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Item 8. Financial Statements and Supplementary Data

2023-02-14 compared with 2022-02-11 · 91 added, 79 removed, 195 unchanged (47% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The plaintiffs filed a consolidated class action complaint seeking treble damages.

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

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

The district court’s settlement approval order has been appealed and oral argument on the appeal is scheduled for March 2022.

The district court’s settlement approval order has been appealed and oral argument on the appeal was heard in March 2022.

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

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

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

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

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

As of December 31, 2022 and 2021, Mastercard had accrued a liability of $ 894 million and $ 783 million, respectively, as a reserve for both the Damages Class litigation and the opt-out merchant cases.

During 2022, Mastercard recorded an additional accrual of $ 133 million as a result of a change in estimate with respect to the claims of merchants who opted out of the Damages Class litigation.

As of December 31, 2022 and 2021, Mastercard had $ 589 million and $ 586 million, respectively, in a qualified cash settlement fund related to the Damages Class litigation and classified as restricted cash on its consolidated balance sheet.

The reserve as of December 31, 2022 for both the Damages Class litigation and the opt-out merchants represents Mastercard’s best estimate of its

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probable liabilities in these matters.

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

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

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

During 2022, Mastercard incurred charges of $ 223 million as a result of settlements (both final and agreements in principle) with a number of U.K.

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

and Pan-European merchants.

Following these settlements, an amount in excess of £ 0.6 billion (approximately $ 0.7 billion as of December 31, 2022) of unresolved damages claims remain.

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

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In July 2018, the U.K.

appellate court heard the appeals of

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the four merchant claimants and ruled against both Mastercard and Visa on two of the three legal issues being considered.

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

The parties appealed the rulings to the U.K.

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

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

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

Additionally, the U.K.

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

Supreme Court sent three of the merchant cases back to the trial court solely for the purpose of determining damages issues.

Mastercard subsequently reached settlement agreements with all four merchants.

Mastercard continues to litigate with the remaining U.K.

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

The majority of these merchant claims generally had been stayed pending the decision of the U.K.

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

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

The plaintiffs were granted permission to appeal that ruling.

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

merchants as well as settlements with a number of Pan-European merchants.

A number of those matters are now progressing with motion practice and discovery.

In one of the actions involving multiple merchant plaintiff claims, the U.K.

trial court in November 2021 denied the plaintiffs’ motion for summary judgment on certain liability issues.

In October 2022, the appellate court rejected the plaintiffs’ appeal.

In a separate matter filed in Belgium involving multiple merchants from the Czech Republic and Slovakia, the trial court held a hearing in June 2022 on liability issues, and the decision is pending.

During the third quarter of 2022, Mastercard and Visa were served with a proposed collective action complaint in the U.K.

on behalf of merchants seeking damages for commercial card transactions and inter-regional consumer card transactions in both the U.K.

and the European Union.

The plaintiffs have claimed damages against Mastercard of approximately £ 0.5 billion (approximately $ 0.6 billion as of December 31, 2022).

The court has scheduled a hearing on the plaintiffs’ collective action application for April 2023.

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

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The complaint, which seeks to leverage the European Commission’s 2007 decision on intra-EEA interchange fees, claims damages in an amount that exceeds £ 14 billion (approximately $ 17 billion as of December 31, 2022).

In July 2017, the trial court denied the plaintiffs’ application for the case to proceed as a collective action.

In April 2019, the U.K.

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

In December 2020, the U.K.

Supreme Court rejected Mastercard’s appeal of this ruling.

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

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

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

Following various hearings since July 2017 regarding collective action and scope, in August 2021, the trial court issued a decision in which it granted class certification to the plaintiffs but narrowed the scope of the class.

In January 2023, the trial court held a hearing on Mastercard’s request to narrow the number of years of damages sought by the plaintiffs on statute of limitations grounds.

The trial court has scheduled an additional hearing for July 2023 regarding Mastercard’s request to preclude the plaintiffs from seeking damages with respect to U.K.

domestic interchange fees.

Mastercard has been named as a defendant in a proposed consumer collective action filed in Portugal on behalf of Portuguese consumers.

The complaint, which seeks to leverage the 2019 resolution of the European Commission’s investigation of Mastercard’s central acquiring rules and interregional interchange fees, claims damages of approximately € 0.4 billion (approximately $ 0.4 billion as of December 31, 2022) for interchange fees that were allegedly passed on to consumers by Portuguese merchants for a period of approximately 20 years.

Mastercard has submitted a statement of defense that disputes both liability and damages.

In May 2022, the Australian Competition & Consumer Commission (“ACCC”) filed a complaint targeting certain agreements entered into by Mastercard and certain Australian merchants related to Mastercard’s debit program.

The ACCC alleges that by entering into such agreements, Mastercard engaged in conduct with the purpose of substantially lessening competition in the supply of debit card acceptance services.

The ACCC seeks both declaratory relief and monetary fines and costs.

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ATM Non-Discrimination Rule Surcharge Complaints

United States.

In October 2011, a trade association of independent Automated Teller Machine (“ATM”) operators and 13 independent ATM operators filed a complaint styled as a class action lawsuit in the U.S.

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In January 2012, the plaintiffs in the ATM Operators Complaint and the ATM Consumer Complaints filed amended class action complaints that largely mirror their prior complaints.

In February 2013, the district court granted Mastercard’s motion to dismiss the complaints for failure to state a claim.

On appeal, the Court of Appeals reversed the district court’s order in August 2015 and sent the case back for further proceedings.

