What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-04-28 compared with 2021-11-09 · 353 added, 394 removed, 870 unchanged (46% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

2022 December 31,

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Accounts receivable, net 850 800

Loans and interest receivable, net of allowances of $ 489 and $ 838 as of September 30, 2021 and December 31, 2020, respectively

Loans and interest receivable, net of allowances of $ 476 and $ 491 as of March 31, 2022 and December 31, 2021, respectively

Funds receivable and customer accounts 37,046 36,141

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4,000 shares authorized;

1,174 and 1,172 shares outstanding as of September 30, 2021 and December 31, 2020, respectively

1,161 and 1,168 shares outstanding as of March 31, 2022 and December 31, 2021, respectively

Preferred stock, $ 0.0001 par value;

100 shares authorized, unissued

Treasury stock at cost, 124 and 117 shares as of September 30, 2021 and December 31, 2020, respectively

Treasury stock at cost, 143 and 132 shares as of March 31, 2022 and December 31, 2021, respectively

( 13,380 ) ( 11,880 )

2 unchanged sentences

Accumulated other comprehensive income (loss) ( 444 ) ( 136 )

Total PayPal stockholders’ equity 22,090 20,019

Noncontrolling interest — 44

Total equity 20,603 21,727

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions, except per share data)

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Income before income taxes 629 872

Income tax expense 78 123 25 571

Income tax expense (benefit) 120 ( 225 )

Net income $ 509 $ 1,097

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

2 unchanged sentences

Foreign currency translation adjustments (“CTA”) ( 95 ) ( 53 )

Net investment hedge CTA gain — — — 55

Unrealized gains (losses) on cash flow hedges, net 204 ( 163 ) 434 ( 111 )

Tax (expense) benefit on unrealized gains (losses) on cash flow hedges, net ( 7 ) 2 ( 10 ) 1

Unrealized (losses) gains on investments, net — ( 12 ) ( 17 ) 10

Tax benefit (expense) on unrealized (losses) gains on investments, net — 3 4 ( 3 )

Net investment hedges CTA gains, net 21 —

Tax expense on net investment hedges CTA gains, net ( 5 ) —

Unrealized (losses) gains on cash flow hedges, net ( 3 ) 198

Tax benefit (expense) on unrealized (losses) gains on cash flow hedges, net — ( 3 )

Unrealized losses on investments, net ( 293 ) ( 15 )

Tax benefit on unrealized losses on investments, net 67 4

Other comprehensive income (loss), net of tax ( 308 ) 131

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock Shares Treasury Stock Additional Paid-In Capital Accumulated Other

Comprehensive Income (Loss) Retained Earnings Noncontrolling Interest Total

Shares Treasury Stock Additional Paid-In Capital Accumulated Other

Comprehensive Income (Loss) Retained Earnings Total

(In millions)

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Foreign CTA — — — ( 95 ) — ( 95 )

Unrealized gains on cash flow hedges, net — — — 198 — — 198

Tax expense on unrealized gains on cash flow hedges, net — — — ( 3 ) — — ( 3 )

Net investment hedges CTA gains, net — — — 21 — 21

Tax expense on net investment hedges CTA gains, net — — — ( 5 ) — ( 5 )

Unrealized losses on cash flow hedges, net — — — ( 3 ) — ( 3 )

Unrealized losses on investments, net — — — ( 293 ) — ( 293 )

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Stock-based compensation — — 447 — — 447

Change in noncontrolling interest — — — — — ( 44 ) ( 44 )

Other — — 1 — — 1

Balances at March 31, 2022 1,161 $ ( 13,380 ) $ 17,383 $ ( 444 ) $ 17,044 $ 20,603

Net income — — — — 1,184 — 1,184

Foreign CTA — — — 31 — — 31

Unrealized gains on cash flow hedges, net — — — 32 — — 32

Unrealized losses on investments, net — — — ( 2 ) — — ( 2 )

Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 2 — 12 — — — 12

Common stock repurchased ( 1 ) ( 200 ) — — — — ( 200 )

Stock-based compensation — — 407 — — — 407

Balances at June 30, 2021 1,175 $ ( 10,030 ) $ 16,580 $ ( 292 ) $ 14,647 $ — $ 20,905

Net income — — — — 1,087 — 1,087

Foreign CTA — — — ( 29 ) — — ( 29 )

Unrealized gains on cash flow hedges, net — — — 204 — — 204

Tax expense on unrealized gains on cash flow hedges, net — — — ( 7 ) — — ( 7 )

Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes — — ( 37 ) — — — ( 37 )

Common stock repurchased ( 1 ) ( 350 ) — — — — ( 350 )

Stock-based compensation — — 317 — — — 317

Balances at September 30, 2021 1,174 $ ( 10,380 ) $ 16,860 $ ( 124 ) $ 15,734 $ — $ 22,090

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

Common Stock Shares Treasury Stock Additional Paid-In Capital Accumulated Other

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Balances at December 31, 2020 1,172 $ ( 8,507 ) $ 16,644 $ ( 484 ) $ 12,366 $ 44 $ 20,063

Adoption of current expected credit loss standard — — — — ( 168 ) — ( 168 )

Net income — — — — 1,097 — 1,097

Foreign CTA — — — ( 53 ) — — ( 53 )

Net investment hedge CTA gain — — — 71 — — 71

Unrealized gains on cash flow hedges, net — — — 198 — — 198

Tax expense on unrealized gains on cash flow hedges, net — — — ( 3 ) — — ( 3 )

Unrealized gains on investments, net — — — 15 — — 15

Tax expense on unrealized gains on investments, net — — — ( 4 ) — — ( 4 )

Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 8 — ( 382 ) — — — ( 382 )

Common stock repurchased ( 8 ) ( 800 ) — — — — ( 800 )

Stock-based compensation — — 295 — — — 295

Balances at March 31, 2020 1,173 $ ( 7,672 ) $ 15,501 $ ( 120 ) $ 8,258 $ 44 $ 16,011

Net income — — — — 1,530 — 1,530

Foreign CTA — — — 52 — — 52

Net investment hedge CTA loss — — — ( 16 ) — — ( 16 )

Unrealized losses on cash flow hedges, net — — — ( 92 ) — — ( 92 )

Tax benefit on unrealized losses on cash flow hedges, net — — — 1 — — 1

Unrealized gains on investments, net — — — 7 — — 7

Tax expense on unrealized gains on investments, net — — — ( 2 ) — — ( 2 )

Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 1 — 52 — — — 52

Common stock repurchased ( 1 ) ( 220 ) — — — — ( 220 )

Stock-based compensation — — 361 — — — 361

Balances at June 30, 2020 1,173 $ ( 7,892 ) $ 15,914 $ ( 170 ) $ 9,788 $ 44 $ 17,684

Net income — — — — 1,021 1,021

Foreign CTA — — — 8 — — 8

Unrealized losses on cash flow hedges, net — — — ( 163 ) — — ( 163 )

Tax benefit on unrealized losses on cash flow hedges, net — — — 2 — — 2

Unrealized losses on investments, net — — — ( 15 ) — — ( 15 )

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Stock-based compensation — — 387 — — — 387

Balances at September 30, 2020 1,172 $ ( 8,242 ) $ 16,248 $ ( 332 ) $ 10,809 $ 44 $ 18,527

Change in noncontrolling interest — — — — — ( 44 ) ( 44 )

Balances at March 31, 2021 1,174 $ ( 9,830 ) $ 16,161 $ ( 353 ) $ 13,463 $ — $ 19,441

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

(In millions)

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Deferred income taxes ( 16 ) —

Net gains on strategic investments ( 336 ) ( 973 )

Net (gains) losses on strategic investments ( 14 ) 120

Changes in assets and liabilities:

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Proceeds from sales of property and equipment 3 —

Changes in principal loans receivable, net ( 643 ) 523

Purchases and originations of loans receivable ( 5,525 ) ( 2,133 )

Principal repayment of loans receivable 5,054 2,208

Purchases of investments ( 8,604 ) ( 10,975 )

Maturities and sales of investments 8,751 9,718

Acquisitions, net of cash and restricted cash acquired ( 469 ) ( 3,609 )

Funds receivable ( 239 ) ( 180 )

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PayPal Holdings, Inc.

(“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide.

PayPal is committed to democratizing financial services to improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world.

Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device when sending payments or getting paid.

We also facilitate person-to-person payments through our PayPal, Venmo, and Xoom products and services and simplify and personalize shopping experiences for our consumers through our Honey Platform.

Our combined payment solutions, including our core PayPal, PayPal Credit, Braintree, Venmo, Xoom, Zettle, and Hyperwallet products and services, comprise our proprietary Payments Platform.

(“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform that enables digital payments and simplifies commerce experiences on behalf of merchants and consumers worldwide.

PayPal is committed to democratizing financial services to help improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world.

Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world in the markets we serve, anytime, on any platform, and using any device when sending payments or getting paid, including person-to-person payments.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened focus by regulators globally on all aspects of the payments industry, including countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection.

The laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation.

The laws and regulations applicable to us, including those enacted prior to the advent of digital payments, are continuing to evolve through legislative and regulatory action and judicial interpretation.

New or changing laws and regulations, including the changes to their interpretation and implementation, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition.

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Basis of presentation and principles of consolidation

The condensed consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries.

The accompanying condensed consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation.

The noncontrolling interest reported in the prior period was a component of equity on our condensed consolidated balance sheets and represented the equity interests not owned by PayPal and was recorded for consolidated entities we controlled and of which we owned less than 100%.

Noncontrolling interest was not presented separately on our condensed consolidated statements of income as the amount was de minimis.

Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting.

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We determine at the inception of each investment, and re-evaluate if certain events occur, whether an entity in which we have made an investment is considered a variable interest entity (“VIE”).

If we determine an investment is a VIE, we then assess if we are the primary beneficiary, which would require consolidation.

As of September 30, 2021, no VIEs qualified for consolidation as the structures of these entities do not provide us with the ability to direct activities that would significantly impact their economic performance.

