 $ 54 Other current assets 41 14 143 Other intangible assets 2,071 237 395 Goodwill 2,842 844 1,076 Other assets 15 11 48 Total assets 5,222 1,112 1,716 Liabilities: Other current liabilities 112 15 121 Deferred income taxes 398 23 52 Other liabilities 12 8 32 Total liabilities 522 46 205 Net assets acquired $ 4,700 $ 1,066 $ 1,511 The following table summarizes the identified intangible assets acquired during the years ended December 31: 2021 2020 2019 2021 2020 2019 Acquisition Date Fair Value Weighted-Average Useful Life (in millions) (in years) Developed technologies $ 433 $ 122 $ 199 11.7 6.3 7.7 Customer relationships 1,614 114 178 19.2 12.0 12.6 Other 24 1 18 7.1 1.0 5.0 Other intangible assets $ 2,071 $ 237 $ 395 17.5 9.0 9.7 Proforma information related to these acquisitions was not included because the impact on the Company's consolidated results of operations was not considered to be material. Pending Acquisition As of December 31, 2021, Mastercard has entered into a definitive agreement to acquire Dynamic Yield LTD. This acquisition is expected to close in the second quarter of 2022. Note 3. Revenue 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. Revenue recognized from domestic assessments, cross-border volume fees and transaction processing are derived from Mastercard’s payments network 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 GDV, on the products that carry the Company’s brands. 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, often integrated and sold with the Company’s payment offerings, that are recognized as revenue in the period in which the related transactions occur or services are performed. MASTERCARD 2021 FORM 10-K 77 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Net revenue can be impacted by the following: • domestic or cross-border transactions • geographic region or country in which the transaction occurs • volumes/transactions subject to tiered rates • switched or not switched by the Company • amount of usage of the Company’s other products or services • amount of rebates and incentives provided to customers The Company classifies its net revenue into the following five categories: Domestic assessments are fees charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry the Company’s brands where the merchant country and the country of issuance are the same. Revenue from domestic assessments is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brands. Cross-border volume fees are charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry the Company’s brands where the merchant country and the country of issuance are different. Revenue from cross-border volume is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brands. Transaction processing revenue is recognized for both domestic and cross-border transactions in the period in which the related transactions occur. Transaction processing includes the following: • Switched transaction revenue is generated from the following products and services: ◦ Authorization, which is the process by which a transaction is routed to the issuer for approval. In certain circumstances, such as when the issuer’s systems are unavailable or cannot be contacted, Mastercard or others approve such transactions on behalf of the issuer in accordance with either the issuer’s instructions or applicable rules (also known as “stand-in”). ◦ Clearing, which is the determination and exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted at the point of interaction. Transactions are cleared among customers through Mastercard’s central and regional processing systems. ◦ Settlement, which facilitates the exchange of funds between parties. • Connectivity fees are charged to issuers, acquirers and other financial institutions for network access, equipment and the transmission of authorization and settlement messages. These fees are based on the size of the data being transmitted and the number of connections to the Company’s network. • Other processing fees include issuer and acquirer processing solutions, payment gateways for e-commerce merchants, mobile gateways for mobile-initiated transactions, and safety and security. Other revenues consist of value-added products and services that are often 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: • Cyber and intelligence solutions fees are for products and services offered to prevent, detect and respond to fraud and to ensure the safety of transactions made primarily on Mastercard products. • Data analytics and consulting fees are for insights, analytics, and test and learn capabilities as well as Mastercard’s advisory and managed services. • Loyalty and rewards solutions fees are charged to issuers for benefits provided directly to consumers with Mastercard-branded cards, such as access to a global airline lounge network, global and local concierge services, individual insurance coverages, emergency card replacement, emergency cash advance services and a 24-hour cardholder service center. Loyalty and reward solution fees also include rewards campaigns and management services. • Program management services provided to prepaid card issuers consist of foreign exchange margin, commissions, load fees and ATM withdrawal fees paid by cardholders on the sale and encashment of prepaid cards. • Batch and real-time account-based payment services relating to ACH transactions and other ACH related services. • Other payment-related products and services and platforms, including account and transaction enhancement services, open banking and digital identity solutions, rules compliance and publications. 78 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Rebates and incentives (contra-revenue) are provided to customers and can be either fixed or variable-based. Fixed incentives typically represent payments to a customer directly related to entering into an agreement, which are generally capitalized and amortized over the life of the agreement on a straight-line basis as a reduction of gross revenue. Variable rebates and incentives are typically tied to customer performance, such as volume thresholds, and are recorded as a reduction of gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. The Company’s disaggregated net revenue by source and geographic region were as follows for the years ended December 31: 2021 2020 2019 (in millions) Revenue by source: Domestic assessments $ 8,158 $ 6,656 $ 6,781 Cross-border volume fees 4,664 3,512 5,606 Transaction processing 10,799 8,731 8,469 Other revenues 6,224 4,717 4,124 Gross revenue 29,845 23,616 24,980 Rebates and incentives (contra-revenue) ( 10,961 ) ( 8,315 ) ( 8,097 ) Net revenue $ 18,884 $ 15,301 $ 16,883 Net revenue by geographic region: North American Markets $ 6,594 $ 5,424 $ 5,843 International Markets 12,068 9,701 10,869 Other 1 222 176 171 Net revenue $ 18,884 $ 15,301 $ 16,883 1 Includes revenues managed by corporate functions. The Company’s customers are generally billed weekly, however the frequency is dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not typically offer extended payment terms to customers. The following table sets forth the location of the amounts recognized on the consolidated balance sheet from contracts with customers at December 31: 2021 2020 (in millions) Receivables from contracts with customers Accounts receivable $ 2,829 $ 2,505 Contract assets Prepaid expenses and other current assets 134 59 Other assets 487 245 Deferred revenue 1 Other current liabilities 482 355 Other liabilities 180 143 1 Revenue recognized from performance obligations satisfied in 2021, 2020 and 2019 was $ 1.5 billion, $ 1.1 billion and $ 994 million, respectively. The Company’s remaining performance periods for its contracts with