PayPal Holdings, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS PayPal Holdings, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2022 December 31, 2021 (In millions, except par value) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 6,659 $ 5,197 Short-term investments 4,190 4,303 Accounts receivable, net 889 800 Loans and interest receivable, net of allowances of $ 478 and $ 491 as of September 30, 2022 and December 31, 2021, respectively 6,002 4,846 Funds receivable and customer accounts 34,824 36,141 Prepaid expenses and other current assets 2,541 1,287 Total current assets 55,105 52,574 Long-term investments 5,215 6,797 Property and equipment, net 1,773 1,909 Goodwill 11,053 11,454 Intangible assets, net 855 1,332 Other assets 2,434 1,737 Total assets $ 76,435 $ 75,803 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 114 $ 197 Funds payable and amounts due to customers 37,824 38,841 Accrued expenses and other current liabilities 4,638 3,755 Income taxes payable 652 236 Total current liabilities 43,228 43,029 Deferred tax liability and other long-term liabilities 2,702 2,998 Long-term debt 10,241 8,049 Total liabilities 56,171 54,076 Commitments and contingencies (Note 13) Equity: Common stock, $ 0.0001 par value; 4,000 shares authorized; 1,147 and 1,168 shares outstanding as of September 30, 2022 and December 31, 2021, respectively — — Preferred stock, $ 0.0001 par value; 100 shares authorized, unissued — — Treasury stock at cost, 161 and 132 shares as of September 30, 2022 and December 31, 2021, respectively ( 15,069 ) ( 11,880 ) Additional paid-in-capital 17,981 17,208 Retained earnings 18,033 16,535 Accumulated other comprehensive income (loss) ( 681 ) ( 136 ) Total equity 20,264 21,727 Total liabilities and equity $ 76,435 $ 75,803 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions, except per share data) (Unaudited) Net revenues $ 6,846 $ 6,182 $ 20,135 $ 18,453 Operating expenses: Transaction expense 2,988 2,564 8,849 7,363 Transaction and credit losses 367 268 1,184 710 Customer support and operations 509 504 1,579 1,543 Sales and marketing 544 549 1,733 1,779 Technology and development 801 755 2,431 2,242 General and administrative 463 498 1,584 1,544 Restructuring and other charges 56 1 182 60 Total operating expenses 5,728 5,139 17,542 15,241 Operating income 1,118 1,043 2,593 3,212 Other income (expense), net 460 122 ( 337 ) 181 Income before income taxes 1,578 1,165 2,256 3,393 Income tax expense 248 78 758 25 Net income (loss) $ 1,330 $ 1,087 $ 1,498 $ 3,368 Net income (loss) per share: Basic $ 1.15 $ 0.93 $ 1.29 $ 2.87 Diluted $ 1.15 $ 0.92 $ 1.29 $ 2.84 Weighted average shares: Basic 1,154 1,174 1,159 1,174 Diluted 1,157 1,187 1,163 1,187 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) (Unaudited) Net income (loss) $ 1,330 $ 1,087 $ 1,498 $ 3,368 Other comprehensive income (loss), net of reclassification adjustments: Foreign currency translation adjustments (“CTA”) ( 206 ) ( 29 ) ( 601 ) ( 51 ) Net investment hedges CTA gains, net 97 — 253 — Tax expense on net investment hedges CTA gains, net ( 23 ) — ( 59 ) — Unrealized gains on cash flow hedges, net 138 204 348 434 Tax expense on unrealized gains on cash flow hedges, net ( 7 ) ( 7 ) ( 18 ) ( 10 ) Unrealized losses on investments, net ( 157 ) — ( 614 ) ( 17 ) Tax benefit on unrealized losses on investments, net 41 — 146 4 Other comprehensive income (loss), net of tax ( 117 ) 168 ( 545 ) 360 Comprehensive income (loss) $ 1,213 $ 1,255 $ 953 $ 3,728 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Equity (In millions) (Unaudited) Balances at December 31, 2021 1,168 $ ( 11,880 ) $ 17,208 $ ( 136 ) $ 16,535 $ 21,727 Net income — — — — 509 509 Foreign CTA — — — ( 95 ) — ( 95 ) 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 ) Tax benefit on unrealized losses on investments, net — — — 67 — 67 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 4 — ( 273 ) — — ( 273 ) Common stock repurchased ( 11 ) ( 1,500 ) — — — ( 1,500 ) Stock-based compensation — — 447 — — 447 Other — — 1 — — 1 Balances at March 31, 2022 1,161 $ ( 13,380 ) $ 17,383 $ ( 444 ) $ 17,044 $ 20,603 Net loss — — — — ( 341 ) ( 341 ) Foreign CTA — — — ( 300 ) — ( 300 ) Net investment hedge CTA gains, net — — — 135 — 135 Tax expense on net investment hedges CTA gains, net — — — ( 31 ) — ( 31 ) Unrealized gains on cash flow hedges, net — — — 213 — 213 Tax expense on unrealized gains on cash flow hedges, net — — — ( 11 ) — ( 11 ) Unrealized losses on investments, net — — — ( 164 ) — ( 164 ) Tax benefit on unrealized losses on investments, net — — — 38 — 38 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 3 — 51 — — 51 Common stock repurchased ( 8 ) ( 750 ) — — — ( 750 ) Stock-based compensation — — 324 — — 324 Balances at June 30, 2022 1,156 $ ( 14,130 ) $ 17,758 $ ( 564 ) $ 16,703 $ 19,767 Net income — — — — 1,330 1,330 Foreign CTA — — — ( 206 ) — ( 206 ) Net investment hedge CTA gains, net — — — 97 — 97 Tax expense on net investment hedges CTA gains, net — — — ( 23 ) — ( 23 ) Unrealized gains on cash flow hedges, net — — — 138 — 138 Tax expense on unrealized gains