The carrying value of our investments that are VIEs is included as non-marketable equity securities applying the equity method of accounting in long-term investments on our condensed consolidated balance sheets.

Our maximum exposure to loss, which represents funded commitments and any future funding commitments, was $ 195 million and $ 105 million as of September 30, 2021 and December 31, 2020, respectively.

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) filed with the Securities and Exchange Commission on February 5, 2021.

If we determine an investment is in a VIE, we then assess if we are the primary beneficiary, which would require consolidation.

As of December 31, 2021, we had consolidated two VIEs that provided financing for and held loans receivable of Paidy, Inc.

We were the primary beneficiary of the VIEs as we performed the servicing and collection for the loans receivable which were the activities that most significantly impacted the VIE’s economic performance and we had the obligation to absorb the losses and/or the right to receive the benefits of the VIE that could potentially be significant to these entities.

The financial results of our consolidated VIEs were included in the condensed consolidated financial statements.

As of December 31, 2021, the carrying value of the assets and liabilities of our consolidated VIEs was included as short-term investments of $ 87 million, loans and interest receivable, net of $ 21 million, and long-term debt of $ 98 million.

Cash of $ 87 million, included in short-term investments, was restricted to settle the debt obligations.

As of March 31, 2022, we have terminated Paidy’s legacy debt structure with a new credit agreement executed in February 2022.

As a result, we no longer have any consolidated VIEs as of March 31, 2022.

See “Note 12—Debt” for additional information.

As of March 31, 2022 and December 31, 2021, the carrying value of our investments that are in nonconsolidated VIEs was $ 86 million and $ 74 million, respectively, and is included as non-marketable equity securities applying the equity method of accounting in long-term investments on our condensed consolidated balance sheets.

Our maximum exposure to loss related to our nonconsolidated VIEs, which represents funded commitments and any future funding commitments, was $ 230 million and $ 205 million as of March 31, 2022 and December 31, 2021, respectively.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on February 3, 2022.

In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the condensed consolidated financial statements for all interim periods presented.

Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2021.

Reclassifications

Beginning with the fourth quarter of 2020, we reclassified certain cash flows related to customer balances from cash flows from operating activities to cash flows from investing activities and cash flows from financing activities within the condensed consolidated statements of cash flows.

Prior period amounts have been reclassified to conform to the current period presentation.

These changes had no impact on our previously reported consolidated net income, financial position, net change in cash, cash equivalents, and restricted cash, or total cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows.

The current period presentation classifies all changes in funds receivable and customer accounts and funds payable and amounts due to customers consistently on our condensed consolidated statement of cash flows as cash flows from investing activities and cash flows from financing activities, respectively, regardless of which product the cash flows relate to on our Payments Platform.

The current period presentation provides a more meaningful representation of the cash flows related to the movement of customer funds due to the restrictions on and use of those funds.

The following table presents the effects of the changes on the presentation of these cash flows to the previously reported condensed consolidated statements of cash flows:

Nine Months Ended September 30, 2020

(In millions)

As Previously Reported (1)

Adjustments Reclassified

Net cash provided by (used in):

Operating activities (2)

$ 4,607 $ ( 100 ) $ 4,507

Investing activities (3)

( 13,266 ) ( 18 ) ( 13,284 )

Financing activities (4)

10,012 118 10,130

Effect of exchange rates on cash, cash equivalents, and restricted cash 26 — 26

Net increase in cash, cash equivalents, and restricted cash $ 1,379 $ — $ 1,379

(1) As reported in our Form 10-Q for the quarterly period ended September 30, 2020 filed with the SEC on November 3, 2020.

(2) Financial statement line impacted in operating activities was “Other assets and liabilities.”

(3) Financial statement line impacted in investing activities was “Funds receivable.”

(4) Financial statement line impacted in financing activities was “Funds payable and amounts due to customers.”

Certain amounts for prior periods have been reclassified to conform to the financial statement presentation as of and for the three months ended March 31, 2022.

Use of estimates

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generally accepted accounting principles (“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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and credit losses, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets.

On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and credit losses, income taxes, loss contingencies, revenue recognition, and the valuation of goodwill and intangible assets.

We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances.

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Actual results could differ from these estimates and any such differences may be material to our financial statements.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Recent accounting guidance

In 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848):

In March 2022, the SEC released Staff Accounting Bulletin No.

121 (“SAB 121”), which provides interpretive guidance for an entity to consider when it operates a platform that allows its users to transact in crypto-assets and that engages in activities in which it has obligations to safeguard customers’ crypto-assets, whether directly or through an agent or another third party acting on its behalf.

The interpretive guidance requires a reporting entity to record a liability to reflect its obligation to safeguard the crypto-assets held for its platform users with a corresponding asset, regardless of its assessment as to who controls the crypto-asset.

The crypto-asset safeguarding liability and related asset will be measured at the fair value of the crypto-assets held for the platform users with the measurement of the safeguarding asset taking into account any potential loss events.

SAB 121 also requires disclosures related to the entity’s safeguarding obligations for crypto-assets held for its platform users.

SEC registrants are expected to comply with SAB 121 in the first interim or annual financial statements ending after June 15, 2022 with retrospective application as of the beginning of the fiscal year.

We are evaluating the approach to, and impact of, adopting this new accounting guidance on our condensed consolidated financial statements.

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures (Topic 326):

Financial Instruments – Credit Losses .

This amended guidance will eliminate the accounting designation of a loan modification as a TDR, including eliminating the measurement guidance for TDRs.

The amendments also enhance existing disclosure requirements and introduce new requirements related to modifications of receivables made to borrowers experiencing financial difficulty.

Additionally, this guidance requires entities to disclose gross write-offs by year of origination for financing receivables, such as loans and interest receivable.

The amended guidance is effective for fiscal years beginning after December 15, 2022 and is required to be applied prospectively, except for the recognition and measurement of TDRs which can be applied on a modified retrospective basis.

We are evaluating the approach to, and impact of, adopting this new accounting guidance on our condensed consolidated financial statements.

In 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

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The amended guidance is effective through December 31, 2022.

Our exposure to London Interbank Offered Rate (“LIBOR”) is primarily limited to an insignificant portion of our available-for-sale debt securities and, accordingly, we do not expect reference rate reform to have a material impact on our condensed consolidated financial statements.

Our exposure to London Interbank Offered Rate (“LIBOR”) is primarily limited to an insignificant portion of our available-for-sale debt securities.

Accordingly, we do not expect reference rate reform to have a material impact on our condensed consolidated financial statements.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable.

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NOTE 2— REVENUE

PayPal enables its customers to send and receive payments.

We enable our customers to send and receive payments.

We earn revenue primarily by completing payment transactions for our customers on our payments platform and from other value added services.

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We operate as one segment and have one reportable segment.

Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors are most appropriately depicted through our primary geographical markets and type of revenue categories (transaction revenues and revenues from other value added services).

Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.

Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors are most appropriately depicted through our primary geographical markets and types of revenue categories (transaction revenues and revenues from other value added services).

Revenues recorded within these categories are earned from similar products and services for which the nature of associated fees and the related revenue recognition models are substantially the same.

The following table presents our revenue disaggregated by primary geographical market and category:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

Primary geographical markets

United States (“U.S.”) $ 3,476 $ 2,820 $ 9,811 $ 7,940

$ 3,671 $ 3,063

United Kingdom (“U.K.”) 526 625

Other countries (1)

2,177 2,033 6,901 5,728

Total net revenues (2)

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$ 6,483 $ 6,033

(1) No single country included in the other countries category generated more than 10% of total revenue.

(2) Total net revenues include $ 168 million and $ 128 million for the three months ended September 30, 2021 and 2020, respectively, and $ 289 million and $ 529 million for the nine months ended September 30, 2021 and 2020, respectively, which do not represent revenues recognized in the scope of Accounting Standards Codification Topic 606, Revenue from contracts with customers .

(1) No single country included in the other countries category generated more than 10% of total net revenues.

(2) Total net revenues include $ 187 million and $ 59 million for the three months ended March 31, 2022 and 2021, respectively, which do not represent revenues recognized in the scope of Accounting Standards Codification Topic 606, Revenue from contracts with customers .

Such revenues relate to interest, fees, and gains earned on loans and interest receivable, as well as hedging gains or losses, and interest earned on certain assets underlying customer balances.

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Revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3— NET INCOME PER SHARE

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The calculation of diluted net income per share excludes all anti-dilutive common shares.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions, except per share amounts)

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NOTE 4— BUSINESS COMBINATIONS

There were no acquisitions accounted for as business combinations or divestitures completed in the three months ended March 31, 2022 or 2021.

ACQUISITIONS COMPLETED IN 2021

In the nine months ended September 30, 2021, we completed three acquisitions accounted for as business combinations.

The total purchase price for these acquisitions was $ 524 million, consisting primarily of cash consideration.

The allocation of purchase consideration resulted in approximately $ 85 million of technology, customer, and marketing related intangible assets with estimated useful lives ranging from approximately one to seven years , net assets of $ 15 million, and initial goodwill of approximately $ 424 million attributable to the workforce of the acquired companies and the synergies expected to arise from these acquisitions, including the integration of the acquired technology with our existing product offerings.

We do not expect goodwill to be deductible for income tax purposes.

The allocation of the purchase price for these acquisitions has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.

We have included the financial results of the acquired businesses in our condensed consolidated financial statements from the date of each acquisition.

Revenues and expenses related to these acquisitions and pro forma results of operations have not been presented for the three and nine months ended September 30, 2021 and 2020 because the effects of these acquisitions were not material to our overall operations.

ACQUISITION COMPLETED IN 2020

Honey Science Corporation

We completed our acquisition of Honey Science Corporation (“Honey”) in January 2020 by acquiring all outstanding shares for total consideration of approximately $ 4.0 billion, consisting of approximately $ 3.6 billion in cash and approximately $ 400 million in assumed restricted stock, restricted stock units, and options, subject to vesting conditions.