customers for its payments network services are typically long-term in nature (generally up to 10 years). As a payments 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 payments network services. The Company also earns revenues primarily from other value-added services comprised of both batch and real-time account-based payments services, cyber and intelligence solutions, consulting fees, loyalty programs, gateway services, processing, and other payment-related products and services. At December 31, 2021, the estimated MASTERCARD 2021 FORM 10-K 79 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS aggregate consideration allocated to unsatisfied performance obligations for these other value-added services is $ 1.3 billion, which is expected to be recognized through 2024. The estimated remaining performance obligations related to these revenues are subject to change and are affected by several factors, including modifications and terminations and are not expected to be material to any future annual period. Note 4. Earnings Per Share The components of basic and diluted EPS for common shares for each of the years ended December 31 were as follows: 2021 2020 2019 (in millions, except per share data) Numerator Net income $ 8,687 $ 6,411 $ 8,118 Denominator Basic weighted-average shares outstanding 988 1,002 1,017 Dilutive stock options and stock units 4 4 5 Diluted weighted-average shares outstanding 1 992 1,006 1,022 Earnings per Share Basic $ 8.79 $ 6.40 $ 7.98 Diluted $ 8.76 $ 6.37 $ 7.94 Note: Table may not sum due to rounding. 1 For the years presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards. Note 5. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported on the consolidated balance sheet that total to the amounts shown on the consolidated statement of cash flows for the years ended December 31: 2021 2020 (in millions) Cash and cash equivalents $ 7,421 $ 10,113 Restricted cash and restricted cash equivalents Restricted cash for litigation settlement 586 586 Restricted security deposits held for customers 1,873 1,696 Prepaid expenses and other current assets 22 24 Cash, cash equivalents, restricted cash and restricted cash equivalents $ 9,902 $ 12,419 80 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Supplemental Cash Flows The following table includes supplemental cash flow disclosures for each of the years ended December 31: 2021 2020 2019 (in millions) Cash paid for income taxes, net of refunds $ 1,820 $ 1,349 $ 1,644 Cash paid for interest 399 311 199 Cash paid for legal settlements 98 149 668 Non-cash investing and financing activities Dividends declared but not yet paid 479 439 403 Accrued property, equipment and right-of-use assets 15 154 468 Fair value of assets acquired, net of cash acquired 4,969 1,106 1,662 Fair value of liabilities assumed related to acquisitions 522 46 205 Note 7. Investments The Company’s investments on the consolidated balance sheet include both available-for-sale and held-to-maturity debt securities (see Investments section below). The Company classifies its investments in equity securities of publicly traded and privately held companies within other assets on the consolidated balance sheet (see Equity Investments section below). Investments Investments on the consolidated balance sheet consisted of the following at December 31: 2021 2020 (in millions) Available-for-sale securities 1 $ 314 $ 321 Held-to-maturity securities 2 159 162 Total investments $ 473 $ 483 1 See Available-for-Sale Securities section below for further detail. 2 The cost of these securities approximates fair value. Available-for-Sale Securities 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, 2021 December 31, 2020 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value (in millions) Municipal securities $ 2 $ — $ — $ 2 $ 10 $ — $ — $ 10 Government and agency securities 98 — — 98 64 — — 64 Corporate securities 214 — — 214 246 1 — 247 Total $ 314 $ — $ — $ 314 $ 320 $ 1 $ — $ 321 The Company’s corporate and municipal available-for-sale investment securities held at December 31, 2021 and 2020, primarily carried a credit rating of A- or better. Corporate securities are comprised of commercial paper and corporate bonds. Municipal securities are comprised of state tax-exempt bonds and are diversified across states and sectors. Government and agency securities include U.S. government bonds, U.S. government sponsored agency bonds and foreign government bonds which are denominated in the national currency of the issuing country. Unrealized gains and losses are recorded as a separate component of other comprehensive income (loss) on the consolidated statement of comprehensive income. MASTERCARD 2021 FORM 10-K 81 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The maturity distribution based on the contractual terms of the Company’s available-for-sale investment securities at December 31, 2021 was as follows: Amortized Cost Fair Value (in millions) Due within 1 year $ 132 $ 132 Due after 1 year through 5 years 182 182 Total $ 314 $ 314 Investment income on the consolidated statement of operations primarily consists of interest income generated from cash, cash equivalents, time deposits and available-for-sale investment securities, as well as realized gains and losses on the Company’s available-for-sale investment securities. The realized gains and losses from the sales of available-for-sale securities for 2021, 2020 and 2019 were not material. Equity Investments Included in other assets on the consolidated balance sheet are equity investments with readily determinable fair values (“Marketable securities”) and equity investments without readily determinable fair values (“Nonmarketable securities”). Marketable securities are equity interests in publicly traded companies and are measured using unadjusted quoted prices in their respective active markets. Nonmarketable securities that do not qualify for equity method accounting are measured at cost, less any impairment and adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer (“Measurement alternative”). The following table is a summary of the activity related to the Company’s equity investments: Balance at December 31, 2020 Purchases Sales Changes in Fair Value 1 Other 2 Balance at December 31, 2021 (in millions) Marketable securities $ 476 $ — $ ( 165 ) $ 91 $ 225 $ 627 Nonmarketable securities 696 228 ( 21 ) 554 ( 250 ) 1,207 Total equity investments $ 1,172 $ 228 $ ( 186 ) $ 645 $ ( 25 ) $ 1,834 1 Recorded in gains (losses) on equity investments, net on the consolidated statement of operations. 