on cash flow hedges, net — — — ( 7 ) — ( 7 ) Unrealized losses on investments, net — — — ( 157 ) — ( 157 ) Tax benefit on unrealized losses on investments, net — — — 41 — 41 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 1 — ( 14 ) — — ( 14 ) Common stock repurchased ( 10 ) ( 939 ) — — — ( 939 ) Stock-based compensation — — 237 — — 237 Balances at September 30, 2022 1,147 $ ( 15,069 ) $ 17,981 $ ( 681 ) $ 18,033 $ 20,264 7 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued) Common Stock Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Noncontrolling Interest Total Equity (In millions) (Unaudited) Balances at December 31, 2020 1,172 $ ( 8,507 ) $ 16,644 $ ( 484 ) $ 12,366 $ 44 $ 20,063 Net income — — — — 1,097 — 1,097 Foreign CTA — — — ( 53 ) — — ( 53 ) Unrealized gains on cash flow hedges, net — — — 198 — — 198 Tax expense on unrealized gains on cash flow hedges, net — — — ( 3 ) — — ( 3 ) Unrealized losses on investments, net — — — ( 15 ) — — ( 15 ) Tax benefit on unrealized losses on investments, net — — — 4 — — 4 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 7 — ( 870 ) — — — ( 870 ) Common stock repurchased ( 5 ) ( 1,323 ) — — — — ( 1,323 ) Stock-based compensation — — 387 — — — 387 Change in noncontrolling interest — — — — — ( 44 ) ( 44 ) Balances at March 31, 2021 1,174 $ ( 9,830 ) $ 16,161 $ ( 353 ) $ 13,463 $ — $ 19,441 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 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2022 2021 (In millions) (Unaudited) Cash flows from operating activities: Net income $ 1,498 $ 3,368 Adjustments to reconcile net income to net cash provided by operating activities: Transaction and credit losses 1,184 710 Depreciation and amortization 991 939 Stock-based compensation 967 1,058 Deferred income taxes ( 538 ) ( 175 ) Net (gains) losses on strategic investments 163 ( 336 ) Other 567 92 Changes in assets and liabilities: Accounts receivable ( 89 ) ( 155 ) Accounts payable ( 55 ) ( 50 ) Income taxes payable 109 18 Other assets and liabilities ( 141 ) ( 892 ) Net cash provided by operating activities 4,656 4,577 Cash flows from investing activities: Purchases of property and equipment ( 548 ) ( 695 ) Proceeds from sales of property and equipment 5 3 Purchases and originations of loans receivable ( 19,167 ) ( 8,241 ) Principal repayment of loans receivable 17,164 7,598 Purchases of investments ( 16,455 ) ( 30,905 ) Maturities and sales of investments 16,770 30,390 Acquisitions, net of cash and restricted cash acquired — ( 469 ) Funds receivable ( 1,085 ) ( 37 ) Other investing activities 30 — Net cash used in investing activities ( 3,286 ) ( 2,356 ) Cash flows from financing activities: Proceeds from issuance of common stock 86 90 Purchases of treasury stock ( 3,189 ) ( 1,873 ) Tax withholdings related to net share settlements of equity awards ( 321 ) ( 978 ) Borrowings under financing arrangements 3,346 — Repayments under financing arrangements ( 1,686 ) — Funds payable and amounts due to customers ( 659 ) 2,575 Other financing activities 1 — Net cash used in financing activities ( 2,422 ) ( 186 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 253 ) ( 106 ) Net change in cash, cash equivalents, and restricted cash ( 1,305 ) 1,929 Cash, cash equivalents, and restricted cash at beginning of period 18,029 18,040 Cash, cash equivalents, and restricted cash at end of period $ 16,724 $ 19,969 9 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(continued) Nine Months Ended September 30, 2022 2021 (In millions) (Unaudited) Supplemental cash flow disclosures: Cash paid for interest $ 114 $ 121 Cash paid for income taxes, net $ 666 $ 436 The table below reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows: Cash and cash equivalents $ 6,659 $ 7,782 Short-term investments 21 23 Funds receivable and customer accounts 10,044 12,164 Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows $ 16,724 $ 19,969 The accompanying notes are an integral part of these condensed consolidated financial statements. 10 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1— OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OVERVIEW AND ORGANIZATION PayPal Holdings, Inc. (“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 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. We monitor these areas closely and are focused on designing compliant solutions for our customers. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and principles of consolidation 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. 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. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our condensed consolidated statements of income (loss). Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our condensed consolidated statements of income (loss). Our investment balance is included in long-term investments on our condensed consolidated balance sheets. 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 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. (“Paidy”). 