We believe our acquisition of Honey will enhance our value proposition by allowing us to further simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:

We completed the acquisition of Paidy in October 2021 by acquiring all outstanding shares for total consideration of approximately $ 2.7 billion, consisting of approximately $ 2.6 billion in cash, and approximately $ 161 million in assumed restricted stock and restricted stock units, subject to vesting conditions.

Paidy is a two-sided payments platform that primarily provides buy now, pay later solutions (installment credit offerings) in Japan.

With the acquisition of Paidy, we intend to expand our capabilities and relevance in Japan.

The following table summarizes the preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:

(In millions)

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Total intangibles $ 642

Accounts receivable, net 50

Loans and interest receivable, net 197

Cash and cash equivalents 101

Other net assets 87

Short-term and long-term debt ( 188 )

Deferred tax liabilities, net ( 186 )

Other net liabilities ( 36 )

Total purchase price $ 2,571

The intangible assets acquired consist primarily of customer contracts, trade name/trademarks, and developed technology with estimated useful lives of three years .

The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill and is attributable to the workforce of Honey and the synergies expected to arise from the acquisition through continued customer acquisition, cross selling initiatives, and product enhancements.

Goodwill was not deductible for income tax purposes.

In connection with the acquisition, we assumed restricted stock, restricted stock units, and options with an approximate grant date fair value of $ 400 million, which represents post-business combination expense.

The equity granted is a combination of shares issued to certain former Honey employees subject to a holdback arrangement and assumed Honey employee grants, which vest over a period of up to four years and are subject to continued employment.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The intangible assets acquired consist primarily of merchant contracts, trade name/trademarks, and developed technology with estimated useful lives of three to seven years .

Contractual gross loans and interest receivable acquired were $ 216 million.

We expect to collect substantially all of these receivables.

The excess of the purchase consideration, including the fair value of our equity investment, over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill and is attributable to the workforce of Paidy and the synergies expected to arise from the acquisition, including continued customer acquisition.

We do not expect goodwill to be deductible for income tax purposes.

The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.

In connection with the acquisition, we issued restricted stock and restricted stock units with an approximate grant date fair value of $ 161 million, which represents post-business combination expense.

The equity granted is a combination of shares issued to certain former Paidy employees subject to a holdback arrangement and assumed Paidy employee equity grants, which vest over a period of up to approximately four years and are subject to continued employment.

Other Acquisitions

In 2021, we completed four other acquisitions accounted for as business combinations.

The total purchase price for these acquisitions was $ 542 million, consisting primarily of cash consideration.

The allocation of purchase consideration resulted in approximately $ 90 million of technology, customer, and marketing related intangible assets with estimated useful lives ranging from approximately one to seven years , net assets of $ 17 million, and initial goodwill of approximately $ 435 million attributable to the workforce of the acquired companies and the synergies expected to arise from these acquisitions, including the integration of the acquired technology with our existing product offerings.

We do not expect goodwill to be deductible for income tax purposes.

OTHER INFORMATION

Prior to acquisition, we held minority interests in certain of the companies we acquired in 2021.

We remeasured these investments immediately before the completion of the respective acquisitions at a total acquisition-date fair value of $ 64 million, which resulted in an aggregate gain of $ 36 million recognized as other income (expense), net in our condensed consolidated statements of income.

The acquisition-date fair value was derived using the value paid less a control premium based on market analysis performed by a third party.

NOTE 5— GOODWILL AND INTANGIBLE ASSETS

The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2021:

December 31, 2020 Goodwill Acquired Adjustments September 30, 2021

The following table presents goodwill balances and adjustments to those balances during the three months ended March 31, 2022:

December 31, 2021 Goodwill Acquired Adjustments March 31, 2022

(In millions)

Total goodwill $ 11,454 $ — $ ( 84 ) $ 11,370

The goodwill acquired during the nine months ended September 30, 2021 was attributable to the three acquisitions completed within the period, as described further in “Note 4—Business Combinations.” The adjustments to goodwill during the nine months ended September 30, 2021 pertain to foreign currency translation adjustments.

The adjustments to goodwill during the three months ended March 31, 2022 pertain primarily to foreign currency translation adjustments.

PayPal Holdings, Inc.

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The components of identifiable intangible assets were as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Gross Carrying Amount

10 unchanged sentences

Intangible assets, net $ 3,666 $ ( 2,481 ) $ 1,185 $ 3,694 $ ( 2,362 ) $ 1,332

Amortization expense for intangible assets was $ 110 million and $ 114 million for the three months ended September 30, 2021 and 2020, respectively.

Amortization expense for intangible assets was $ 326 million and $ 343 million for the nine months ended September 30, 2021 and 2020, respectively.

Expected future intangible asset amortization as of September 30, 2021 was as follows (in millions):

Amortization expense for intangible assets was $ 118 million and $ 106 million for the three months ended March 31, 2022 and 2021, respectively.

Expected future intangible asset amortization as of March 31, 2022 was as follows (in millions):

Fiscal years:

1 unchanged sentence

Thereafter 124

Total $ 1,185

NOTE 6— LEASES

PayPal enters into various leases, which are primarily real estate operating leases.

We use these properties for executive and administrative offices, data centers, product development offices, and customer service and operations centers.

While a majority of our lease agreements do not contain an explicit interest rate, we do have some lease agreements that are subject to changes based on the Consumer Price Index or another referenced index.

We use these properties for executive and administrative offices, data centers, product development offices, customer services and operations centers, and warehouses.

While a majority of our lease agreements do not contain an explicit interest rate, we have certain lease agreements that are subject to changes based on the Consumer Price Index or another referenced index.

In the event of changes to the relevant index, lease liabilities are not remeasured and instead are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred.

2 unchanged sentences

A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements.

As of September 30, 2021, we had no finance leases.

As of March 31, 2022, we had no finance leases.

PayPal Holdings, Inc.

1 unchanged sentence

The components of lease expense were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

4 unchanged sentences

Supplemental cash flow information related to leases was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

1 unchanged sentence

Operating cash flows from operating leases $ 41 $ 42

Right-of-use (“ROU”) assets obtained in exchange for operating lease liabilities $ 47 $ 15 $ 58 $ 261

Right-of-use (“ROU”) lease assets obtained in exchange for operating lease liabilities $ 73 $ 1

Supplemental balance sheet information related to leases was as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(In millions, except weighted-average figures)

Operating lease ROU assets $ 645 $ 707

Operating ROU lease assets $ 693 $ 659

Other current operating lease liabilities 155 142

4 unchanged sentences

Weighted-average discount rate — operating leases

Future minimum lease payments for our operating leases as of September 30, 2021 were as follows:

Future minimum lease payments for our operating leases as of March 31, 2022 were as follows:

Operating Leases

7 unchanged sentences

The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases.

In the three months ended March 31, 2022 and 2021, we incurred asset impairment charges of $ 16 million and $ 26 million, respectively, within restructuring and other charges on our condensed consolidated statements of income.

The impairments included a reduction to our ROU lease assets in the amount of $ 10 million and $ 21 million, respectively, which were attributed to certain leased space we are no longer utilizing for our core business operations, of which a portion is being subleased.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In the first quarter of 2020, we entered into a sale-leaseback arrangement as the seller-lessee for a data center as the buyer-lessor obtained control of the facility.

We sold the data center and simultaneously entered into an operating lease agreement with the purchaser for the right to use the facility for eight years .

The Company received proceeds of approximately $ 119 million, net of selling costs, which resulted in a de minimis net gain on the sale transaction.

In the nine months ended September 30, 2021 and 2020, we incurred asset impairment charges of $ 26 million and $ 21 million, respectively, within restructuring and other charges on our condensed consolidated statements of income.

The impairments included a reduction to our ROU lease assets in the amount of $ 21 million and $ 17 million, respectively, which were attributed to certain leased space we are no longer utilizing for our core business operations.

A portion of the leased space associated with the impairment charges recorded in the nine months ended September 30, 2021 is being subleased.

As of September 30, 2021, we have additional operating leases, primarily for real estate and data centers, with minimum lease payments aggregating to $ 20 million and lease terms ranging from three to nine years , which will commence in the fourth quarter of 2021 and later.

As of March 31, 2022, we have additional operating leases, primarily for real estate and data centers, which will commence in the second quarter of 2022 or later with minimum lease payments aggregating to $ 5 million and lease terms ranging from three to nine years .

NOTE 7— OTHER FINANCIAL STATEMENT DETAILS

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2021:

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2022:

Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Losses on Investments

1 unchanged sentence

Translation Adjustment (“CTA”)

Net Investment Hedge CTA Gain

Net Investment Hedges CTA Gains

Estimated Tax (Expense) Benefit Total

2 unchanged sentences

Other comprehensive income (loss) before reclassifications 44 ( 293 ) ( 95 ) 21 62 ( 261 )

Amount of loss reclassified from accumulated other comprehensive income (“AOCI”) ( 44 ) — — — — ( 44 )

Amount of gain reclassified from accumulated other comprehensive income (“AOCI”) 47 — — — — 47

Net current period other comprehensive income (loss) ( 3 ) ( 293 ) ( 95 ) 21 62 ( 308 )

Ending balance $ 196 $ ( 380 ) $ ( 365 ) $ 45 $ 60 $ ( 444 )

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2020:

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2021:

Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Investments

Net Investment Hedge CTA Gain

Estimated Tax (Expense) Benefit Total

Net Investment Hedges CTA Gains

Estimated Tax Benefit Total

(In millions)

6 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2021:

Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Investments

Net Investment Hedge CTA Gain

Estimated Tax (Expense) Benefit Total

(In millions)

Beginning balance $ ( 323 ) $ 11 $ ( 198 ) $ 24 $ 2 $ ( 484 )

Other comprehensive income (loss) before reclassifications 242 ( 17 ) ( 51 ) — ( 6 ) 168

Amount of loss reclassified from AOCI ( 192 ) — — — — ( 192 )

Net current period other comprehensive income (loss) 434 ( 17 ) ( 51 ) — ( 6 ) 360