2 Includes translational impact of currency and $ 227 million of transfers between equity investment categories due to changes to the existence of readily determinable fair values. The following table sets forth the components of the Company’s Nonmarketable securities at December 31: 2021 2020 (in millions) Measurement alternative $ 952 $ 539 Equity method 255 157 Total Nonmarketable securities $ 1,207 $ 696 82 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the total carrying value of the Company’s Measurement alternative investments, including cumulative unrealized gains and losses, at December 31: 2021 (in millions) Initial cost basis $ 448 Adjustments: Upward adjustments 514 Downward adjustments (including impairment) ( 10 ) Carrying amount, end of period $ 952 Unrealized gains and losses included in the carrying value of the Company’s Measurement alternative investments still held as of December 31, 2021 and 2020, were as follows: For the Years Ended December 31, 2021 2020 (in millions) Upward adjustments $ 468 $ 21 Downward adjustments (including impairment) $ ( 2 ) $ ( 3 ) Note 8. Fair Value Measurements The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). Financial instruments are categorized for fair value measurement purposes as recurring or non-recurring in nature. MASTERCARD 2021 FORM 10-K 83 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial Instruments - Recurring Measurements 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, 2021 December 31, 2020 Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total (in millions) Assets Investment securities available-for-sale 1 : Municipal securities $ — $ 2 $ — $ 2 $ — $ 10 $ — $ 10 Government and agency securities 35 63 — 98 26 38 — 64 Corporate securities — 214 — 214 — 247 — 247 Derivative instruments 2 : Foreign exchange contracts — 8 — 8 — 19 — 19 Interest rate contracts — 6 — 6 — — — — Marketable securities 3 : Equity securities 627 — — 627 476 — — 476 Deferred compensation plan 4 : Deferred compensation assets 89 — — 89 78 — — 78 Liabilities Derivative instruments 2 : Foreign exchange contracts $ — $ 15 $ — $ 15 $ — $ 28 $ — $ 28 Interest rate contracts — 8 — 8 — — — — Deferred compensation plan 5 : Deferred compensation liabilities 89 — — 89 81 — — 81 1 The Company’s U.S. government securities are classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices for identical assets in active markets. The fair value of the Company’s available-for-sale municipal securities, non-U.S. government and agency securities and corporate securities are based on observable inputs such as quoted prices, benchmark yields and issuer spreads for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy. 2 The Company’s foreign exchange and interest rate derivative asset and liability contracts have been classified within Level 2 of the Valuation Hierarchy as the fair value is based on observable inputs such as broker quotes relating to foreign exchange for similar derivative instruments. See Note 23 (Derivative and Hedging Instruments) for further details. 3 The Company’s Marketable securities are publicly held and classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices in their respective active markets. 4 The Company has a nonqualified deferred compensation plan where assets are invested primarily in mutual funds held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for these mutual funds, which are measured using quoted prices of identical instruments in active markets and are included in prepaid expenses and other current assets on the consolidated balance sheet. 5 The deferred compensation liabilities are measured at fair value based on the quoted prices of identical instruments to the investment vehicles selected by the participants. These are included in other liabilities on the consolidated balance sheet . 84 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial Instruments - Non-Recurring Measurements Nonmarketable Securities The Company’s Nonmarketable securities are recorded at fair value on a non-recurring basis in periods after initial recognition under the equity method or measurement alternative method. Nonmarketable securities are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity and unobservable inputs used to measure fair value that require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its Nonmarketable securities when certain events or circumstances indicate that impairment may exist. See Note 7 (Investments) for further details. Debt The Company estimates the fair value of its long-term debt based on market quotes. These debt securities are classified as Level 2 of the Valuation Hierarchy as they are not traded in active markets. At December 31, 2021, the carrying value and fair value of total long-term debt (including the current portion) was $ 13.9 billion and $ 15.3 billion, respectively. At December 31, 2020, the carrying value and fair value of long-term debt (including the current portion) was $ 12.7 billion and $ 14.8 billion, respectively. See Note 15 (Debt) for further details. Other Financial Instruments Certain other financial instruments are carried on the consolidated balance sheet at cost or amortized cost basis, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, settlement assets, restricted security deposits held for customers, accounts payable, settlement obligations and other accrued liabilities. Note 9. Prepaid Expenses and Other Assets Prepaid expenses and other current assets consisted of the following at December 31: 2021 2020 (in millions) Customer and merchant incentives $ 1,326 $ 1,086 Prepaid income taxes 92 78 Other 853 719 Total prepaid expenses and other current assets $ 2,271 $ 1,883 Other assets consisted of the following at December 31: 2021 2020 (in millions) Customer and merchant incentives $ 3,798 $ 3,220 Equity investments 1,834 1,172 Income taxes receivable 645 553 Other 717 420 Total other assets $ 6,994 $ 5,365 Customer and merchant incentives represent payments made to customers and merchants under business agreements. Payments directly related to entering into such an agreement are generally deferred and amortized over the life of the agreement. MASTERCARD 2021 FORM 10-K 85 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Property, Equipment and Right-of-Use Assets Property, equipment and right-of-use assets consisted of the following at December 31: 2021 2020 (in millions) Building, building equipment and land $ 615 $ 522 Equipment 1,456 1,321 Furniture and fixtures 96 99 Leasehold improvements 371 380 Operating lease right-of-use assets 983 970 Property, equipment and right-of-use assets 3,521 3,292 Less: Accumulated depreciation and amortization ( 1,614 ) ( 1,390 ) Property, equipment and right-of-use assets, net $ 1,907 $ 1,902 Depreciation and amortization expense for the above property, equipment and right-of-use assets was $ 424 million, $ 400 million and $ 336 million for 2021, 2020 and 2019, respectively. Operating lease ROU assets and operating lease liabilities are recorded on the consolidated balance sheet as follows at December 31: 2021 2020 (in millions) Balance sheet location Property, equipment and right-of-use assets, net $ 671 $ 748 Other current liabilities 127 125 Other liabilities 645 726 Operating lease amortization expense for 2021, 2020 and 2019 was $ 122 million, $ 123 million and $ 99 million, respectively. As of December 31, 2021 and 2020, the weighted-average remaining lease term of operating leases was 8.8 years and 9.1 years and the weighted-average discount rate for operating leases was 2.6 % and 2.7 %, respectively. The following table summarizes the maturity of the Company’s operating lease liabilities at December 31, 2021 based on lease term: Operating Leases (in millions) 2022 $ 145 2023 130 2024 109 2025 83 2026 75 Thereafter 322 Total operating lease payments 864 Less: Interest ( 92 ) Present value of operating lease liabilities $ 772 86 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11. Goodwill The changes in the carrying amount of goodwill for the years ended December 31 were as follows: 2021 2020 (in millions) Beginning balance $ 4,960 $ 4,021 Additions 2,842 844 Foreign currency translation ( 140 ) 95 Ending balance $ 7,662 $ 4,960 The Company performed its annual qualitative assessment of goodwill during the fourth quarter of 2021 and determined a quantitative assessment was not necessary. The Company concluded that goodwill was not impaired and had no accumulated impairment losses at December 31, 2021. Note 12. Other Intangible Assets The following table sets forth net intangible assets, other than goodwill, at December 31: 2021 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount (in millions) Finite-lived intangible assets Capitalized software $ 2,929 $ ( 1,288 ) $ 1,641 $ 2,276 $ ( 1,126 ) $ 1,150 Customer relationships 2,272 ( 429 ) 1,843 743 ( 322 ) 421 Other 59 ( 38 ) 21 44 ( 41 ) 3 Total 5,260 ( 1,755 ) 3,505 3,063 ( 1,489 ) 1,574 Indefinite-lived intangible assets Customer relationships 166 — 166 179 — 179 Total $ 5,426 $ ( 1,755 ) $ 3,671 $ 3,242 $ ( 1,489 ) $ 1,753 The increase in the gross carrying amount of amortized intangible assets in 2021 was primarily related to businesses acquired in 2021 and software additions. See Note 2 (Acquisitions) for further details. Certain intangible assets are denominated in foreign currencies. As such, the change in intangible assets includes a component attributable to foreign currency translation. Based on the qualitative assessment performed in 2021, it was determined that the Company’s indefinite-lived intangible assets were not impaired. Amortization on the assets above amounted to $ 424 million, $ 303 million and $ 285 million in 2021, 2020 and 2019, respectively. The following table sets forth the estimated future amortization expense on finite-lived intangible assets on the consolidated balance sheet at December 31, 2021 for the years ending December 31: (in millions) 2022 $ 429 2023 378 2024 355 2025 347 2026 and thereafter 1,996 Total $ 3,505 MASTERCARD 2021 FORM 10-K 87 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13. Accrued Expenses and Accrued Litigation Accrued expenses consisted of the following at December 31: 2021 2020 (in millions) Customer and merchant incentives $ 4,730 $ 3,998 Personnel costs 980 727 Income and other taxes 337 208 Other 595 497 Total accrued expenses $ 6,642 $ 5,430 Customer and merchant incentives represent amounts to be paid to customers under business agreements. As of December 31, 2021 and 2020, long-term customer and merchant incentives included in other liabilities were $ 1,835 million and $ 1,215 million, respectively. As of December 31, 2021 and 2020, the Company’s provision for litigation was $ 840 million and $ 842 million, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the consolidated balance sheet. See Note 21 (Legal and Regulatory Proceedings) for additional information regarding the Company’s accrued litigation. Note 14. Pension, Postretirement and Savings Plans The Company and certain of its subsidiaries maintain various pension and other postretirement plans that cover substantially all employees worldwide. Defined Contribution Plans The Company sponsors defined contribution retirement plans. The primary plan is the Mastercard Savings Plan, a 401(k) plan for substantially all of the Company’s U.S. employees, which is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. In addition, the Company has several defined contribution plans outside of the U.S. The Company’s total expense for its defined contribution plans was $ 175 million, $ 150 million and $ 127 million in 2021, 2020 and 2019, respectively. Defined Benefit and Other Postretirement Plans The Company sponsors pension and postretirement plans for certain non-U.S. employees (the “non-U.S. Plans”) that cover various benefits specific to their country of employment. Additionally, Vocalink has a defined benefit pension plan (the “Vocalink Plan”) which was permanently closed to new entrants and future accruals as of July 21, 2013, however, plan participants’ obligations are adjusted for future salary changes. The Company has agreed to make contributions of £ 15 million (approximately $ 20 million as of December 31, 2021) annually until September 2022. The term “Pension Plans” includes the non-U.S. Plans and the Vocalink Plan. The Company maintains a postretirement plan providing health coverage and life insurance benefits for substantially all of its U.S. employees hired before July 1, 2007 (the “Postretirement Plan”). 88 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company uses a December 31 measurement date for the Pension Plans and its Postretirement Plan (collectively the “Plans”). The Company recognizes the funded status of its Plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, on the consolidated balance sheet. The following table sets forth the Plans’ funded status, key assumptions and amounts recognized on the Company’s consolidated balance sheet at December 31: Pension Plans Postretirement Plan 2021 2020 2021 2020 ($ in millions) Change in benefit obligation Benefit obligation at beginning of year $ 604 $ 531 $ 70 $ 64 Service cost 14 13 1 1 Interest cost 9 9 2 2 Actuarial (gain) loss ( 6 ) 43 ( 7 ) 7 Benefits paid ( 17 ) ( 18 ) ( 4 ) ( 4 ) Transfers in 4 3 — — Foreign currency translation ( 12 ) 23 — — Benefit obligation at end of year 596 604 62 70 Change in plan assets Fair value of plan assets at beginning of year 617 518 — — Actual gain on plan assets 63 56 — — Employer contributions 32 34 4 4 Benefits paid ( 17 ) ( 18 ) ( 4 ) ( 4 ) Transfers in 4 5 — — Foreign currency translation ( 11 ) 22 — — Fair value of plan assets at end of year 688 617 — — Funded status at end of year $ 92 $ 13 $ ( 62 ) $ ( 70 ) Amounts recognized on the consolidated balance sheet consist of: Noncurrent assets $ 105 $ 28 $ — $ — Other liabilities, short-term — — ( 3 ) ( 4 ) Other liabilities, long-term ( 13 ) ( 15 ) ( 59 ) ( 66 ) $ 92 $ 13 $ ( 62 ) $ ( 70 ) Accumulated other comprehensive income consists of: Net actuarial (gain) loss $ ( 38 ) $ 12 $ 2 $ 9 Prior service credit 1 1 ( 2 ) ( 4 ) Balance at end of year $ ( 37 ) $ 13 $ — $ 5 Weighted-average assumptions used to determine end of year benefit obligations Discount rate Non-U.S. Plans 0.90 % 0.70 % * * Vocalink Plan 1.75 % 1.55 % * * Postretirement Plan * * 2.75 % 2.50 % Rate of compensation increase Non-U.S. Plans 1.50 % 1.50 % * * Vocalink Plan 3.20 % 2.75 % * * Postretirement Plan * * 3.00 % 3.00 % * Not applicable MASTERCARD 2021 FORM 10-K 89 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2021 and 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 $ 116 million and $ 112 million, the accumulated benefit obligation was $ 115 million and $ 111 million and plan assets were $ 104 million and $ 97 million at December 31, 2021 and 2020, respectively. Information on the Pension Plans were as follows as of December 31: 2021 2020 (in millions) Projected benefit obligation $ 596 $ 604 Accumulated benefit obligation 592 601 Fair value of plan assets 688 617 For the year ended December 31, 2021, the Company’s projected benefit obligation related to its Pension Plans decreased $ 8 million, primarily attributable to actuarial gains related to higher discount rate assumptions. For the year ended December 31, 2020, the Company’s projected benefit obligation related to its Pension Plans increased $ 73 million, 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 2021 2020 2019 2021 2020 2019 (in millions) Service cost $ 14 $ 13 $ 11 $ 1 $ 1 $ 1 Interest cost 9 9 13 2 2 2 Expected return on plan assets ( 19 ) ( 18 ) ( 18 ) — — — Amortization of actuarial loss ( 1 ) — 1 — — — Amortization of prior service credit — — — ( 1 ) ( 1 ) ( 1 ) Net periodic benefit cost $ 3 $ 4 $ 7 $ 2 $ 2 $ 2 The service cost component is recognized in general and administrative expenses on the consolidated statement of operations. Net periodic benefit cost, excluding the service cost component, is recognized in other income (expense) on the consolidated statement of operations. 