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 our 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. In the first quarter of 2022, we terminated Paidy’s legacy debt structure and replaced it with a new credit agreement executed in February 2022. As a result, we no longer have any consolidated VIEs as of September 30, 2022. See “Note 12—Debt” for additional information. As of September 30, 2022 and December 31, 2021, the carrying value of our investments in nonconsolidated VIEs was $ 116 million and $ 74 million, respectively, and is included in long-term investments on our condensed consolidated balance sheets as non-marketable equity securities applying the equity method of accounting. Our maximum exposure to loss related to our nonconsolidated VIEs, which represents funded commitments and any future funding commitments, was $ 231 million and $ 205 million as of September 30, 2022 and December 31, 2021, respectively. 11 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 periods have been reclassified to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2022. Use of estimates The preparation of condensed consolidated financial statements in conformity with U.S. 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, 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. Actual results could differ materially from these estimates. Recent accounting guidance 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 due from 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 have concluded that our financial statements will not be materially impacted upon adoption. We will adopt the guidance on January 1, 2023 on a prospective basis and expand certain disclosures as required. In 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This amended guidance provides transition relief for the accounting impact of reference rate reform. For a limited period, this guidance provides optional expedients and exceptions for applying GAAP to certain contract modifications, hedging relationships, and other transactions affected by a reference rate expected to be discontinued due to reference rate reform. The amended guidance is effective through December 31, 2022. Our exposure to London Interbank Offered Rate 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. 12 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Recently adopted accounting guidance In March 2022, the SEC released Staff Accounting Bulletin No. 121 (“SAB 121”), which provides guidance for an entity to consider when 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 safeguarding asset. The crypto asset safeguarding liability and the corresponding safeguarding 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. SAB 121 is effective 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 adopted this guidance for the quarter ended June 30, 2022 with retrospective application as of January 1, 2022. As of June 30, 2022, we recorded $ 596 million for both the crypto asset safeguarding liability and corresponding safeguarding asset, which are classified as accrued expenses and other current liabilities and prepaid expenses and other current assets, respectively, on our condensed consolidated balance sheet. For additional information, see “Note 7—Other Financial Statement Details.” There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable. We do not believe any of these accounting pronouncements have had, or will have, a material impact on our condensed consolidated financial statements or disclosures. NOTE 2— REVENUE 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. Our revenues are classified into two categories: transaction revenues and revenues from other value added services. DISAGGREGATION OF REVENUE We determine operating segments based on how our chief operating decision maker (“CODM”) manages the business, makes operating decisions around the allocation of resources, and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. 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 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. 13 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table presents our revenue disaggregated by primary geographical market and category: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Primary geographical markets U.S. $ 3,978 $ 3,476 $ 11,512 $ 9,811 United Kingdom (“U.K.”) 490 529 1,552 1,741 Other countries (1) 2,378 2,177 7,071 6,901 Total net revenues (2) $ 6,846 $ 6,182 $ 20,135 $ 18,453 Revenue category Transaction revenues $ 6,234 $ 5,607 $ 18,504 $ 17,025 Revenues from other value added services 612 575 1,631 1,428 Total net revenues (2) $ 6,846 $ 6,182 $ 20,135 $ 18,453 (1) No single country included in the other countries category generated more than 10% of total net revenues. (2) Total net revenues include $ 391 million and $ 168 million for the three months ended September 30, 2022 and 2021, respectively, and $ 874 million and $ 289 million for the nine months ended September 30, 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 and fees earned on loans and interest receivable, as well as hedging gains or losses, and interest earned on certain assets underlying customer balances. Net revenues are attributed to the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside. NOTE 3— NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding equity incentive awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. During periods when we report net loss, diluted net loss per share is the same as basic net loss per share because the effects of potentially dilutive items would decrease the net loss per share. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions, except per share amounts) Numerator: Net income (loss) $ 1,330 $ 1,087 $ 1,498 $ 3,368 Denominator: Weighted average shares of common stock - basic 1,154 1,174 1,159 1,174 Dilutive effect of equity incentive awards 3 13 4 13 Weighted average shares of common stock - diluted 1,157 1,187 1,163 1,187 Net income (loss) per share: Basic $ 1.15 $ 0.93 $ 1.29 $ 2.87 Diluted $ 1.15 $ 0.92 $ 1.29 $ 2.84 Common stock equivalents excluded from income (loss) per diluted share because their effect would have been anti-dilutive or potentially dilutive 14 — 13 2 14 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 4— BUSINESS COMBINATIONS There were no acquisitions accounted for as business combinations or divestitures completed in the three and nine months ended September 30, 2022. ACQUISITIONS COMPLETED IN 2021 Paidy 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) Goodwill $ 1,897 Customer lists and user base 512 Marketing related 83 Developed technology 47 Total intangibles $ 642 Loans and interest receivable, net 197 Cash and cash equivalents 102 Other net assets 87 Short-term and long-term debt ( 188 ) Deferred tax liabilities, net ( 166 ) Total purchase price $ 2,571 The intangible assets acquired consist primarily of merchant contracts, trade names/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 subject to continued employment. 15 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 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. Goodwill was not considered 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 (loss). 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 GOODWILL The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2022: December 31, 2021 Goodwill Acquired Adjustments September 30, 2022 (In millions) Total goodwill $ 11,454 $ — $ ( 401 ) $ 11,053 The adjustments to goodwill during the nine months ended September 30, 2022 pertained to foreign currency translation adjustments. INTANGIBLE ASSETS The components of identifiable intangible assets were as follows: September 30, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Useful Life (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Useful Life (Years) (In millions, except years) Intangible assets: Customer lists and user base $ 1,623 $ ( 1,043 ) $ 580 7 $ 1,726 $ ( 919 ) $ 807 7 Marketing related 388 ( 332 ) 56 5 405 ( 315 ) 90 5 Developed technology 1,095 ( 989 ) 106 3 1,109 ( 822 ) 287 3 All other 432 ( 319 ) 113 7 454 ( 306 ) 148 7 Intangible assets, net $ 3,538 $ ( 2,683 ) $ 855 $ 3,694 $ ( 2,362 ) $ 1,332 Amortization expense for intangible assets was $ 118 million and $ 110 million for the three months ended September 30, 2022 and 2021, respectively. Amortization expense for intangible assets was $ 356 million and $ 326 million for the nine months ended September 30, 2022 and 2021, respectively. 16 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Expected future intangible asset amortization as of September 30, 2022 was as follows (in millions): Fiscal years: Remaining 2022 $ 111 2023 206 2024 186 2025 152 2026 95 Thereafter 105 Total $ 855 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, customer services and operations centers, and warehouses. While a majority of our lease agreements do not contain an explicit interest rate, certain of our lease agreements 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. The short-term lease exemption has been adopted for all leases with a duration of less than 12 months. PayPal’s lease portfolio includes a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements. As of September 30, 2022, we had no finance leases. The components of lease expense were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Lease expense Operating lease expense $ 43 $ 42 $ 128 $ 129 Sublease income ( 2 ) ( 2 ) ( 6 ) ( 6 ) Lease expense, net $ 41 $ 40 $ 122 $ 123 Supplemental cash flow information related to leases was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 44 $ 42 $ 127 $ 126 Right-of-use (“ROU”) lease assets obtained in exchange for new operating lease liabilities $ 5 $ 47 $ 99 $ 79 Other non-cash ROU lease asset activity $ ( 11 ) $ — $ ( 36 ) $ ( 21 ) 17 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Supplemental balance sheet information related to leases was as follows: September 30, 2022 December 31, 2021 (In millions, except weighted-average figures) Operating ROU lease assets $ 588 $ 659 Current operating lease liabilities 152 142 Operating lease liabilities 566 620 Total operating lease liabilities $ 718 $ 762 Weighted-average remaining lease term — operating leases 5.7 years 6.1 years Weighted-average discount rate — operating leases 3 % 3 % Future minimum lease payments for our operating leases as of September 30, 2022 were as follows: Operating Leases Fiscal years: (In millions) Remaining 2022 $ 44 2023 170 2024 154 2025 115 2026 94 Thereafter 211 Total $ 788 Less: present value discount ( 70 ) Lease liability $ 718 Operating lease amounts include minimum lease payments under our non-cancelable operating leases primarily for office and data center facilities. 