Ending balance $ 111 $ ( 6 ) $ ( 249 ) $ 24 $ ( 4 ) $ ( 124 )

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2020:

Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains on Investments

Net Investment Hedge CTA Gain (Loss)

Estimated Tax Expense Total

(In millions)

Beginning balance $ 6 $ 2 $ ( 150 ) $ ( 31 ) $ — $ ( 173 )

Other comprehensive income (loss) before reclassifications ( 53 ) 10 ( 111 ) 55 ( 2 ) ( 101 )

Amount of gain reclassified from AOCI 58 — — — — 58

Net current period other comprehensive income (loss) ( 111 ) 10 ( 111 ) 55 ( 2 ) ( 159 )

Ending balance $ ( 105 ) $ 12 $ ( 261 ) $ 24 $ ( 2 ) $ ( 332 )

The following table provides details about reclassifications out of AOCI for the periods presented below:

1 unchanged sentence

Affected Line Item in the Statement of Income

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

(In millions) (In millions)

(Losses) gains on cash flow hedges — foreign exchange contracts

Three Months Ended March 31,

(In millions)

Gains (losses) on cash flow hedges — foreign exchange contracts

$ 47 $ ( 59 ) Net revenues

3 unchanged sentences

Total reclassifications for the period $ 47 $ ( 59 ) Net income

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

OTHER INCOME (EXPENSE), NET

The following table reconciles the components of other income (expense), net for the periods presented below:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

1 unchanged sentence

Interest expense ( 59 ) ( 58 )

Net gains on strategic investments 173 209 336 973

Net gains (losses) on strategic investments 14 ( 120 )

Other ( 52 ) ( 7 )

1 unchanged sentence

NOTE 8— FUNDS RECEIVABLE AND CUSTOMER ACCOUNTS AND INVESTMENTS

The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

(In millions)

13 unchanged sentences

Available-for-sale debt securities 3,921 3,545

Restricted cash — 7

Strategic investments 3,189 3,207

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of September 30, 2021 and December 31, 2020, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows:

September 30, 2021 (1)

As of March 31, 2022 and December 31, 2021, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows:

March 31, 2022 (1)

Losses Estimated

28 unchanged sentences

Corporate debt securities 3,402 — ( 15 ) 3,387

Asset-backed securities 1,552 — ( 3 ) 1,549

Municipal securities 535 — — 535

3 unchanged sentences

Corporate debt securities 2,273 — — 2,273

Asset-backed securities 278 — ( 1 ) 277

Long-term investments:

10 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Gross amortized cost and estimated fair value balances exclude accrued interest receivable on available-for-sale debt securities, which totaled $ 30 million and $ 42 million at September 30, 2021 and December 31, 2020, respectively, and were included in other current assets on our condensed consolidated balance sheets.

As of September 30, 2021 and December 31, 2020, the gross unrealized losses and estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments for which an allowance for credit losses was not deemed necessary, aggregated by the length of time those individual securities have been in a continuous loss position, was as follows:

September 30, 2021 (1)

Gross amortized cost and estimated fair value balances exclude accrued interest receivable on available-for-sale debt securities, which totaled $ 43 million and $ 36 million at March 31, 2022 and December 31, 2021, respectively, and were included in other current assets on our condensed consolidated balance sheets.

As of March 31, 2022 and December 31, 2021, the gross unrealized losses and estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments for which an allowance for credit losses has not been deemed necessary in the current period, aggregated by the length of time those individual securities have been in a continuous loss position, was as follows:

March 31, 2022 (1)

Less than 12 months 12 months or longer Total

8 unchanged sentences

Asset-backed securities 1,130 ( 14 ) — — 1,130 ( 14 )

Municipal securities 49 ( 1 ) — — 49 ( 1 )

Short-term investments:

22 unchanged sentences

Corporate debt securities 1,841 ( 15 ) — — 1,841 ( 15 )

Asset-backed securities 1,302 ( 3 ) — — 1,302 ( 3 )

Municipal securities 50 — — — 50 —

3 unchanged sentences

Corporate debt securities 323 — — — 323 —

Asset-backed securities 273 ( 1 ) — — 273 ( 1 )

Long-term investments:

6 unchanged sentences

Unrealized losses have not been recognized into income as we neither intend to sell, nor anticipate that it is more likely than not that we will be required to sell, the securities before recovery of their amortized cost basis.

The decline in fair value is due primarily to changes in market conditions, rather than credit losses.

The decline in fair value is due primarily to changes in market interest rates, rather than credit losses.

We will continue to monitor the performance of the investment portfolio and assess whether impairment due to expected credit losses has occurred.

Amounts reclassified to earnings from unrealized gains and losses were not material for the three and nine months ended September 30, 2021 and 2020.

Amounts reclassified to earnings from unrealized gains and losses were not material for the three months ended March 31, 2022 and 2021.

Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows:

September 30, 2021

March 31, 2022

Amortized Cost Fair Value

8 unchanged sentences

Our marketable equity securities have readily determinable fair values and are recorded as long-term investments on our condensed consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), net on our condensed consolidated statements of income.

Marketable equity securities totaled $ 2.2 billion and $ 2.4 billion as of September 30, 2021 and December 31, 2020, respectively.

Marketable equity securities totaled $ 1.6 billion and $ 1.9 billion as of March 31, 2022 and December 31, 2021, respectively.

PayPal Holdings, Inc.

1 unchanged sentence

Our non-marketable equity securities are recorded in long-term investments on our condensed consolidated balance sheets.

As of September 30, 2021 and December 31, 2020, we had non-marketable equity securities of $ 68 million and $ 10 million, respectively, where we have the ability to exercise significant influence, but not control, over the investee.

As of March 31, 2022 and December 31, 2021, we had non-marketable equity securities of $ 92 million and $ 79 million, respectively, where we have the ability to exercise significant influence, but not control, over the investee.

We account for these equity securities using the equity method of accounting.

1 unchanged sentence

All gains and losses on these investments, realized and unrealized, and our share of earnings or losses from investments accounted for using the equity method are recognized in other income (expense), net on our condensed consolidated statements of income.

The carrying value of our non-marketable equity securities totaled $ 1.3 billion and $ 789 million as of September 30, 2021 and December 31, 2020, respectively.

The carrying value of our non-marketable equity securities totaled $ 1.6 billion and $ 1.3 billion as of March 31, 2022 and December 31, 2021, respectively.

Measurement Alternative adjustments

The adjustments to the carrying value of our non-marketable equity securities accounted for under the Measurement Alternative in the three and nine months ended September 30, 2021 and 2020 were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

The adjustments to the carrying value of our non-marketable equity securities accounted for under the Measurement Alternative in the three months ended March 31, 2022 and 2021 were as follows:

Three Months Ended March 31,

(In millions)

3 unchanged sentences

Gross unrealized gains 197 12

Gross unrealized losses and impairments — ( 7 ) — ( 22 )

Carrying amount, end of period $ 1,469 $ 801

(1) Net additions include purchases, reductions due to sales of securities, and reclassifications when Measurement Alternative is subsequently elected or no longer applies.

The following table summarizes the cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative for investments held at September 30, 2021 and December 31, 2020, respectively:

September 30, 2021 December 31, 2020

The following table summarizes the cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative for investments held at March 31, 2022 and December 31, 2021, respectively:

March 31, 2022 December 31, 2021

(In millions)

Cumulative gross unrealized gains $ 911 $ 733

Cumulative gross unrealized losses and impairment $ ( 27 ) $ ( 27 )

Cumulative gross unrealized losses and impairments $ ( 27 ) $ ( 27 )

Unrealized gains (losses) on strategic investments, excluding those accounted for using the equity method

The following table summarizes the net unrealized gains (losses) on marketable and non-marketable equity securities, excluding those accounted for using the equity method, held at September 30, 2021 and 2020, respectively:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

Net unrealized gains $ 173 $ 162 $ 265 $ 670

Net unrealized losses $ ( 36 ) $ ( 149 )

PayPal Holdings, Inc.

2 unchanged sentences

FINANCIAL ASSETS AND LIABILITIES MEASURED AND RECORDED AT FAIR VALUE ON A RECURRING BASIS

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:

September 30, 2021 Quoted Prices in

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:

March 31, 2022 Quoted Prices in

Active Markets for

30 unchanged sentences

(1) Excludes cash of $ 4.4 billion not measured and recorded at fair value.

(2) Excludes restricted cash of $ 23 million and time deposits of $ 1.2 billion not measured and recorded at fair value.

(2) Excludes restricted cash of $ 27 million and time deposits of $ 337 million not measured and recorded at fair value.

(3) Excludes cash, time deposits, and funds receivable of $ 17.8 billion underlying funds receivable and customer accounts not measured and recorded at fair value.

14 unchanged sentences

Corporate debt securities 2,273 — 2,273

Asset-backed securities 277 — 277

Total short-term investments 3,604 — 3,604

4 unchanged sentences

Corporate debt securities 3,545 — 3,545

Asset-backed securities 1,549 — 1,549

Municipal securities 535 — 535

11 unchanged sentences

(1) Excludes cash of $ 4.8 billion not measured and recorded at fair value.

(2) Excludes restricted cash of $ 88 million and time deposits of $ 1.6 billion not measured and recorded at fair value.

(2) Excludes restricted cash of $ 109 million and time deposits of $ 635 million not measured and recorded at fair value.

(3) Excludes cash, time deposits, and funds receivable of $ 17.2 billion underlying funds receivable and customer accounts not measured and recorded at fair value.

(4) Excludes non-marketable equity securities of $ 789 million measured using the Measurement Alternative or equity method accounting.

(4) Excludes non-marketable equity securities of $ 1.3 billion measured using the Measurement Alternative or equity method accounting.

Our marketable equity securities are valued using quoted prices for identical assets in active markets (Level 1).

3 unchanged sentences

Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months.

As of September 30, 2021 and December 31, 2020, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).

As of March 31, 2022 and December 31, 2021, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).

PayPal Holdings, Inc.