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 2021 2020 2019 2021 2020 2019 (in millions) Current year actuarial loss (gain) $ ( 50 ) $ 5 $ 12 $ ( 7 ) $ 7 $ 9 Amortization of prior service credit — — — 2 1 1 Total other comprehensive loss (income) $ ( 50 ) $ 5 $ 12 $ ( 5 ) $ 8 $ 10 Total net periodic benefit cost and other comprehensive loss (income) $ ( 47 ) $ 9 $ 19 $ ( 3 ) $ 10 $ 12 90 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assumptions Weighted-average assumptions used to determine net periodic benefit cost were as follows for the years ended December 31: Pension Plans Postretirement Plan 2021 2020 2019 2021 2020 2019 Discount rate Non-U.S. Plans 0.70 % 0.70 % 1.80 % * * * Vocalink Plan 1.55 % 1.55 % 2.00 % * * * Postretirement Plan * * * 2.50 % 3.25 % 4.25 % Expected return on plan assets Non-U.S. Plans 1.60 % 1.60 % 2.10 % * * * Vocalink Plan 3.20 % 3.20 % 3.75 % * * * Rate of compensation increase Non-U.S. Plans 1.50 % 1.50 % 1.50 % * * * Vocalink Plan 2.75 % 2.75 % 2.50 % * * * Postretirement Plan * * * 3.00 % 3.00 % 3.00 % * Not applicable The Company’s discount rate assumptions are based on yield curves derived from high quality corporate bonds, which are matched to the expected cash flows of each respective plan. The expected return on plan assets assumptions are derived using the current and expected asset allocations of the Pension Plans’ assets and considering historical as well as expected returns on various classes of plan assets. The rates of compensation increases are determined by the Company, based upon its long-term plans for such increases. The following additional assumptions were used at December 31 in accounting for the Postretirement Plan: 2021 2020 Healthcare cost trend rate assumed for next year 6.75 % 7.00 % Ultimate trend rate 5.00 % 5.00 % Year that the rate reaches the ultimate trend rate 7 8 Assets Plan assets are managed taking into account the timing and amount of future benefit payments. The Vocalink Plan assets are managed with the following target asset allocations: cash and cash equivalents 42 %, U.K. government securities 18 %, fixed income 17 %, equity 15 % and real estate 8 %. For the non-U.S. Plans, the assets are concentrated primarily in insurance contracts. The Valuation Hierarchy of the Pension Plans’ assets is determined using a consistent application of the categorization measurements for the Company’s financial instruments. See Note 1 (Summary of Significant Accounting Policies) for additional information. MASTERCARD 2021 FORM 10-K 91 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth by level, within the Valuation Hierarchy, the Pension Plans’ assets at fair value: December 31, 2021 December 31, 2020 Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value (in millions) Cash and cash equivalents 1 $ 246 $ — $ — $ 246 $ 59 $ — $ — $ 59 Mutual funds 2 185 102 — 287 270 117 — 387 Insurance contracts 3 — 104 — 104 — 96 — 96 Total $ 431 $ 206 $ — $ 637 $ 329 $ 213 $ — $ 542 Investments at Net Asset Value (“NAV”) 4 51 75 Total Plan Assets $ 688 $ 617 1 Cash and cash equivalents are valued at quoted market prices, which represent the net asset value of the shares held by the Plans. 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. Certain other mutual funds 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, and are therefore included in Level 2. 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. 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. The following table summarizes expected benefit payments (as of December 31, 2021) through 2031 for the Pension Plans and the Postretirement Plan, including those payments expected to be paid from the Company’s general assets. Actual benefit payments may differ from expected benefit payments. Pension Plans Postretirement Plan (in millions) 2022 $ 27 $ 3 2023 18 3 2024 21 3 2025 21 4 2026 19 4 2027 - 2031 124 19 92 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15. Debt Long-term debt consisted of the following at December 31: 2021 2020 Effective Interest Rate (in millions) 2021 USD Notes 2.000 % Senior Notes due November 2031 $ 750 $ — 2.112 % 1.900 % Senior Notes due March 2031 600 — 1.981 % 2.950 % Senior Notes due March 2051 700 — 3.013 % 2020 USD Notes 3.300 % Senior Notes due March 2027 1,000 1,000 3.420 % 3.350 % Senior Notes due March 2030 1,500 1,500 3.430 % 3.850 % Senior Notes due March 2050 1,500 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 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 793 859 1.265 % 2.100 % Senior Notes due December 2027 906 982 2.189 % 2.500 % Senior Notes due December 2030 170 184 2.562 % 2014 USD Notes 3.375 % Senior Notes due April 2024 1,000 1,000 3.484 % 14,019 12,775 Less: Unamortized discount and debt issuance costs ( 116 ) ( 103 ) Less: Cumulative hedge accounting fair value adjustments 2 ( 2 ) — Total debt outstanding 13,901 12,672 Less: Current portion 3 ( 792 ) ( 649 ) Long-term debt $ 13,109 $ 12,023 1 € 1.650 billion euro-denominated debt issued in December 2015. 2 In 2021, the Company entered into an interest rate swap which is accounted for as a fair value hedge. See Note 23 (Derivative and Hedging Instruments) for additional information. 3 2015 EUR Notes due December 2022 and 2016 USD Notes due November 2021 are classified as current portion of long-term debt on the consolidated balance sheet as of December 31, 2021 and 2020, respectively. In March 2021, the Company issued $ 600 million principal amount of notes due March 2031 and $ 700 million principal amount of notes due March 2051. In November 2021, the Company also issued $ 750 million principal amount of notes due November 2031. The two issuances in 2021 are collectively referred to as the “2021 USD Notes”. The net proceeds from the issuance of the 2021 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $ 2.024 billion. 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. MASTERCARD 2021 FORM 10-K 93 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. In December 2019, the Company also issued $ 750 million principal amount of notes due March 2025. The two issuances in 2019 are collectively referred to as the “2019 USD Notes”. The net proceeds from the issuance of the 2019 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $ 2.724 billion. The outstanding debt, described above, is not subject to any financial covenants and it may be redeemed in whole, or in part, at the Company’s option at any time for a specified make-whole amount. These notes are senior unsecured obligations and would rank equally with any future unsecured and unsubordinated indebtedness. Scheduled annual maturities of the principal portion of long-term debt outstanding at December 31, 2021 are summarized below. (in millions) 2022 $ 793 2023 — 2024 1,000 2025 750 2026 750 Thereafter 10,726 Total $ 14,019 As of December 31, 2021, the Company has a commercial paper program (the “Commercial Paper Program”) under which the Company is authorized to issue up to $ 6 billion in unsecured commercial paper notes with maturities of up to 397 days from the date of issuance. The Commercial Paper Program is available in U.S. dollars. In conjunction with the Commercial Paper Program, the Company has a committed five-year unsecured $ 6 billion revolving credit facility (the “Credit Facility”). The Credit Facility, which previously expired on November 13, 2025, was amended and extended on November 13, 2021 for an additional year and now expires on November 12, 2026. The amendment and 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. dollars and/or euros. The facility fee under the Credit Facility is determined according to the Company’s credit rating and is payable on the average daily commitment, regardless of usage, per annum. In addition to the facility fee, interest rates on borrowings under the Credit Facility would be based on prevailing market interest rates plus applicable margins that fluctuate based on the Company’s credit rating. The Credit Facility contains customary representations, warranties, affirmative and negative covenants, events of default and indemnification provisions. The Company was in compliance in all material respects with the covenants of the Credit Facility at December 31, 2021 and 2020. Borrowings under the Commercial Paper Program and the Credit Facility are to be used to provide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by the Company’s customers. The Company may borrow and repay amounts under the Commercial Paper Program and Credit Facility from time to time. The Company had no borrowings under the Credit Facility and the Commercial Paper Program at December 31, 2021 and 2020. Note 16. Stockholders' Equity Classes of Capital Stock Mastercard’s amended and restated certificate of incorporation authorizes the following classes of capital stock: 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 Preferred $ 0.0001 300 No shares issued or outstanding at December 31, 2021 and 2020. Dividend and voting rights are to be determined by the Board of Directors of the Company upon issuance. 