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 and nine months ended September 30, 2022, we incurred asset impairment charges of $ 29 million and $ 64 million, respectively, within restructuring and other charges on our condensed consolidated statements of income (loss). The impairments in three and nine months ended September 30, 2022 included a reduction to our ROU lease assets in the amount of $ 11 million and $ 36 million, respectively, which were attributed to certain leased space we are no longer utilizing for our business operations, a portion of which is being subleased. In the three and nine months ended September 30, 2021, we incurred asset impairment charges of nil and $ 26 million, respectively, within restructuring and other charges on our condensed consolidated statements of income (loss). The impairments in the three and nine months ended September 30, 2021 included a reduction to our ROU lease assets in the amount of nil and $ 21 million, respectively, which was attributed to certain leased space we are no longer utilizing for our business operations, a portion of which is being subleased. As of September 30, 2022, we have an additional operating lease for real estate, which will commence in the fourth quarter of 2022 or later with minimum lease payments aggregating to $ 3 million and a lease term of eight years . 18 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 7— OTHER FINANCIAL STATEMENT DETAILS CRYPTO ASSET SAFEGUARDING LIABILITY AND CORRESPONDING SAFEGUARDING ASSET We allow our customers in certain markets to buy, hold, sell, receive, and send certain cryptocurrencies as well as use the proceeds from sales of cryptocurrencies to pay for purchases at checkout. These cryptocurrencies consist of Bitcoin, Ethereum, Bitcoin Cash, and Litecoin (collectively, “our customers’ crypto assets”). We engage third parties, which are licensed trust companies, to provide certain custodial services, including holding our customers’ cryptographic key information, securing our customers’ crypto assets, and protecting them from loss or theft, including indemnification against certain types of losses such as theft. Our third-party custodian holds the crypto assets in a custodial account in PayPal’s name for the benefit of PayPal’s customers. We maintain the internal recordkeeping of our customers’ crypto assets, including the amount and type of crypto asset owned by each of our customers in that custodial account. Given that we currently utilize one third-party custodian, there is concentration risk in the event the custodian is not able to perform in accordance with our agreement. Due to the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks, we recognize a crypto asset safeguarding liability to reflect our obligation to safeguard the crypto assets held for the benefit of our customers, which is recorded in accrued expenses and other current liabilities on our condensed consolidated balance sheet. We also recognize a corresponding safeguarding asset which is recorded in prepaid expenses and other current assets on our condensed consolidated balance sheet. The crypto asset safeguarding liability and corresponding safeguarding asset are measured and recorded at fair value on a recurring basis using prices available in the market we determine to be the principal market at the balance sheet date. The corresponding safeguarding asset may be adjusted for loss events (e.g., uninsured losses), as applicable. As of September 30, 2022, the Company has not incurred any safeguarding loss events, and therefore, the crypto asset safeguarding liability and corresponding safeguarding asset were recorded at the same value. The following table summarizes the significant crypto assets we hold for the benefit of our customers and the crypto asset safeguarding liability and corresponding safeguarding asset as of September 30, 2022 (in millions): Bitcoin $ 343 Ethereum 290 Other 57 Crypto asset safeguarding liability $ 690 Crypto asset safeguarding asset $ 690 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, 2022: Unrealized Gains on Cash Flow Hedges Unrealized Losses on Investments Foreign Currency Translation Adjustment (“CTA”) Net Investment Hedges CTA Gains Estimated Tax Benefit Total (In millions) Beginning balance $ 409 $ ( 544 ) $ ( 665 ) $ 180 $ 56 $ ( 564 ) Other comprehensive income (loss) before reclassifications 294 ( 157 ) ( 206 ) 97 11 39 Less: Amount of gain reclassified from accumulated other comprehensive income (loss) (“AOCI”) 156 — — — — 156 Net current period other comprehensive income (loss) 138 ( 157 ) ( 206 ) 97 11 ( 117 ) Ending balance $ 547 $ ( 701 ) $ ( 871 ) $ 277 $ 67 $ ( 681 ) 19 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2021: Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Losses on Investments Foreign CTA Net Investment Hedges CTA Gains Estimated Tax (Expense) Benefit Total (In millions) Beginning balance $ ( 93 ) $ ( 6 ) $ ( 220 ) $ 24 $ 3 $ ( 292 ) Other comprehensive income (loss) before reclassifications 160 — ( 29 ) — ( 7 ) 124 Less: Amount of loss reclassified from AOCI ( 44 ) — — — — ( 44 ) Net current period other comprehensive income (loss) 204 — ( 29 ) — ( 7 ) 168 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, 2022: Unrealized Gains on Cash Flow Hedges Unrealized Losses on Investments Foreign CTA Net Investment Hedges CTA Gains Estimated Tax (Expense) Benefit Total (In millions) Beginning balance $ 199 $ ( 87 ) $ ( 270 ) $ 24 $ ( 2 ) $ ( 136 ) Other comprehensive income (loss) before reclassifications 658 ( 614 ) ( 601 ) 253 69 ( 235 ) Less: Amount of gain reclassified from AOCI 310 — — — — 310 Net current period other comprehensive income (loss) 348 ( 614 ) ( 601 ) 253 69 ( 545 ) Ending balance $ 547 $ ( 701 ) $ ( 871 ) $ 277 $ 67 $ ( 681 ) 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 Foreign CTA Net Investment Hedges CTA Gains 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 Less: 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 ) 20 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table provides details about reclassifications out of AOCI for the periods presented below: Details about AOCI Components Amount of Gains (Losses) Reclassified from AOCI Affected Line Item in the Statement of Income (Loss) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Gains (losses) on cash flow hedges — foreign currency exchange contracts $ 156 $ ( 44 ) $ 310 $ ( 192 ) Net revenues Unrealized gains (losses) on investments — — — — Other income (expense), net 156 ( 44 ) 310 ( 192 ) Income before income taxes — — — — Income tax expense Total reclassifications for the period $ 156 $ ( 44 ) $ 310 $ ( 192 ) Net income (loss) 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, 2022 2021 2022 2021 (In millions) Interest income $ 48 $ 15 $ 90 $ 43 Interest expense ( 87 ) ( 58 ) ( 215 ) ( 173 ) Net gains (losses) on strategic investments 495 173 ( 163 ) 336 Other 4 ( 8 ) ( 49 ) ( 25 ) Other income (expense), net $ 460 $ 122 $ ( 337 ) $ 181 21 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 (In millions) Funds receivable and customer accounts: Cash and cash equivalents $ 10,044 $ 12,723 Time deposits 39 334 Available-for-sale debt securities 18,916 18,336 Funds receivable 5,825 4,748 Total funds receivable and customer accounts $ 34,824 $ 36,141 Short-term investments: Time deposits $ 383 $ 590 Available-for-sale debt securities 3,786 3,604 Restricted cash 21 109 Total short-term investments $ 4,190 $ 4,303 Long-term investments: Time deposits $ 55 $ 45 Available-for-sale debt securities 2,912 3,545 Strategic investments 2,248 3,207 Total long-term investments $ 5,215 $ 6,797 As of September 30, 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: September 30, 2022 (1) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (In millions) Funds receivable and customer accounts: U.S. government and agency securities $ 9,698 $ — $ ( 288 ) $ 9,410 Foreign government and agency securities 1,671 — ( 52 ) 1,619 Corporate debt securities 1,698 — ( 93 ) 1,605 Asset-backed securities 1,379 — ( 36 ) 1,343 Municipal securities 328 — ( 4 ) 324 Commercial paper 3,793 — ( 25 ) 3,768 Short-term investments: U.S. government and agency securities 75 — ( 3 ) 72 Foreign government and agency securities 480 — ( 13 ) 467 Corporate debt securities 969 — ( 14 ) 955 Asset-backed securities 522 — ( 9 ) 513 Commercial paper 1,781 — ( 2 ) 1,779 Long-term investments: U.S. government and agency securities 493 — ( 39 ) 454 Foreign government and agency securities 400 — ( 24 ) 376 Corporate debt securities 1,076 — ( 70 ) 1,006 Asset-backed securities 1,105 — ( 29 ) 1,076 Total available-for-sale debt securities (2) $ 25,468 $ — $ ( 701 ) $ 24,767 (1) “—” Denotes gross unrealized gain or unrealized loss of less than $1 million in a given position. (2) Excludes foreign currency denominated available-for-sale debt securities accounted for under the fair value option. Refer to “Note 9 — Fair Value Measurement of Assets and Liabilities.” 22 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) December 31, 2021 (1) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (In millions) Funds receivable and customer accounts: U.S. government and agency securities $ 8,754 $ — $ ( 31 ) $ 8,723 Foreign government and agency securities 1,849 — ( 9 ) 1,840 Corporate debt securities 3,377 — ( 15 ) 3,362 Asset-backed securities 1,552 — ( 3 ) 1,549 Municipal securities 535 — — 535 Short-term investments: U.S. government and agency securities 537 — — 537 Foreign government and agency securities 493 — ( 1 ) 492 Corporate debt securities 2,285 — — 2,285 Asset-backed securities 278 — ( 1 ) 277 Long-term investments: U.S. government and agency securities 568 — ( 6 ) 562 Foreign government and agency securities 742 — ( 6 ) 736 Corporate debt securities 1,445 — ( 11 ) 1,434 Asset-backed securities 817 — ( 4 ) 813 Total available-for-sale debt securities (2) $ 23,232 $ — $ ( 87 ) $ 23,145 (1) “—” Denotes gross unrealized gain or unrealized loss of less than $1 million in a given position. (2) Excludes foreign currency denominated available-for-sale debt securities accounted for under the fair value option. Refer to “Note 9 — Fair Value Measurement of Assets and Liabilities.” 