Mastercard Inc 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 derivative 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. A hypothetical 10% adverse change in the value of the functional currencies would not have a material impact to the fair value of our short duration foreign exchange derivative contracts outstanding at December 31, 2023 and 2022, respectively. We are further exposed to foreign exchange rate risk related to translation of our net investment in foreign subsidiaries 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. As of December 31, 2023, we did not have any foreign exchange derivative contracts designated as a net investment hedge. As of December 31, 2022, 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 $203 million on our foreign exchange derivative contracts designated as a net investment hedge before considering the offsetting effect of the underlying hedged activity. 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, 2023 and 2022. 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 would not have a material impact to the fair value of our interest rate derivative contracts designated as a fair value hedge of our fixed-rate debt at December 31, 2023 and 2022, respectively, before considering the offsetting effect of the underlying hedged activity. 63 MASTERCARD 2023 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, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021 Management’s report on internal control over financial reporting 65 Report of independent registered public accounting firm (PCAOB ID 238 ) 66 Consolidated Statement of Operations 68 Consolidated Statement of Comprehensive Income 69 Consolidated Balance Sheet 70 Consolidated Statement of Changes in Equity 71 Consolidated Statement of Cash Flows 73 Notes to consolidated financial statements 74 MASTERCARD 2023 FORM 10-K 64 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, 2023. 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, 2023. The effectiveness of Mastercard’s internal control over financial reporting as of December 31, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on the next page. 65 MASTERCARD 2023 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, 2023 and 2022, 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, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 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, 2023, 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 2023 FORM 10-K 66 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 are a portion of total net revenue of $25.1 billion for the year ended December 31, 2023. The Company has business agreements with certain customers that provide for rebates and incentives within net revenue that could be either fixed or variable. Variable rebates and incentives are recorded 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 13, 2024 We have served as the Company’s auditor since 1989. 67 MASTERCARD 2023 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Operations For the Years Ended December 31, 2023 2022 2021 (in millions, except per share data) Net Revenue $ 25,098 $ 22,237 $ 18,884 Operating Expenses: General and administrative 8,927 8,078 7,087 Advertising and marketing 825 789 895 Depreciation and amortization 799 750 726 Provision for litigation 539 356 94 Total operating expenses 11,090 9,973 8,802 Operating income 14,008 12,264 10,082 Other Income (Expense): Investment income 274 61 11 Gains (losses) on equity investments, net ( 61 ) ( 145 ) 645 Interest expense ( 575 ) ( 471 ) ( 431 ) Other income (expense), net ( 7 ) 23 — Total other income (expense) ( 369 ) ( 532 ) 225 Income before income taxes 13,639 11,732 10,307 Income tax expense 2,444 1,802 1,620 Net Income $ 11,195 $ 9,930 $ 8,687 Basic Earnings per Share $ 11.86 $ 10.26 $ 8.79 Basic weighted-average shares outstanding 944 968 988 Diluted Earnings per Share $ 11.83 $ 10.22 $ 8.76 Diluted weighted-average shares outstanding 946 971 992 The accompanying notes are an integral part of these consolidated financial statements. MASTERCARD 2023 FORM 10-K 68 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Comprehensive Income For the Years Ended December 31, 2023 2022 2021 (in millions) Net Income $ 11,195 $ 9,930 $ 8,687 Other comprehensive income (loss): Foreign currency translation adjustments 328 ( 712 ) ( 442 ) Income tax effect ( 33 ) 37 55 Foreign currency translation adjustments, net of income tax effect 295 ( 675 ) ( 387 ) Translation adjustments on net investment hedges ( 165 ) 353 269 Income tax effect 37 ( 78 ) ( 60 ) Translation adjustments on net investment hedges, net of income tax effect ( 128 ) 275 209 Cash flow hedges ( 41 ) 1 6 Income tax effect 10 — ( 1 ) Reclassification adjustment for cash flow hedges 35 ( 10 ) 5 Income tax effect ( 8 ) 2 ( 1 ) Cash flow hedges, net of income tax effect ( 4 ) ( 7 ) 9 Defined benefit pension and other postretirement plans ( 18 ) ( 45 ) 57 Income tax effect 5 14 ( 14 ) Reclassification adjustment for defined benefit pension and other postretirement plans ( 1 ) ( 1 ) ( 2 ) Income tax effect — — — Defined benefit pension and other postretirement plans, net of income tax effect ( 14 ) ( 32 ) 41 Investment securities available-for-sale 6 ( 6 ) ( 1 ) Income tax effect ( 1 ) 1 — Investment securities available-for-sale, net of income tax effect 5 ( 5 ) ( 1 ) Other comprehensive income (loss), net of income tax effect 154 ( 444 ) ( 129 ) Comprehensive Income $ 11,349 $ 9,486 $ 8,558 The accompanying notes are an integral part of these consolidated financial statements. 