94 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dividends The Company declared a quarterly cash dividend on its Class A and Class B Common Stock during each of the four quarters of 2021, 2020 and 2019. 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: 2021 2020 2019 (in millions, except per share data) Dividends declared per share $ 1.81 $ 1.64 $ 1.39 Total dividends declared $ 1,781 $ 1,641 $ 1,408 Ownership and Governance Structure Equity ownership and voting power of the Company’s shares were allocated as follows as of December 31: 2021 2020 Equity Ownership General Voting Power Equity Ownership General Voting Power Public Investors (Class A stockholders) 88.4 % 89.2 % 88.2 % 88.9 % Principal or Affiliate Customers (Class B stockholders) 0.8 % — % 0.8 % — % Mastercard Foundation (Class A stockholders) 10.8 % 10.8 % 11.0 % 11.1 % Class B Common Stock Conversions Shares of Class B common stock are convertible on a one-for-one basis into shares of Class A common stock. Entities eligible to hold Mastercard’s Class B common stock are defined in the Company’s amended and restated certificate of incorporation (generally the Company’s principal or affiliate customers), and they are restricted from retaining ownership of shares of Class A common stock. Class B stockholders are required to subsequently sell or otherwise transfer any shares of Class A common stock received pursuant to such a conversion. Mastercard Foundation In connection and simultaneously with its 2006 initial public offering (the “IPO”), the Company issued and donated 135 million newly authorized shares of Class A common stock to Mastercard Foundation. 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 pursuant to Canadian tax law. 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. MASTERCARD 2021 FORM 10-K 95 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Common Stock Activity The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the years ended December 31: Outstanding Shares Class A Class B (in millions) Balance at December 31, 2018 1,018.6 11.8 Purchases of treasury stock ( 26.4 ) — Share-based payments 3.2 — Conversion of Class B to Class A common stock 0.6 ( 0.6 ) Balance at December 31, 2019 996.0 11.2 Purchases of treasury stock ( 14.3 ) — Share-based payments 2.3 — Conversion of Class B to Class A common stock 2.9 ( 2.9 ) Balance at December 31, 2020 986.9 8.3 Purchases of treasury stock ( 16.5 ) — Share-based payments 1.2 — Conversion of Class B to Class A common stock 0.5 ( 0.5 ) Balance at December 31, 2021 972.1 7.8 The Company’s Board of Directors have approved share repurchase programs authorizing the Company to repurchase shares of its Class A Common Stock. The following table summarizes the Company’s share repurchase authorizations of its Class A common stock for the years ended December 31: 2021 2020 2019 (In millions, except per share data) Board authorization $ 8,000 $ 6,000 $ 8,000 Dollar-value of shares repurchased $ 5,904 $ 4,473 $ 6,497 Shares repurchased 16.5 14.3 26.4 Average price paid per share $ 356.82 $ 312.68 $ 245.89 As of December 31, 2021, the remaining authorization under the share repurchase programs approved by the Company’s Board of Directors was $ 11.9 billion. 96 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17. Accumulated Other Comprehensive Income (Loss) The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2021 and 2020 were as follows: December 31, 2020 Increase / (Decrease) Reclassifications December 31, 2021 (in millions) Foreign currency translation adjustments 1 $ ( 352 ) $ ( 387 ) $ — $ ( 739 ) Translation adjustments on net investment hedges 2 ( 175 ) 209 — 34 Cash flow hedges Foreign exchange contracts 3 — 5 ( 1 ) 4 Interest rate contracts 4 ( 133 ) — 5 ( 128 ) Defined benefit pension and other postretirement plans 5 ( 20 ) 43 ( 2 ) 21 Investment securities available-for-sale — ( 1 ) — ( 1 ) Accumulated Other Comprehensive Income (Loss) $ ( 680 ) $ ( 131 ) $ 2 $ ( 809 ) December 31, 2019 Increase / (Decrease) Reclassifications December 31, 2020 (in millions) Foreign currency translation adjustments 1 $ ( 638 ) $ 286 $ — $ ( 352 ) Translation adjustments on net investment hedges 2 ( 38 ) ( 137 ) — ( 175 ) Cash flow hedges Interest rate contracts 4 11 ( 147 ) 3 ( 133 ) Defined benefit pension and other postretirement plans 5 ( 9 ) ( 10 ) ( 1 ) ( 20 ) Investment securities available-for-sale 1 ( 1 ) — — Accumulated Other Comprehensive Income (Loss) $ ( 673 ) $ ( 9 ) $ 2 $ ( 680 ) 1 During 2021, the increase in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily b y the depreciation of the euro against the U.S. dollar. 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. 2 During 2021, t he increase in the accumulated other comprehensive income related to the net investment hedges was driven by the depreciation of the euro against the U.S. dollar. During 2020, the increase in the accumulated other comprehensive loss related to the net investment hedge was driven by the appreciation of the euro. See Note 23 (Derivative and Hedging Instruments) for additional information. 3 Beginning in 2021, certain foreign exchange derivative contracts are designated as cash flow hedging instruments. Gains and losses resulting from changes in the 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. See Note 23 (Derivative and Hedging Instruments) for additional information. 4 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 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. 5 During 2021, the increase in the accumulated other comprehensive income related to the Plans was driven primarily by a net actuarial gain within the Pension Plans. During 2020, the increase in the accumulated other comprehensive loss related to the Plans was driven primarily by an actuarial loss within the Postretirement Plan. See Note 14 (Pension, Postretirement and Savings Plans) for additional information. MASTERCARD 2021 FORM 10-K 97 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18. Share-Based Payments In May 2006, the Company granted the following awards under the Mastercard Incorporated 2006 Long Term Incentive Plan, which was amended and restated as of June 5, 2012 (the “LTIP”). The LTIP is a stockholder-approved plan that permits the grant of various types of equity awards to employees. The Company has granted Options, RSUs and PSUs under the LTIP. The Company uses the straight-line method of attribution for expensing all equity awards. Compensation expense is recorded net of estimated forfeitures, with estimates adjusted as appropriate. There are approximately 116 million shares of Class A common stock authorized for equity awards under the LTIP. Although the LTIP permits the issuance of shares of Class B common stock, no such shares have been authorized for issuance. 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. Stock Options 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. 