2 unchanged sentences

Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the condensed consolidated statements of income to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the corresponding foreign exchange gains and losses relating to customer liabilities.

The following table summarizes the estimated fair value of our available-for-sale debt securities under the fair value option as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

The following table summarizes the estimated fair value of our available-for-sale debt securities under the fair value option as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

(In millions)

1 unchanged sentence

Short-term investments $ 12 $ 13

The following table summarizes the gains (losses) from fair value changes recognized in other income (expense), net related to the available-for-sale debt securities under the fair value option for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

1 unchanged sentence

Short-term investments $ — $ ( 11 )

FINANCIAL ASSETS MEASURED AND RECORDED AT FAIR VALUE ON A NON-RECURRING BASIS

The following tables summarize our financial assets and liabilities held as of September 30, 2021 and December 31, 2020 for which a non-recurring fair value measurement was recorded during the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively:

September 30, 2021 Significant Other

ASSETS MEASURED AND RECORDED AT FAIR VALUE ON A NON-RECURRING BASIS

The following tables summarize our assets and liabilities held as of March 31, 2022 and December 31, 2021 for which a non-recurring fair value measurement was recorded during the three months ended March 31, 2022 and the year ended December 31, 2021, respectively:

2022 Significant Other

Observable Inputs

3 unchanged sentences

Total $ 660 $ 660

(1) Excludes non-marketable equity investments of $ 641 million accounted for under the Measurement Alternative for which no observable price changes occurred during the nine months ended September 30, 2021.

(2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the nine months ended September 30, 2021.

(1) Excludes non-marketable equity investments of $ 833 million accounted for under the Measurement Alternative for which no observable price changes occurred during the three months ended March 31, 2022.

(2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the three months ended March 31, 2022.

See “Note 6—Leases” for additional information.

December 31, 2021 Significant Other

11 unchanged sentences

FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AND RECORDED AT FAIR VALUE

Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, certain customer accounts, and notes receivable are carried at amortized cost, which approximates their fair value.

Our long-term debt (including current portion) in the form of fixed rate notes had a carrying value of approximately $ 8.9 billion and fair value of approximately $ 9.4 billion as of September 30, 2021.

Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, certain customer accounts, notes receivable, and long-term debt related to borrowings on our credit facilities, are carried at amortized cost, which approximates their fair value.

Our long-term debt (including current portion) in the form of fixed rate notes had a carrying value of approximately $ 9.0 billion and fair value of approximately $ 8.7 billion as of March 31, 2022.

Our fixed rate notes had a carrying value of approximately $ 9.0 billion and fair value of approximately $ 9.3 billion as of December 31, 2021.

12 unchanged sentences

We have a foreign currency exposure management program in which we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues denominated in foreign currencies.

The objective of the foreign currency exchange contracts is to help mitigate the risk that the U.S.

The objective of these foreign currency exchange contracts is to help mitigate the risk that the U.S.

dollar-equivalent cash flows are adversely affected by changes in the applicable U.S.

6 unchanged sentences

Accordingly, the cash flows associated with derivatives designated as cash flow hedges are classified in cash flows from operating activities on our condensed consolidated statements of cash flows.

As of September 30, 2021, we estimated that $ 83 million of net derivative gains related to our cash flow hedges included in AOCI are expected to be reclassified into earnings within the next 12 months.

During the three and nine months ended September 30, 2021 and 2020, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction.

As of March 31, 2022, we estimated that $ 185 million of net derivative gains related to our cash flow hedges included in AOCI are expected to be reclassified into earnings within the next 12 months.

During the three months ended March 31, 2022 and 2021, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction.

If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report the derivative’s gain or loss in AOCI until the forecasted transaction affects earnings, at which point we also reclassify it into earnings.

3 unchanged sentences

Net investment hedge

We used a forward foreign currency exchange contract, which matured in 2020, to reduce the foreign currency exchange risk related to our investment in a foreign subsidiary.

This derivative was designated as a net investment hedge and accordingly, the derivative’s gain and loss was recorded in AOCI as part of foreign currency translation.

The accumulated gains and losses associated with this instrument will remain in AOCI until the foreign subsidiary is sold or substantially liquidated, at which point they will be reclassified into earnings.

The cash flow associated with the derivative designated as a net investment hedge is classified in cash flows from investing activities on our condensed consolidated statements of cash flows.

During the nine months ended September 30, 2020, we recognized $ 55 million in unrealized gain on the foreign currency exchange contract designated as a net investment hedge.

As of September 30, 2021, we did no t have a net investment hedge.

We have no t reclassified any gains or losses related to the net investment hedge from AOCI into earnings during any of the periods presented.

We use forward foreign currency exchange contracts to reduce the foreign currency exchange risk related to our investment in certain foreign subsidiaries.

These derivatives are designated as net investment hedges and accordingly, the gain and loss on the portion of the derivative included in the assessment of hedge effectiveness is recorded in AOCI as part of foreign currency translation.

We exclude the forward points from the assessment of hedge effectiveness and recognize them in other income (expense), net on a straight-line basis over the life of the hedge.

The accumulated gains and losses associated with these instruments will remain in AOCI until the foreign subsidiaries are sold or substantially liquidated, at which point they will be reclassified into earnings.

The cash flow associated with derivatives designated as a net investment hedge are classified in cash flows from investing activities on our condensed consolidated statements of cash flows.

We have no t reclassified any gains or losses related to the net investment hedges from AOCI into earnings during any of the periods presented.

Foreign currency exchange contracts not designated as hedging instruments

4 unchanged sentences

FAIR VALUE OF DERIVATIVE CONTRACTS

The fair value of our outstanding derivative instruments as of September 30, 2021 and December 31, 2020 was as follows:

Balance Sheet Location September 30, 2021 December 31, 2020

The fair value of our outstanding derivative instruments as of March 31, 2022 and December 31, 2021 was as follows:

Balance Sheet Location March 31, 2022 December 31, 2021

(In millions)

14 unchanged sentences

However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our condensed consolidated balance sheets.

Rights of set-off associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities of $ 135 million as of September 30, 2021 and $ 34 million as of December 31, 2020.

Rights of set-off associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities of $ 55 million as of March 31, 2022 and $ 102 million as of December 31, 2021.

We have entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds.

The following table provides the collateral exchanged:

September 30, 2021 December 31, 2020

The following table provides the collateral posted and received:

March 31, 2022 December 31, 2021

(In millions)

3 unchanged sentences

(2) Obligation to return counterparty cash collateral related to our derivative assets recognized in other current liabilities on our condensed consolidated balance sheets.

EFFECT OF DERIVATIVE CONTRACTS ON CONDENSED CONSOLIDATED STATEMENTS OF INCOME

The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

(In millions)

Total amounts presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded $ 6,182 $ 5,459 $ 18,453 $ 15,338

(Losses) gains on foreign exchange contracts designated as cash flow hedges reclassified from AOCI $ ( 44 ) $ ( 17 ) $ ( 192 ) $ 58

The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

EFFECT OF DERIVATIVE CONTRACTS ON CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments:

Three Months Ended March 31,

(In millions)

Gains (losses) on foreign exchange contracts recognized in other income (expense), net $ 111 $ ( 40 ) $ 109 $ ( 8 )

Losses on equity derivative contracts recognized in other income (expense), net (1)

— ( 64 ) — ( 64 )

Total gains (losses) recognized from contracts not designated as hedging instruments $ 111 $ ( 104 ) $ 109 $ ( 72 )

(1) During the three months ended September 30, 2020, equity derivative contracts were entered into and matured which related to the sale of a portion of a strategic investment.

The cash flows associated with the equity derivative contracts were classified in cash flows from investing activities on our consolidated statements of cash flows.

Net revenues Other income (expense), net Net revenues Other income (expense), net

Total amounts presented in the condensed consolidated statements of income in which the effects of cash flow hedges and net investment hedges are recorded $ 6,483 $ ( 82 ) $ 6,033 $ ( 170 )

Gains (losses) on derivatives in cash flow hedging relationship:

Amount of gains (losses) on foreign exchange contracts reclassified from AOCI 47 — ( 59 ) —

Gains on derivatives in net investment hedging relationship:

Amount of gains on foreign exchange contracts excluded from the assessment of effectiveness

(Losses) gains on derivatives not designated as hedging instruments:

Amount of (losses) gains on foreign exchange contracts — ( 39 ) — 41

Total gains (losses) $ 47 $ ( 30 ) $ ( 59 ) $ 41

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table provides the amount of pre-tax unrealized gains or losses included in the assessment of hedge effectiveness related to our derivative instruments designated as hedging instruments that are recognized in other comprehensive income:

Three Months Ended March 31,

(In millions)

Unrealized gains on foreign exchange contracts designated as cash flow hedges $ 44 $ 139

Unrealized gains on foreign exchange contracts designated as net investment hedges 21 —

Total unrealized gains recognized from derivative contracts designated as hedging instruments in the condensed consolidated statements of comprehensive income $ 65 $ 139

NOTIONAL AMOUNTS OF DERIVATIVE CONTRACTS

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The following table provides the notional amounts of our outstanding derivatives:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(In millions)

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We offer revolving and installment credit products as a funding option for consumers in certain checkout transactions on our payments platform.

The majority of the installment loans allow consumers to pay for a product over periods of 12 months or less.

As of September 30, 2021 and December 31, 2020, the outstanding balance of consumer receivables, which consisted of revolving and installment loans and interest receivable, was $ 2.8 billion and $ 2.2 billion, respectively.

Our revolving credit product consists of PayPal Credit in the U.K.;

once a consumer is approved for credit, it is made available to them as a funding source.

Additionally, we offer installment credit products at the time of checkout in various locations including the U.S., Europe, Australia, and Japan.

The majority of the installment loans allow consumers to pay for purchases over periods of 12 months or less.

As of March 31, 2022 and December 31, 2021, the outstanding balance of consumer receivables, which consisted of revolving and installment loans and interest receivable, was $ 4.1 billion and $ 3.8 billion, respectively.

We closely monitor the credit quality of our consumer receivables to evaluate and manage our related exposure to credit risk.