23 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Gross amortized cost and estimated fair value balances exclude accrued interest receivable on available-for-sale debt securities, which totaled $ 61 million and $ 36 million at September 30, 2022 and December 31, 2021, respectively, and were included in other current assets on our condensed consolidated balance sheets. As of September 30, 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 was not 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: September 30, 2022 (1) Less than 12 months 12 months or longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses (In millions) Funds receivable and customer accounts: U.S. government and agency securities $ 7,297 $ ( 186 ) $ 1,939 $ ( 102 ) $ 9,236 $ ( 288 ) Foreign government and agency securities 1,057 ( 32 ) 562 ( 20 ) 1,619 ( 52 ) Corporate debt securities 1,017 ( 62 ) 589 ( 31 ) 1,606 ( 93 ) Asset-backed securities 1,148 ( 30 ) 195 ( 6 ) 1,343 ( 36 ) Municipal securities 307 ( 4 ) — — 307 ( 4 ) Commercial paper 3,768 ( 25 ) — — 3,768 ( 25 ) Short-term investments: U.S. government and agency securities 72 ( 3 ) — — 72 ( 3 ) Foreign government and agency securities 361 ( 9 ) 106 ( 3 ) 467 ( 12 ) Corporate debt securities 926 ( 14 ) 28 ( 1 ) 954 ( 15 ) Asset-backed securities 420 ( 7 ) 62 ( 2 ) 482 ( 9 ) Commercial paper 1,779 ( 2 ) — — 1,779 ( 2 ) Long-term investments: U.S. government and agency securities 247 ( 19 ) 206 ( 20 ) 453 ( 39 ) Foreign government and agency securities 31 ( 2 ) 345 ( 22 ) 376 ( 24 ) Corporate debt securities 590 ( 43 ) 407 ( 27 ) 997 ( 70 ) Asset-backed securities 972 ( 23 ) 104 ( 6 ) 1,076 ( 29 ) Total available-for-sale debt securities $ 19,992 $ ( 461 ) $ 4,543 $ ( 240 ) $ 24,535 $ ( 701 ) (1) “—” Denotes gross unrealized loss or fair value of less than $1 million in a given position. 24 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) December 31, 2021 (1) Less than 12 months 12 months or longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses (In millions) Funds receivable and customer accounts: U.S. government and agency securities $ 8,224 $ ( 31 ) $ — $ — $ 8,224 $ ( 31 ) Foreign government and agency securities 1,703 ( 9 ) 20 — 1,723 ( 9 ) Corporate debt securities 1,816 ( 15 ) — — 1,816 ( 15 ) Asset-backed securities 1,302 ( 3 ) — — 1,302 ( 3 ) Municipal securities 50 — — — 50 — Short-term investments: U.S. government and agency securities 440 — — — 440 — Foreign government and agency securities 485 ( 1 ) — — 485 ( 1 ) Corporate debt securities 336 — — — 336 — Asset-backed securities 273 ( 1 ) — — 273 ( 1 ) Long-term investments: U.S. government and agency securities 562 ( 6 ) — — 562 ( 6 ) Foreign government and agency securities 736 ( 6 ) — — 736 ( 6 ) Corporate debt securities 1,355 ( 11 ) — — 1,355 ( 11 ) Asset-backed securities 707 ( 4 ) — — 707 ( 4 ) Total available-for-sale debt securities $ 17,989 $ ( 87 ) $ 20 $ — $ 18,009 $ ( 87 ) (1) “—” Denotes gross unrealized loss or fair value of less than $1 million in a given position. 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 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, 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, 2022 Amortized Cost Fair Value (In millions) One year or less $ 13,266 $ 13,119 After one year through five years 10,164 9,656 After five years through ten years 1,952 1,908 After ten years 86 84 Total $ 25,468 $ 24,767 STRATEGIC INVESTMENTS Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are primarily investments in privately held companies. 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 (loss). Marketable equity securities totaled $ 361 million and $ 1.9 billion as of September 30, 2022 and December 31, 2021, respectively, including the impact of the sale of marketable equity securities during the three months ended September 30, 2022. 25 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Our non-marketable equity securities are recorded in long-term investments on our condensed consolidated balance sheets. As of September 30, 2022 and December 31, 2021, we had non-marketable equity securities of $ 122 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. The remaining non-marketable equity securities do not have a readily determinable fair value and we measure these equity investments at cost minus impairment, if any, and adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). 