69 MASTERCARD 2023 FORM 10-K PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheet December 31, 2023 2022 (in millions, except per share data) Assets Current assets: Cash and cash equivalents $ 8,588 $ 7,008 Restricted cash for litigation settlement — 589 Restricted security deposits held for customers 1,845 1,568 Investments 592 400 Accounts receivable 4,060 3,425 Settlement assets 1,233 1,270 Prepaid expenses and other current assets 2,643 2,346 Total current assets 18,961 16,606 Property, equipment and right-of-use assets, net 2,061 2,006 Deferred income taxes 1,355 1,151 Goodwill 7,660 7,522 Other intangible assets, net 4,086 3,859 Other assets 8,325 7,580 Total Assets $ 42,448 $ 38,724 Liabilities, Redeemable Non-controlling Interests and Equity Current liabilities: Accounts payable $ 834 $ 926 Settlement obligations 1,399 1,111 Restricted security deposits held for customers 1,845 1,568 Accrued litigation 723 1,094 Accrued expenses 8,517 7,801 Short-term debt 1,337 274 Other current liabilities 1,609 1,397 Total current liabilities 16,264 14,171 Long-term debt 14,344 13,749 Deferred income taxes 369 393 Other liabilities 4,474 4,034 Total Liabilities 35,451 32,347 Commitments and Contingencies Redeemable Non-controlling Interests 22 21 Stockholders’ Equity Class A common stock, $ 0.0001 par value; authorized 3,000 shares, 1,402 and 1,399 shares issued and 927 and 948 shares outstanding, respectively — — Class B common stock, $ 0.0001 par value; authorized 1,200 shares, 7 and 8 shares issued and outstanding, respectively — — Additional paid-in-capital 5,893 5,298 Class A treasury stock, at cost, 475 and 451 shares, respectively ( 60,429 ) ( 51,354 ) Retained earnings 62,564 53,607 Accumulated other comprehensive income (loss) ( 1,099 ) ( 1,253 ) Mastercard Incorporated Stockholders' Equity 6,929 6,298 Non-controlling interests 46 58 Total Equity 6,975 6,356 Total Liabilities, Redeemable Non-controlling Interests and Equity $ 42,448 $ 38,724 The accompanying notes are an integral part of these consolidated financial statements. MASTERCARD 2023 FORM 10-K 70 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, 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 Net income — — — — 9,930 — 9,930 — 9,930 Activity related to non-controlling interests — — — — — — — ( 13 ) ( 13 ) Redeemable non-controlling interest adjustments — — — — ( 3 ) — ( 3 ) — ( 3 ) Other comprehensive income (loss) — — — — — ( 444 ) ( 444 ) — ( 444 ) Dividends — — — — ( 1,968 ) — ( 1,968 ) — ( 1,968 ) Purchases of treasury stock — — — ( 8,773 ) — — ( 8,773 ) — ( 8,773 ) Share-based payments — — 237 7 — — 244 — 244 Balance at December 31, 2022 — — 5,298 ( 51,354 ) 53,607 ( 1,253 ) 6,298 58 6,356 71 MASTERCARD 2023 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, 2022 — — 5,298 ( 51,354 ) 53,607 ( 1,253 ) 6,298 58 6,356 Net income — — — — 11,195 — 11,195 — 11,195 Activity related to non-controlling interests — — — — — — — ( 12 ) ( 12 ) Redeemable non-controlling interest adjustments — — — — ( 7 ) — ( 7 ) ( 7 ) Other comprehensive income (loss) — — — — — 154 154 — 154 Dividends — — — — ( 2,231 ) — ( 2,231 ) — ( 2,231 ) Purchases of treasury stock — — — ( 9,088 ) — — ( 9,088 ) — ( 9,088 ) Share-based payments — — 595 13 — — 608 — 608 Balance at December 31, 2023 $ — $ — $ 5,893 $ ( 60,429 ) $ 62,564 $ ( 1,099 ) $ 6,929 $ 46 $ 6,975 The accompanying notes are an integral part of these consolidated financial statements. MASTERCARD 2023 FORM 10-K 72 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Cash Flows For the Years Ended December 31, 2023 2022 2021 (in millions) Operating Activities Net income $ 11,195 $ 9,930 $ 8,687 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of customer incentives 1,622 1,586 1,371 Depreciation and amortization 799 750 726 (Gains) losses on equity investments, net 61 145 ( 645 ) Share-based compensation 460 295 273 Deferred income taxes ( 236 ) ( 651 ) ( 69 ) Other 22 44 36 Changes in operating assets and liabilities: Accounts receivable ( 546 ) ( 481 ) ( 397 ) Income taxes receivable ( 171 ) 12 ( 87 ) Settlement assets 40 48 390 Prepaid expenses ( 2,438 ) ( 2,175 ) ( 2,087 ) Accrued litigation and legal settlements ( 375 ) 240 ( 1 ) Restricted security deposits held for customers 277 ( 305 ) 177 Accounts payable ( 99 ) 190 100 Settlement obligations 282 201 ( 568 ) Accrued expenses 571 1,188 1,355 Long-term taxes payable ( 129 ) ( 121 ) ( 52 ) Net change in other assets and liabilities 645 299 254 Net cash provided by operating activities 11,980 11,195 9,463 Investing Activities Purchases of investment securities available-for-sale ( 300 ) ( 267 ) ( 389 ) Purchases of investments held-to-maturity ( 347 ) ( 239 ) ( 294 ) Proceeds from sales of investment securities available-for-sale 87 54 83 Proceeds from maturities of investment securities available-for-sale 191 211 291 Proceeds from maturities of investments held-to-maturity 157 265 296 Purchases of property and equipment ( 371 ) ( 442 ) ( 407 ) Capitalized software ( 717 ) ( 655 ) ( 407 ) Purchases of equity investments ( 89 ) ( 88 ) ( 228 ) Proceeds from sales of equity investments 44 7 186 Acquisition of businesses, net of cash acquired — ( 313 ) ( 4,436 ) Other investing activities ( 6 ) ( 3 ) 33 Net cash used in investing activities ( 1,351 ) ( 1,470 ) ( 5,272 ) Financing Activities Purchases of treasury stock ( 9,032 ) ( 8,753 ) ( 5,904 ) Dividends paid ( 2,158 ) ( 1,903 ) ( 1,741 ) Proceeds from debt, net 1,554 1,123 2,024 Payment of debt — ( 724 ) ( 650 ) Acquisition of redeemable non-controlling interests — ( 4 ) — Acquisition of non-controlling interest — — ( 133 ) Contingent consideration paid — — ( 64 ) Tax withholdings related to share-based payments ( 89 ) ( 141 ) ( 133 ) Cash proceeds from exercise of stock options 237 90 61 Other financing activities — ( 16 ) ( 15 ) Net cash used in financing activities ( 9,488 ) ( 10,328 ) ( 6,555 ) Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents 128 ( 103 ) ( 153 ) Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents 1,269 ( 706 ) ( 2,517 ) Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 9,196 9,902 12,419 Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period $ 10,465 $ 9,196 $ 9,902 The accompanying notes are an integral part of these consolidated financial statements. 