Credit risk management begins with initial underwriting and continues through to full repayment of a loan.

Credit risk management begins with initial underwriting and continues through the full repayment of a loan.

To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history with our credit products where available.

We use delinquency status and trends to assist in making new and ongoing credit decisions, to adjust our models, to plan our collection practices and strategies, and in determining our allowance for consumer loans and interest receivable.

Consumer receivables delinquency and allowance

The following table presents the delinquency status of consumer loans and interest receivable at September 30, 2021 and December 31, 2020.

Since the majority of our consumer loans are revolving in nature, they are disclosed in the aggregate and not by year of origination.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following tables present the delinquency status of consumer loans and interest receivable by year of origination.

The amounts are based on the number of days past the billing date for revolving loans or contractual repayment date for installment loans.

The “current” category represents balances that are within 29 days of the billing date or contractual repayment date, as applicable.

September 30, 2021 December 31, 2020

Amortized Cost Basis Revolving Percent Amortized Cost Basis Revolving Percent

March 31, 2022

(In millions, except percentages)

Installment Loans Amortized Cost Basis

Revolving Loans

Amortized Cost Basis 2022 2021 2020 2019 2018 Total Percent

Current $ 1,744 $ 1,773 $ 470 $ — $ — $ — $ 3,987 96.9 %

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90 - 179 Days 26 — 33 — — — 59 1.4 %

Total consumer loans and interest receivable (1), (2), (3)

$ 1,804 $ 1,787 $ 524 $ — $ — $ — $ 4,115 100 %

(1) Excludes receivables from other consumer credit products of $ 43 million and $ 56 million at September 30, 2021 and December 31, 2020, respectively.

(2) Includes installment loans of $ 1.1 billion and $ 556 million at September 30, 2021 and December 31, 2020, respectively, substantially all of which were current and originated within the 12 months prior to the reporting date.

(3) Balances at December 31, 2020 include the impact of payment holidays provided primarily in the second quarter of 2020 by the Company to certain consumers as a part of our COVID-19 payment relief initiatives.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the activity in the allowance for consumer loans and interest receivable for the nine months ended September 30, 2021 and 2020:

September 30, 2021 September 30, 2020

(1) Excludes receivables from other consumer credit products of $ 39 million at March 31, 2022.

December 31, 2021

(In millions, except percentages)

Installment Loans Amortized Cost Basis

Revolving Loans

Amortized Cost Basis 2021 2020 2019 2018 2017 Total Percent

Current $ 1,790 $ 1,939 $ 3 $ — $ — $ — $ 3,732 97.0 %

30 - 59 Days 18 16 — — — — 34 0.9 %

60 - 89 Days 12 13 — — — — 25 0.6 %

90 - 179 Days 27 28 1 — — — 56 1.5 %

$ 1,847 $ 1,996 $ 4 $ — $ — $ — $ 3,847 100 %

(1) Excludes receivables from other consumer credit products of $ 44 million at December 31, 2021.

The following table summarizes the activity in the allowance for consumer loans and interest receivable for the three months ended March 31, 2022 and 2021:

March 31, 2022 March 31, 2021

Consumer Loans Receivable Interest Receivable Total Allowance (1)

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Beginning balance $ 243 $ 43 $ 286 $ 299 $ 53 $ 352

Adjustment for adoption of credit losses accounting standard — — — 24 4 28

Provisions 43 6 49 6 2 8

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Ending balance $ 241 $ 39 $ 280 $ 292 $ 52 $ 344

(1) Excludes allowances from other consumer credit products of $ 3 million and $ 4 million at September 30, 2021 and 2020, respectively.

(2) The recoveries for the nine months ended September 30, 2020 were primarily related to fully charged-off U.S.

consumer credit receivables not subject to the sale to Synchrony Bank.

(1) Excludes allowances from other consumer credit products of $ 3 million at both March 31, 2022 and 2021.

(2) Includes amounts related to foreign currency remeasurement.

The benefit for the nine months ended September 30, 2021 was primarily attributable to improvements in the credit quality of the consumer portfolio and current and projected macroeconomic conditions.

This was partially offset by provisions for originations in the portfolio and the impact of qualitative adjustments to account for limitations in our current expected credit loss models due to a high degree of uncertainty around the financial health of our consumer borrowers and continued volatility with respect to macroeconomic conditions.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The provision for the three months ended March 31, 2022 was primarily attributable to originations in the consumer portfolio, partially offset by improvements in the credit quality of the consumer portfolio and a reduction in the volatility of model inputs representing current and projected macroeconomic conditions.

Qualitative adjustments were made to account for limitations in our current expected credit loss models due to uncertainty with respect to macroeconomic conditions.

The increase in charge-offs for the three months ended March 31, 2022 compared to the same period in the prior year was due to growth in the consumer portfolio driven primarily by the expansion of our short-term installment products.

The provision for current expected credit losses relating to our consumer loans receivable portfolio is recognized in transaction and credit losses on our condensed consolidated statements of income.

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MERCHANT RECEIVABLES

We offer access to credit products for certain small and medium-sized merchants through our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products, which we collectively refer to as our merchant lending offerings.

We offer access to merchant finance products for certain small and medium-sized businesses through our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products, which we collectively refer to as the merchant finance offerings.

We purchase receivables related to credit extended to U.S.

merchants by an independent chartered financial institution and are responsible for servicing functions related to that portfolio.

During the nine months ended September 30, 2021 and 2020, we purchased approximately $ 1.3 billion and $ 1.5 billion in credit receivables, respectively.

As of both September 30, 2021 and December 31, 2020, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $ 1.4 billion, net of the participation interest sold to an independent chartered financial institution of $ 59 million.

merchants by WebBank and are responsible for servicing functions related to that portfolio.

During the three months ended March 31, 2022 and 2021, we purchased approximately $ 605 million and $ 297 million in credit receivables, respectively.

As of March 31, 2022 and December 31, 2021, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $ 1.5 billion and $ 1.4 billion, respectively, net of the participation interest sold to WebBank of $ 68 million and $ 63 million, respectively.

Through our PPWC product, merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan or advance based on the overall credit assessment of the merchant.

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PPBL repayments are collected through periodic payments until the balance has been satisfied.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The interest or fee is fixed at the time the loan or advance is extended and is recognized as deferred revenue in accrued expenses and other current liabilities on our condensed consolidated balance sheets.

The fixed interest or fee is amortized into revenues from other value added services based on the amount repaid over the repayment period.

We estimate the repayment period for PPWC based on the merchant’s payment processing history with PayPal, where available.

We estimate the repayment period for PPWC based on the merchant’s payment processing history with PayPal.

For PPWC, there is a general requirement that at least 10 % of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days.

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Primary drivers of the models include the merchant’s annual payment volume, payment processing history with PayPal, prior repayment history with PayPal’s credit products where available, information sourced from consumer and business credit bureau reports, and other information obtained during the application process.

We use delinquency status and trends to assist in making (or, in the U.S., to assist the independent chartered financial institution in making) ongoing credit decisions, to adjust our internal models, to plan our collection strategies, and in determining our allowance for these loans and advances.

We use delinquency status and trends to assist in making (or, in the U.S., to assist WebBank in making) ongoing credit decisions, to adjust our internal models, to plan our collection strategies, and in determining our allowance for these loans, advances, and interest and fees receivable.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Merchant receivables delinquency and allowance

The following tables present the delinquency status of the principal amount of merchant loans, advances, and interest and fees receivable by year of origination.

The following tables present the delinquency status of the merchant loans, advances, and interest and fees receivable by year of origination.

The amounts are based on the number of days past the expected or contractual repayment date for amounts outstanding.

The “current” category represents balances that are within 29 days of the contractual repayment dates or expected repayment date, as applicable.

September 30, 2021

The “current” category represents balances that are within 29 days of the expected repayment date or contractual repayment date, as applicable.

March 31, 2022

(In millions, except percentages)

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180+ Days — 1 4 5 1 11 0.7 %

$ 968 $ 219 $ 169 $ 8 $ — $ 1,364 100 %

Total $ 721 $ 583 $ 132 $ 104 $ 5 $ 1,545 100 %

December 31, 2021

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$ 1,144 $ 164 $ 132 $ 6 $ — $ 1,446 100 %

(1) Balances include the impact of payment holidays provided primarily during the second quarter of 2020 and modification programs offered by the Company as a part of our COVID-19 payment relief initiatives (as discussed further below).

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the activity in the allowance for merchant loans, advances, and interest and fees receivable, for the nine months ended September 30, 2021 and 2020:

September 30, 2021 September 30, 2020

(1) Balances include the impact of modification programs offered by the Company as a part of our COVID-19 payment relief initiatives (as discussed further below).

The following table summarizes the activity in the allowance for merchant loans, advances, and interest and fees receivable for the three months ended March 31, 2022 and 2021:

March 31, 2022 March 31, 2021

Merchant Loans and Advances Interest and Fees Receivable Total Allowance Merchant Loans and Advances Interest and Fees Receivable Total Allowance

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Beginning balance $ 192 $ 9 $ 201 $ 440 $ 43 $ 483

Adjustment for adoption of credit losses accounting standard — — — 165 17 182

Provisions 5 1 6 ( 15 ) ( 2 ) ( 17 )

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Ending balance $ 185 $ 8 $ 193 $ 362 $ 35 $ 397

The benefit for the nine months ended September 30, 2021 was primarily attributable to improvements in current and projected macroeconomic conditions.

This was partially offset by provisions for originations during the period and the impact of qualitative adjustments to account for varying degrees of expected merchant performance in the current environment and in future periods, including continued volatility with respect to macroeconomic conditions and uncertainty around the effectiveness of loan modification programs made available to merchants, as described further below.

The provision for the three months ended March 31, 2022 was primarily attributable to originations in the merchant portfolio mostly offset by improvements in the credit quality of our merchant portfolio and a reduction in the volatility of model inputs representing current and projected macroeconomic conditions.