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 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: 2021 2020 2019 Risk-free rate of return 0.9 % 1.0 % 2.6 % Expected term (in years) 6.00 6.00 6.00 Expected volatility 26.1 % 19.3 % 19.6 % Expected dividend yield 0.5 % 0.6 % 0.6 % Weighted-average fair value per Option granted $ 91.70 $ 80.92 $ 53.09 The risk-free rate of return was based on the U.S. Treasury yield curve in effect on the date of grant. The expected term and the expected volatility were based on historical Mastercard information. The expected dividend yields were based on the Company’s expected annual dividend rate on the date of grant. The following table summarizes the Company’s option activity for the year ended December 31, 2021: Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value (in millions) (in years) (in millions) Outstanding at January 1, 2021 5.7 $ 137 Granted 0.3 $ 363 Exercised ( 0.6 ) $ 96 Forfeited/expired — $ 259 Outstanding at December 31, 2021 5.4 $ 152 5.3 $ 1,109 Exercisable at December 31, 2021 4.2 $ 122 4.6 $ 986 Options vested and expected to vest at December 31, 2021 5.3 $ 152 5.3 $ 1,109 As of December 31, 2021, there was $ 26 million of total unrecognized compensation cost related to non-vested Options. The cost is expected to be recognized over a weighted-average period of 1.9 years. 98 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 . The following table summarizes the Company’s RSU activity for the year ended December 31, 2021: Units Weighted-Average Grant-Date Fair Value Aggregate Intrinsic Value (in millions) (in millions) Outstanding at January 1, 2021 2.5 $ 231 Granted 0.8 $ 358 Converted ( 1.0 ) $ 199 Forfeited ( 0.1 ) $ 282 Outstanding at December 31, 2021 2.2 $ 291 $ 781 RSUs expected to vest at December 31, 2021 2.1 $ 289 $ 751 The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on the date of grant, adjusted for the exclusion of dividend equivalents. Upon vesting, a portion of the RSU award may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSUs will be settled in shares of the Company’s Class A common stock after the vesting period. As of December 31, 2021, there was $ 283 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 2.6 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. 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. The following table summarizes the Company’s PSU activity for the year ended December 31, 2021: Units Weighted-Average Grant-Date Fair Value Aggregate Intrinsic Value (in millions) (in millions) Outstanding at January 1, 2021 0.4 $ 259 Granted 0.2 $ 385 Converted ( 0.1 ) $ 226 Other ( 0.1 ) $ 231 Outstanding at December 31, 2021 0.4 $ 334 $ 128 PSUs expected to vest at December 31, 2021 0.4 $ 334 $ 128 Since 2013, PSUs containing performance and market conditions have been issued. Performance measures used to determine the actual number of shares that vest after three years include net revenue growth, EPS growth and relative total shareholder return (“TSR”). Relative TSR is considered a market condition, while net revenue and EPS growth are considered performance conditions. The Monte Carlo simulation valuation model is used to determine the grant-date fair value. MASTERCARD 2021 FORM 10-K 99 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (“2018 PSU Awards”) were adjusted to exclude certain pandemic-related financial impacts deemed outside of the Company’s control. The adjustment during the year ended December 31, 2020 required the Company to apply modification accounting to the 2018 PSU Awards which had an immaterial impact on compensation expense. As of December 31, 2021, there was $ 34 million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a weighted-average period of 1.5 years. Additional Information The following table includes additional share-based payment information for each of the years ended December 31: 2021 2020 2019 (in millions, except weighted-average fair value) Share-based compensation expense: Options, RSUs and PSUs $ 273 $ 254 $ 250 Income tax benefit recognized for equity awards 57 53 53 Income tax benefit realized related to Options exercised 36 68 69 Options: Total intrinsic value of Options exercised 169 317 317 RSUs: Weighted-average grant-date fair value of awards granted 358 288 226 Total intrinsic value of RSUs converted into shares of Class A common stock 360 330 394 PSUs: Weighted-average grant-date fair value of awards granted 385 291 231 Total intrinsic value of PSUs converted into shares of Class A common stock 32 92 85 Note 19. Commitments At December 31, 2021, the Company had the following future minimum payments due under noncancelable agreements, primarily related to sponsorships to promote the Mastercard brand and licensing arrangements. The Company has accrued $ 17 million of these future payments as of December 31, 2021. (in millions) 2022 $ 424 2023 202 2024 114 2025 48 2026 3 Thereafter 1 Total $ 792 100 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20. Income Taxes 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: 2021 2020 2019 (in millions) United States $ 4,261 $ 3,304 $ 4,213 Foreign 6,046 4,456 5,518 Income before income taxes $ 10,307 $ 7,760 $ 9,731 The total income tax provision for the years ended December 31 is comprised of the following components: 2021 2020 2019 (in millions) Current Federal $ 663 $ 439 $ 642 State and local 51 56 81 Foreign 976 781 897 1,690 1,276 1,620 Deferred Federal ( 31 ) 106 40 State and local ( 4 ) 9 — Foreign ( 35 ) ( 42 ) ( 47 ) ( 70 ) 73 ( 7 ) Income tax expense $ 1,620 $ 1,349 $ 1,613 Effective Income Tax Rate A reconciliation of the effective income tax rate to the U.S. federal statutory income tax rate for the years ended December 31, is as follows: 2021 2020 2019 Amount Percent Amount Percent Amount Percent (in millions, except percentages) Income before income taxes $ 10,307 $ 7,760 $ 9,731 Federal statutory tax 2,164 21.0 % 1,630 21.0 % 2,044 21.0 % State tax effect, net of federal benefit 60 0.6 % 57 0.7 % 65 0.7 % Foreign tax effect ( 283 ) ( 2.7 ) % ( 193 ) ( 2.5 ) % ( 208 ) ( 2.1 ) % U.S. tax benefits 1 ( 132 ) ( 1.3 ) % — — % — — % Windfall benefit ( 67 ) ( 0.7 ) % ( 119 ) ( 1.5 ) % ( 129 ) ( 1.3 ) % Other, net 2 ( 122 ) ( 1.2 ) % ( 26 ) ( 0.3 ) % ( 159 ) ( 1.7 ) % Income tax expense $ 1,620 15.7 % $ 1,349 17.4 % $ 1,613 16.6 % 1 Refer to the description below for the components that represent U.S. tax benefits. 2 Included within the impact of other is $ 27 million of tax benefits for 2019 relating to the carryback of certain foreign tax credits. The effective income tax rates for the years ended December 31, 2021, 2020 and 2019 were 15.7 %, 17.4 % and 16.6 %, respectively. The effective income tax rate for 2021 was lower than the effective income tax rate for 2020, primarily due to the recognition of U.S. tax benefits, the majority of which were discrete, resulting from a higher foreign derived intangible income deduction and greater utilization of foreign tax credits in the U.S. In addition, a more favorable geographic mix of earnings in 2021 contributed to the Company’s lower effective tax rate. These benefits were partially offset by a lower discrete tax benefit related to share-based payments in 2021. MASTERCARD 2021 FORM 10-K 101 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective income tax rate for 2020 was higher than the effective income tax rate for 2019, primarily due to higher 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. Singapore Income Tax Rate In connection with the expansion of the Company’s operations in the Asia Pacific, Middle East and Africa region, the Company’s subsidiary in Singapore, Mastercard Asia Pacific