73 MASTERCARD 2023 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. Mastercard connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide by enabling electronic forms of payment and making those payment transactions safe, simple, smart and accessible. 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, merchants and Mastercard customers. Through its unique and proprietary core global payments network, the Company switches (authorizes, clears and settles) payment transactions. The Company has additional payments capabilities that include automated clearing house (“ACH”) transactions (both batch and real-time account-based payments). Using these capabilities, the Company offers payment products and services and captures new payment flows. The Company’s value-added services include, among others, cyber and intelligence solutions designed to allow all parties to transact securely, easily and with confidence, as well as other services that provide proprietary insights, drawing on Mastercard’s principled and responsible use of secure consumer and merchant data. The Company’s investments in new networks, such as open banking solutions and digital identity capabilities, support and strengthen payments and services solutions. Each of the Company’s capabilities support and build upon each other and are fundamentally interdependent. For the core global payments network, Mastercard’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 employs a multi-layered approach to help protect the global payments ecosystem in which it operates. 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, 2023 and 2022, 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. Prior period amounts have been reclassified to conform to the 2023 presentation. The reclassifications had no impact on previously reported total net revenue, operating income or net income. 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 2023, 2022 and 2021, net income/(losses) attributable to 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, 2023 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. MASTERCARD 2023 FORM 10-K 74 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue recognition - Revenue is recognized to depict the transfer of promised services to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those services. Revenue from the Company’s payment network is primarily generated by charging fees to customers (issuers, acquirers and other market participants) for providing switching and other network-related services, as well as by charging fees to customers based primarily on the gross dollar volume of activity (GDV, which includes both domestic and cross-border volume) on the cards that carry the Company’s brands. Revenue is recognized in the period in which the related transactions and volume occur. Certain volume-based revenue is determined from information reported by customers. Revenue from the Company’s value-added services and solutions is generated through either fixed or transaction-based fees. These services and solutions can be integrated and sold with the Company’s payment network services or can be sold on a stand-alone basis. Revenue from the Company’s value-added services and solutions is recognized in the period in which the related services and solutions 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, or 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 within net revenue that could be either fixed or variable. 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. Variable rebates and incentives are recorded 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. Certain of the Company’s contracts may include options to receive additional value-added services and solutions. The Company accounts for the option as a distinct performance obligation if the option provides a material right to the customer. Material rights are incremental to the standard offerings, which a customer would not have received without entering into the contract. If a material right exists in a contract, revenue allocated to the option is deferred and recognized as revenue when those future products or services are transferred or when the option expires. The value of the option is based on observable prices in the contract or on a relative standalone selling price (“SSP”) basis. The SSP is the price at which the Company would sell a promised product or service separately in similar circumstances to similar customers. Contract assets include unbilled consideration typically resulting from executed value-added services and solutions 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 primarily relates to certain value-added services and solutions. 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 and customer relationships. Goodwill represents the synergies expected to arise after the acquisition date and the assembled workforce. Finite-lived intangible assets consist of capitalized software costs, other intangible assets acquired in business combinations (including customer relationships and acquired technology) 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 the fair value of its intangible assets, primarily discounted cash flows analysis, relief-from-royalty and multi-period excess earnings. As the assumptions employed to measure these assets are based on 75 MASTERCARD 2023 FORM 10-K PART II