Qualitative adjustments were made to account for historical loss rates and uncertainty around the effectiveness of loan modification programs made available to merchants, as described further below.

The decrease in the charge-offs for the three months ended March 31, 2022 compared to the same period in the prior year was due to improved credit quality of our merchant loan portfolio due to modifications in the acceptable risk parameters, which tightened eligibility requirements.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

For merchant loans and advances, the determination of delinquency is based on the current expected or contractual repayment period of the loan or advance and fixed interest or fee payment as compared to the original expected or contractual repayment period.

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Bankrupt accounts are charged off within 60 days of receiving notification of bankruptcy.

The provision for credit losses on merchant loans and advances is recognized in transaction and credit losses, and the provision for interest and fees receivable is recognized as a reduction of deferred revenue included in accrued expenses and other current liabilities on our condensed consolidated balance sheets.

The provision for credit losses on merchant loans and advances is recognized in transaction and credit losses, and the provision for interest and fees receivable is recognized as a reduction of deferred revenue in accrued expenses and other current liabilities on our condensed consolidated balance sheets.

Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.

Troubled debt restructurings (“TDRs”)

In instances where a merchant is able to demonstrate that it is experiencing financial difficulty, there may be a modification of the loans or advances and the related interest or fee receivable for which it is probable that, without modification, we will be unable to collect all amounts due.

Troubled debt restructurings

In instances where a merchant is able to demonstrate that it is experiencing financial difficulty, there may be a modification of the loan or advance and the related interest or fee receivable for which it is probable that, without modification, we will be unable to collect all amounts due.

These modifications are intended to provide merchants with financial relief, and help enable us to mitigate losses.

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Alternatively, certain loans and advances have been modified to replace the initial fixed fee structure at the time the loan or advance was extended with a fixed annual percentage rate applied over the amended remaining term, which will continue to accrue interest at the fixed rate until the earlier of maturity or charge-off.

These modifications had a de minimis impact on our condensed consolidated statements of income in the nine months ended September 30, 2021.

These modifications had a de minimis impact on our condensed consolidated statements of income in the three months ended March 31, 2022 and 2021.

Allowances for TDRs are assessed separately from other loans and advances within our portfolio and are determined by estimating current expected credit losses utilizing the modified term and interest rate assumptions.

Historical loss estimates are utilized in addition to macroeconomic assumptions to determine expected credit loss rates.

Further, we include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table shows the merchant loans and interest receivables which have been modified as TDRs in the three and nine months ended September 30, 2021:

Three Months Ended September 30, 2021

Number of Accounts

(in thousands) (1)

Outstanding Balances (2)

(in millions)

Weighted Average Payment Term Extensions

Loans and interest receivable — $ 4 34

(1) “—” Denotes less than five hundred accounts.

(2) Balances are as of modification date.

Nine Months Ended September 30, 2021

Further, we may include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses.

During the three months ended March 31, 2022, the merchant loans and interest receivables which have been modified as TDRs were de minimis.

The following table shows the merchant loans and interest receivables which were modified as TDRs in the three months ended March 31, 2021:

Three Months Ended March 31, 2021

Number of Accounts

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For loans that have defaulted after being modified, the increased estimate of current expected credit loss is factored into overall expected credit losses.

In the three and nine months ended September 30, 2021, the amount of merchant loans and interest receivables classified as TDRs that have subsequently defaulted on payments was de minimis.

In the three months ended March 31, 2022 and 2021, the amount of merchant loans and interest receivables classified as TDRs that have subsequently defaulted on payments was de minimis.

NOTE 12— DEBT

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The notes issued from the May 2020 and September 2019 debt issuances are senior unsecured obligations and are collectively referred to as the “Notes.”

As of both September 30, 2021 and December 31, 2020, we had an outstanding aggregate principal amount of $ 9.0 billion related to the Notes.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of both March 31, 2022 and December 31, 2021, we had an outstanding aggregate principal amount of $ 9.0 billion related to the Notes.

The following table summarizes the Notes:

Maturities Effective Interest Rate September 30, 2021 December 31, 2020

Maturities Effective Interest Rate March 31, 2022 December 31, 2021

(in millions)

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current portion of long-term debt (1)

( 999 ) ( 999 )

Total carrying amount of long-term debt $ 7,953 $ 7,951

(1) The current portion of long-term debt is included within accrued expenses and other current liabilities on our condensed consolidated balance sheets.

The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and amortization of the debt discount.

The interest expense recorded for the Notes, including amortization of the debt discount and debt issuance costs, was $ 56 million for both the three months ended March 31, 2022 and 2021.

Paidy credit agreement

In February 2022, we entered into a credit agreement (the “Paidy Credit Agreement”) with Paidy as co-borrower, which provides for an unsecured revolving credit facility of ¥ 60.0 billion (approximately $ 493 million as of March 31, 2022).

Borrowings under the Paidy Credit Agreement are for use by Paidy for working capital, capital expenditures, and other permitted purposes.

We are obligated to pay interest on loans under the Paidy Credit Agreement.

Loans under the Paidy Credit Agreement bear interest at the Tokyo Interbank Offered Rate plus a margin (based on our public debt rating) ranging from 0.40 percent to 0.60 percent.

The Paidy Credit Agreement will terminate and all amounts owed thereunder will be due and payable on February 8, 2027, unless the commitments are terminated earlier.

The Paidy Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default, and indemnification provisions in favor of the lenders.

The negative covenants include restrictions regarding the incurrence of liens and subsidiary indebtedness, in each case subject to certain exceptions.

The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.

In March 2022, ¥ 32.8 billion (approximately $ 269 million) was drawn down under the Paidy Credit Agreement, which was recorded in long-term debt on our condensed consolidated balance sheet.

Accordingly, at March 31, 2022, ¥ 27.2 billion (approximately $ 224 million) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing.

During the three months ended March 31, 2022, the total interest expense and fees we recorded related to the Paidy Credit Agreement were de minimis.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and amortization of the debt discount.

The interest expense recorded for the Notes, including amortization of the debt discount and debt issuance costs, was $ 56 million and $ 168 million for the three and nine months ended September 30, 2021, respectively.

The interest expense recorded for the Notes, including amortization of the debt discount and debt issuance costs, was $ 56 million and $ 134 million for the three and nine months ended September 30, 2020, respectively.

Other available facilities

We maintain uncommitted credit facilities in various regions throughout the world, which had a borrowing capacity of approximately $ 80 million and $ 30 million in the aggregate, as of September 30, 2021 and December 31, 2020, respectively.

This available credit includes facilities where we can withdraw and utilize the funds at our discretion for general corporate purposes.

Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings.

As of September 30, 2021, the majority of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.

Prior credit agreement

In October 2021, we assumed a credit agreement through our acquisition of Paidy (the “Prior Credit Agreement”) which provided for a secured revolving credit facility of ¥ 22.8 billion (approximately $ 198 million at acquisition).

As of December 31, 2021, ¥ 11.3 billion (approximately $ 98 million) was outstanding under the Prior Credit Agreement, which was recorded in long-term debt on our consolidated balance sheet.

Accordingly, at December 31, 2021, ¥ 11.5 billion (approximately $ 100 million) of borrowing capacity was available for the purposes permitted by the Prior Credit Agreement, subject to customary conditions to borrowing.

In the first quarter of 2022, we terminated the Prior Credit Agreement and repaid all outstanding borrowings.

The total interest expense and fees we recorded related to the Prior Credit Agreement were de minimis for the three months ended March 31, 2022.

FUTURE PRINCIPAL PAYMENTS

As of September 30, 2021, the future principal payments associated with our long-term debt were as follows (in millions):

As of March 31, 2022, the future principal payments associated with our term debt were as follows (in millions):

Remaining 2022 $ 1,000

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Total $ 9,000

Other than as provided above, there are no significant changes to the information disclosed in our 2020 Form 10-K.

Other than as provided above, there were no significant changes to the information disclosed in our 2021 Form 10-K.

NOTE 13— COMMITMENTS AND CONTINGENCIES

As of September 30, 2021 and December 31, 2020, approximately $ 3.8 billion and $ 3.0 billion, respectively, of unused credit was available to PayPal Credit account holders.

As of March 31, 2022 and December 31, 2021, approximately $ 4.4 billion and $ 4.1 billion, respectively, of unused credit was available to PayPal Credit account holders.

Substantially all of our PayPal Credit account holders with unused credit are in the U.K.

While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all our PayPal Credit account holders will access their entire available credit at any given point in time.

While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our PayPal Credit account holders will access their entire available credit at any given point in time.

In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination based on, among other things, account usage and customer creditworthiness.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

LITIGATION AND REGULATORY MATTERS

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With respect to the matters disclosed in this Note 13, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable and reasonably estimable were not material as of September 30, 2021.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable and reasonably estimable were not material as of March 31, 2022.

Except as otherwise noted for the proceedings described in this Note 13, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material.

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PPAU is continuing to cooperate with AUSTRAC in all respects, including remediation activities, ongoing regular engagement with AUSTRAC, and responding to notices and requests for information and documents.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

We cannot estimate the potential impact, if any, on our business or financial statements at this time.

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We are responding to subpoenas and requests for information received from the U.S.

Securities and Exchange Commission (“SEC”) Enforcement Division relating to whether the interchange rates paid to the bank that issues debit cards bearing our licensed brands were consistent with Regulation II of the Board of Governors of the Federal Reserve System, and to the reporting of marketing fees earned from the Company’s branded card program (the “SEC Debit Card Program Matter”).

Securities and Exchange Commission (“SEC”) Enforcement Division relating to whether the interchange rates paid to the bank that issues debit cards bearing our licensed brands were consistent with Regulation II of the Board of Governors of the Federal Reserve System, and to the reporting of marketing fees earned from the PayPal-branded card programs (the “SEC Debit Card Program Matter”).

We are cooperating with the SEC Enforcement Division in connection with this investigation.

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In February 2022, we received a CID from the Federal Trade Commission (“FTC”) related to PayPal’s practices relating to commercial customers that submit charges on behalf of other merchants or sellers, and related activities.