Pte. Ltd. (“MAPPL”) received an incentive grant from the Singapore Ministry of Finance in 2010. The incentive had provided MAPPL with, among other benefits, a reduced income tax rate for the 10 -year period commencing January 1, 2010 on taxable income in excess of a base amount. The Company continued to explore business opportunities in this region, resulting in an expansion of the incentives being granted by the Ministry of Finance, including a further reduction to the income tax rate on taxable income in excess of a revised fixed base amount commencing July 1, 2011 and continuing through December 31, 2025. Without the incentive grant, MAPPL would have been subject to the statutory income tax rate on its earnings. For 2021, 2020 and 2019, the impact of the incentive grant received from the Ministry of Finance resulted in a reduction of MAPPL’s income tax liability of $ 300 million, or $ 0.30 per diluted share, $ 260 million, or $ 0.26 per diluted share, and $ 300 million, or $ 0.29 per diluted share, respectively. Indefinite Reinvestment As of December 31, 2021 the Company had immaterial deferred tax liabilities 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 $ 1.1 billion remain permanently reinvested and the Company estimates that immaterial U.S. federal and state and local income tax benefits would result, primarily from foreign exchange, if these earnings were to be repatriated. 102 MASTERCARD 2021 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred Taxes Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The components of deferred tax assets and liabilities at December 31 are as follows: 2021 2020 (in millions) Deferred Tax Assets Accrued liabilities $ 497 $ 324 Compensation and benefits 260 218 State taxes and other credits 40 47 Net operating and capital losses 136 147 Unrealized gain/loss - 2015 EUR Notes 24 58 U.S. foreign tax credits 333 276 Intangible assets 206 182 Other items 137 142 Less: Valuation allowance ( 415 ) ( 353 ) Total Deferred Tax Assets 1,218 1,041 Deferred Tax Liabilities Prepaid expenses and other accruals 114 78 Gains on equity investments 153 60 Goodwill and intangible assets 571 216 Property, plant and equipment 174 183 Previously taxed earnings and profits 3 61 Other items 112 38 Total Deferred Tax Liabilities 1,127 636 Net Deferred Tax Assets $ 91 $ 405 The valuation allowance balance at December 31, 2021 and 2020 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 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 on the timing and character of future taxable income in such jurisdictions. A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the years ended December 31, is as follows: 2021 2020 2019 (in millions) Beginning balance $ 388 $ 203 $ 164 Additions: Current year tax positions 17 19 22 Prior year tax positions 4 192 37 Reductions: Prior year tax positions ( 31 ) ( 10 ) ( 11 ) Settlements with tax authorities ( 15 ) ( 12 ) ( 2 ) Expired statute of limitations ( 3 ) ( 4 ) ( 7 ) Ending balance $ 360 $ 388 $ 203 MASTERCARD 2021 FORM 10-K 103 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2021, the amount of unrecognized tax benefit was $ 360 million. This amount, if recognized, would reduce the effective income tax rate. The Company’s unrecognized tax benefits increased in 2020 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. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation. Within the next twelve months, the Company believes that the resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. While such a change may be significant, it is not possible to provide a range of the potential change until the examinations progress further or the related statutes of limitation expire. The Company has effectively settled its U.S. federal income tax obligations through 2011. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2010. At December 31, 2021 and 2020, the Company had a net income tax-related interest payable of $ 20 million and $ 24 million, respectively, in its consolidated balance sheet. Tax-related interest income/(expense) in 2021, 2020 and 2019 was not material. In addition, as of December 31, 2021 and 2020, the amounts the Company has recognized for penalties payable in its consolidated balance sheet were not material. Note 21. Legal and Regulatory Proceedings Mastercard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business. Some of these proceedings are based on complex claims involving substantial uncertainties and unascertainable damages. Accordingly, except as discussed below, it is not possible to determine the probability of loss or estimate damages, and therefore, Mastercard has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, Mastercard records a liability and discloses the amount of the liability if it is material. When a material loss contingency is only reasonably possible, Mastercard does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Unless otherwise stated below with respect to these matters, Mastercard cannot provide an estimate of the possible loss or range of loss based on one or more of the following reasons: (1) actual or potential plaintiffs have not claimed an amount of monetary damages or the amounts are unsupportable or exaggerated, (2) the matters are in early stages, (3) there is uncertainty as to the outcome of pending appeals or motions, (4) there are significant factual issues to be resolved, (5) the existence in many such proceedings of multiple defendants or potential defendants whose share of any potential financial responsibility has yet to be determined and/or (6) there are novel legal issues presented. Furthermore, except as identified with respect to the matters below, Mastercard does not believe that the outcome of any individual existing legal or regulatory proceeding to which it is a party will have a material adverse effect on its results of operations, financial condition or overall business. However, an adverse judgment or other outcome or settlement with respect to any proceedings discussed below could result in fines or payments by Mastercard and/or could require Mastercard to change its business practices. In addition, an adverse outcome in a regulatory proceeding could lead to the filing of civil damage claims and possibly result in significant damage awards. Any of these events could have a material adverse effect on Mastercard’s results of operations, financial condition and overall business. Interchange Litigation and Regulatory Proceedings Mastercard’s interchange fees and other practices are subject to regulatory, legal review and/or challenges in a number of jurisdictions, including the proceedings described below. When taken as a whole, the resulting decisions, regulations and legislation with respect to interchange fees and acceptance practices may have a material adverse effect on the Company’s prospects for future growth and its overall results of operations, financial position and cash flows. United States. In June 2005, the first of a series of complaints were filed on behalf of merchants (the majority of the complaints were styled as class actions, although a few complaints were filed on behalf of individual merchant plaintiffs) against Mastercard International, Visa U.S.A., Inc., Visa International Service Association and a number of financial institutions. 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, resulting in merchants paying excessive costs for the acceptance of Mastercard and Visa credit and debit cards. The cases were consolidated for pre-trial proceedings in the U.S. District Court for the Eastern District of New York in MDL No. 1720. The plaintiffs filed a consolidated class action complaint that seeks treble damages. 104 MASTERCARD 2021 FORM 10-K PART II