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

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

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

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

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

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

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Visa and Mastercard subsequently appealed the certification decision to the appellate court and oral argument on the appeal was heard in September 2022.

Mastercard has been named as a defendant in an action brought by Euronet 360 Finance Limited, Euronet Polska Spolka z.o.o.

and Euronet Services spol.

(“Euronet”) alleging that certain rules affecting ATM access fees in Poland, the Czech Republic and Greece by Visa and Mastercard, and certain of their subsidiaries, breach various competition laws.

Euronet seeks damages, costs and injunctive relief to prevent the defendants from enforcing these rules.

A trial has been scheduled for October 2023.

Liability Shift Litigation

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Plaintiffs allege damages equal to the value of all chargebacks for which class members became liable as a result of the EMV Liability Shift on October 1, 2015.

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

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

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

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merchant class interchange litigation described above.

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

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

In August 2020, the district court issued an order granting the plaintiffs’ request for class certification and in January 2021, the Network Defendants’ request for permission to appeal that decision was denied.

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

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

Briefing on summary judgment is expected to occur in 2022.

Briefing on summary judgment is scheduled to conclude in July 2023.

Telephone Consumer Protection Class Action

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

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

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

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

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

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

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

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

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

In December 2019, the Federal Communications Commission (“FCC”) issued a declaratory ruling clarifying that the TCPA does not apply to faxes sent to online fax services that are received online via email.

In December 2021, the trial court granted plaintiffs’ request for class certification, but narrowed the scope of the class to stand alone fax recipients only.

Mastercard’s request to appeal that decision was denied.

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Federal Trade Commission Investigation

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

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

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

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

In December 2022, the FTC voted to issue an administrative complaint and accept a consent agreement with Mastercard.

Pursuant to this agreement, Mastercard agreed to provide primary account numbers (PANs) so that merchants can route tokenized online debit transactions to alternative networks.

The consent agreement does not include any monetary penalty.

The consent agreement is currently undergoing a comment period, after which the FTC will decide whether to make the proposed consent agreement final.

Prepaid Cards Matter

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

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

Mastercard paid the agreed fine in March 2022.

Settlement and Other Risk Management

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Settlement exposure is the 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.

For those transactions the Company guarantees, the guarantee will cover the full amount of the settlement obligation to the extent the settlement obligation is not otherwise satisfied.

Settlement is generally completed on a same-day basis, however, in some circumstances, funds may not settle until subsequent business days creating a short-term settlement exposure.

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

The Company has global risk management policies and procedures, which

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

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

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

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

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

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

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

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

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative and Hedging Instruments

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As of December 31, 2022, a cumulative loss of $ 123 million, after tax, remains in accumulated other comprehensive income (loss) associated with these contracts and will be reclassified as an adjustment to interest expense over the respective terms of the 2020 USD Notes due in March 2030 and March 2050.

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Hedges

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

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

The net impact to interest expense for the years ended December 31, 2022 and 2021 was not material.

Net Investment Hedges

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

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

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

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

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

The amounts recognized in earnings related to forward points for 2022 and 2021 were not material.

In 2015 and 2022, the Company designated its € 1,650 million and € 750 million euro-denominated debt, respectively, as hedges of a portion of its net investment in its European operations.

In 2022, € 700 million of the 2015 euro-denominated debt matured and was de-designated as a net investment hedge.

During 2022, 2021 and 2020 the Company recorded a pre-tax net foreign currency gain of $ 176 million, gain of $ 155 million and loss of $ 177 million, respectively, in other comprehensive income (loss).

As of December 31, 2022 and 2021, the Company had net foreign currency gains of $ 309 million and $ 34 million, after tax, respectively, in accumulated other comprehensive income (loss) associated with this hedging activity.

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Non-designated Derivatives

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

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

December 31, 2022 December 31, 2021

Notional Fair Value Notional Fair Value

Notional Derivative Assets Derivative Liabilities Notional Derivative Assets Derivative Liabilities

(in millions)

Derivative assets:

Derivatives designated as hedging instruments

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Interest rate contracts in a fair value hedge 2

Derivatives not designated as hedging instruments

Foreign exchange contracts 1

Total Derivative Assets $ 226 $ 14 $ 483 $ 19

Derivative liabilities:

Derivatives designated as hedging instruments

Foreign exchange contracts in a cash flow hedge 1

1,000 — 105 1,000 6 8

Interest rate contracts in a fair value hedge 2

Foreign exchange contracts in a net investment hedge 1

1,814 103 4 1,473 — 4

Derivatives not designated as hedging instruments

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521 1 2 530 1 8

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

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

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

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

Total derivative assets/liabilities $ 3,977 $ 108 $ 126 $ 3,209 $ 14 $ 23

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

2 As of December 31, 2022, interest rate derivative liabilities are included within other current liabilities and other liabilities on the consolidated balance sheet.

As of December 31, 2021, interest rate derivative assets and liabilities are included within prepaid expenses and other current assets and other liabilities, respectively, on the consolidated balance sheet.

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

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Revenue generated in the U.S.

was approximately 32 % of total revenue in 2021, 33 % in 2020 and 32 % in 2019.

No individual country, other than the U.S., generated more than 10% of total revenue in those periods.

was approximately 33 % of net revenue in 2022, 32 % in 2021 and 33 % in 2020.

No individual country, other than the U.S., generated more than 10% of net revenue in those periods.

Mastercard did not have any individual customer that generated greater than 10% of net revenue in 2022, 2021 or 2020.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data