The CID requests the production of documents and answers to written questions.

We are cooperating with the FTC in connection with this CID.

Legal proceedings

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District Court for the Northern District of California (the “Securities Action”).

The Securities Action asserts claims relating to our disclosure of the CFPB PayPal Credit Matter and the SEC Debit Card Program Matter in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 (for further information, see “Litigation and Regulatory Matters – Regulatory Proceedings” above).

The Securities Action purports to be brought on behalf of purchasers of the Company’s stock between February 9, 2017 and July 28, 2021 (the “Class Period”), and asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, its Chief Executive Officer, and Chief Financial Officer.

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The Securities Action seeks unspecified compensatory damages on behalf of the putative class members.

On November 2, 2021, the court appointed a Lead Plaintiff, and on January 25, 2022, the Lead Plaintiff filed an amended complaint.

The amended complaint alleges a class period between April 27, 2016 and July 28, 2021 (the “Amended Class Period”), and in addition to the Company, its Chief Executive Officer, and Chief Financial Officer, also names other Company executives as defendants.

The amended complaint alleges that various statements made by the defendants during the Amended Class Period were rendered materially false and misleading, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by PayPal’s alleged violations of the 2015 consent order with the CFPB, federal consumer financial laws, and Regulation II.

Defendants’ motion to dismiss the amended complaint was filed on April 18, 2022.

Plaintiff's response to the motion to dismiss is due on June 2, 2022.

On December 16, 2021 and January 19, 2022, two related putative shareholder derivative actions captioned Pang v.

Daniel Schulman, et al.

21-cv-09720, and Lalor v.

Daniel Schulman, et al.

22-cv-00370, respectively, were filed in the U.S.

District Court for the Northern District of California (the “Derivative Actions”), purportedly on behalf of the Company.

The Derivative Actions are based on the same alleged facts and circumstances as the Securities Action, and name certain of our officers, including our Chief Executive Officer and Chief Financial Officer, and members of our Board of Directors, as defendants.

The Derivative Actions allege claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of the Securities Exchange Act of 1934, and seek to recover damages on behalf of the Company.

On February 1, 2022, the court entered an order consolidating the Derivative Actions and staying them until all motions to dismiss in the Securities Action are resolved.

General matters

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In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that may reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our business and customers and may lead to increased costs and decreased transaction volume and revenue.

Further, the number and significance of these disputes and inquiries are increasing as our business has grown and expanded in scale and scope, including the number of active accounts and payments transactions on our platforms, the range and increasing complexity of the products and services that we offer, and our geographical operations.

Further, the number and significance of these disputes and inquiries are increasing as our business has grown and expanded in scale and scope, including the number of active accounts and payments transactions on our platform, the range and increasing complexity of the products and services that we offer, and our geographical operations.

Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, settlement payments, damage awards (including statutory damages for certain causes of action in certain jurisdictions), fines, penalties, injunctive relief, or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources, or otherwise harm our business.

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Under these contracts, we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by any third party with respect to our domain names, trademarks, logos, and other branding elements to the extent that such marks are related to the subject agreement.

We have provided an indemnity for other types of third-party claims, which are indemnities related primarily to intellectual property rights, confidentiality, willful misconduct, data privacy obligations, and certain breach of contract claims.

We have provided an indemnity for other types of third-party claims, which may include indemnities related to intellectual property rights, confidentiality, willful misconduct, data privacy obligations, and certain breach of contract claims, among others.

We have also provided an indemnity to our payments processors in the event of card association fines against the processor arising out of conduct by us or our customers.

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Loans made under this program are funded by an independent chartered financial institution that we partner with.

We receive a fee for providing origination services and loan servicing for these loans and retain operational risk related to those activities.

We have agreed, under certain circumstances, to provide indemnities in connection with the services provided for loans made under this program.

We receive a fee for providing services in connection with these loans and retain operational risk related to those activities.

We have agreed, under certain circumstances, to indemnify the chartered financial institution and its assignee of a portion of these loans in connection with the services provided for loans made under this program.

To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2021 and December 31, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

As of March 31, 2022 and December 31, 2021, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

PayPal Holdings, Inc.

5 unchanged sentences

Our seller protection programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales.

Additionally, in some instances we provide protection for cryptocurrencies held in PayPal accounts in case of loss directly resulting from service provider insolvency or in the event the service provider’s private keys are compromised.

These protection programs are considered assurance-type warranties under applicable accounting standards for which we estimate and record associated costs in transaction and credit losses during the period the payment transaction is completed.

At September 30, 2021 and December 31, 2020, the allowance for transaction losses was $ 104 million and $ 144 million, respectively.

The allowance for negative customer balances was $ 283 million and $ 270 million at September 30, 2021 and December 31, 2020, respectively.

The following table shows changes in the allowance for transaction losses and negative customer balances related to our protection programs for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

At March 31, 2022 and December 31, 2021, the allowance for transaction losses was $ 115 million and $ 121 million, respectively.

The allowance for negative customer balances was $ 204 million and $ 234 million at March 31, 2022 and December 31, 2021, respectively.

The following table shows changes in the allowance for transaction losses and negative customer balances related to our protection programs for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in millions)

5 unchanged sentences

NOTE 14— STOCK REPURCHASE PROGRAMS

During the nine months ended September 30, 2021, we repurchased approximately 7 million shares of our common stock for approximately $ 1.9 billion at an average cost of $ 255.05 .

During the three months ended March 31, 2022, we repurchased approximately 11 million shares of our common stock for approximately $ 1.5 billion at an average cost of $ 133.93 .

These shares were purchased in the open market under our stock repurchase program authorized in July 2018.

As of September 30, 2021, a total of approximately $ 6.6 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program.

As of March 31, 2022, a total of approximately $ 3.6 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program.

NOTE 15— STOCK-BASED PLANS

1 unchanged sentence

Stock-based compensation expense for our equity incentive plans are measured based on their estimated fair value at the time of grant, and recognized over the award’s vesting period.

The impact on our results of operations of recording stock-based compensation expense under our equity incentive plans for the three and nine months ended September 30, 2021 and 2020 was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

The impact on our results of operations of recording stock-based compensation expense under our equity incentive plans for the three months ended March 31, 2022 and 2021 was as follows:

Three Months Ended March 31,

(In millions)

8 unchanged sentences

NOTE 16— INCOME TAXES

Our effective tax rate for the three and nine months ended September 30, 2021 was 7 % and 1 %, respectively.

Our effective tax rate for the three and nine months ended September 30, 2020 was 11 % and 18 %, respectively.

Our effective tax rate for the three months ended March 31, 2022 and 2021 was 19 % and ( 26 )%, respectively.

The difference between our effective tax rate and the U.S.

federal statutory rate of 21% in the above periods was primarily the result of foreign income taxed at different rates, discrete tax adjustments including tax benefits related to stock-based compensation, and for the nine months ended September 30, 2020, tax expense related to the intra-group transfer of intellectual property.

federal statutory rate of 21% in both periods was primarily the result of foreign income taxed at different rates, and for the three months ended March 31, 2021, discrete tax adjustments including tax benefits related to stock-based compensation.

NOTE 17— RESTRUCTURING AND OTHER CHARGES

During the first quarter of 2020, management approved a strategic reduction of the existing global workforce as part of a multiphase process to reorganize our workforce concurrently with the redesign of our operating structure, which spanned multiple quarters.

During the three and nine months ended September 30, 2021, the associated restructuring charges were nil and $ 27 million, respectively.

During the three and nine months ended September 30, 2020, the associated restructuring charges were $ 19 million and $ 74 million, respectively.

We primarily incurred employee severance and benefits costs, as well as other associated consulting costs under the 2020 strategic reduction, substantially all of which have been accrued as of June 30, 2021.

The following table summarizes the restructuring reserve activity during the nine months ended September 30, 2021:

During the first quarter of 2022, management initiated a strategic reduction of the existing global workforce intended to streamline and optimize our global operations to enhance operating efficiency.

As part of this effort, we are focusing on the reduction of redundant operations and simplifying our organizational structure.

The associated restructuring charges during the three months ended March 31, 2022 were $ 20 million.

We primarily incurred employee severance and benefits costs, as well as other associated consulting costs.

Additionally, we are continuing to review our facility needs due to our new work models.

The strategic actions and cash payments associated with this plan are expected to be substantially completed by the fourth quarter of 2022.

The following table summarizes the restructuring reserve activity during the three months ended March 31, 2022:

Employee Severance and Benefits and Other Associated Costs

2 unchanged sentences

Payments ( 3 )

Accrued liability as of September 30, 2021

Additionally, in the nine months ended September 30, 2021 and 2020 we incurred asset impairment charges of $ 26 million and $ 21 million, respectively, due to the exiting of certain leased properties which resulted in a reduction of certain ROU lease assets and related leasehold improvements.

Accrued liability as of March 31, 2022

The associated restructuring charges during the three months ended March 31, 2021 were $ 32 million.

We primarily incurred employee severance and benefits costs, as well as other associated consulting costs under the 2020 strategic reduction, which was substantially completed in 2021.

Additionally, in the three months ended March 31, 2022 and 2021, we incurred asset impairment charges of $ 16 million and $ 26 million, respectively, due to the exiting of certain leased properties which resulted in a reduction of certain ROU lease assets and related leasehold improvements.

See “Note 6—Leases” for additional information.

NOTE 18— SUBSEQUENT EVENTS

In October 2021, we completed the acquisition of Paidy, Inc.

(“Paidy”) for approximately $ 2.7 billion, consisting of approximately $ 2.5 billion in cash, and approximately $ 175 million in assumed restricted stock and restricted stock units, subject to vesting conditions.

Paidy is a two-sided payments platform that primarily provides buy now, pay later solutions (installment credit offerings) in Japan.

With the acquisition of Paidy, we intend to expand our capabilities and relevance in Japan.

The acquisition will be accounted for as a business combination.

The purchase price allocation has not yet been completed, and as such, further disclosure has been omitted.

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-Q

Item 1. Financial Statements