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 (loss). The carrying value of our non-marketable equity securities totaled $ 1.9 billion and $ 1.3 billion as of September 30, 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, 2022 and 2021 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Carrying amount, beginning of period $ 1,574 $ 1,009 $ 1,268 $ 779 Adjustments related to non-marketable equity securities: Net additions (1) 17 97 74 110 Gross unrealized gains 174 90 423 307 Carrying amount, end of period $ 1,765 $ 1,196 $ 1,765 $ 1,196 (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, held at September 30, 2022 and December 31, 2021, respectively: September 30, 2022 December 31, 2021 (In millions) Cumulative gross unrealized gains $ 1,137 $ 733 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, 2022 and 2021, respectively: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Net unrealized gains (losses) $ 232 $ 173 $ 220 $ 265 26 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 9— FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES 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, 2022 and December 31, 2021: September 30, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) (In millions) Assets: Cash and cash equivalents (1) $ 893 $ — $ 893 Short-term investments (2) : U.S. government and agency securities 72 — 72 Foreign government and agency securities 467 — 467 Corporate debt securities 955 — 955 Asset-backed securities 513 — 513 Commercial paper 1,779 — 1,779 Total short-term investments 3,786 — 3,786 Funds receivable and customer accounts (3) : Cash and cash equivalents 400 — 400 U.S. government and agency securities 9,410 — 9,410 Foreign government and agency securities 2,290 — 2,290 Corporate debt securities 1,748 — 1,748 Asset-backed securities 1,343 — 1,343 Municipal securities 324 — 324 Commercial paper 3,801 — 3,801 Total funds receivable and customer accounts 19,316 — 19,316 Derivatives 1,015 — 1,015 Crypto asset safeguarding asset 690 — 690 Long-term investments (2),(4) : U.S. government and agency securities 454 — 454 Foreign government and agency securities 376 — 376 Corporate debt securities 1,006 — 1,006 Asset-backed securities 1,076 — 1,076 Marketable equity securities 361 361 — Total long-term investments 3,273 361 2,912 Total financial assets $ 28,973 $ 361 $ 28,612 Liabilities: Derivatives $ 187 $ — $ 187 Crypto asset safeguarding liability 690 — 690 Total financial liabilities $ 877 $ — $ 877 (1) Excludes cash of $ 5.8 billion not measured and recorded at fair value. (2) Excludes restricted cash of $ 21 million and time deposits of $ 438 million not measured and recorded at fair value. (3) Excludes cash, time deposits, and funds receivable of $ 15.5 billion underlying funds receivable and customer accounts not measured and recorded at fair value. (4) Excludes non-marketable equity securities of $ 1.9 billion measured using the Measurement Alternative or equity method accounting. 27 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) December 31, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) (In millions) Assets: Cash and cash equivalents (1) $ 400 $ — $ 400 Short-term investments (2) : U.S. government and agency securities 537 — 537 Foreign government and agency securities 505 — 505 Corporate debt securities 2,285 — 2,285 Asset-backed securities 277 — 277 Total short-term investments 3,604 — 3,604 Funds receivable and customer accounts (3) : Cash and cash equivalents 622 — 622 U.S. government and agency securities 8,723 — 8,723 Foreign government and agency securities 4,090 — 4,090 Corporate debt securities 3,439 — 3,439 Asset-backed securities 1,549 — 1,549 Municipal securities 535 — 535 Total funds receivable and customer accounts 18,958 — 18,958 Derivatives 304 — 304 Long-term investments (2), (4) : U.S. government and agency securities 562 — 562 Foreign government and agency securities 736 — 736 Corporate debt securities 1,434 — 1,434 Asset-backed securities 813 — 813 Marketable equity securities 1,860 1,860 — Total long-term investments 5,405 1,860 3,545 Total financial assets $ 28,671 $ 1,860 $ 26,811 Liabilities: Derivatives $ 130 $ — $ 130 (1) Excludes cash of $ 4.8 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 $ 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). There are no active markets for our crypto asset safeguarding liability or the corresponding safeguarding asset. Accordingly, we have valued the asset and liability using quoted prices on the active exchange that has been identified as the principal market for the underlying crypto assets (Level 2). All other financial assets and liabilities are valued using quoted prices for identical instruments in less active markets, readily available pricing sources for comparable instruments, or models using market observable inputs (Level 2). A majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as currency rates, interest rate yield curves, option volatility, and equity prices. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months. 28 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) As of September 30, 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). We elect to account for available-for-sale debt securities denominated in currencies other than the functional currency of our subsidiaries under the fair value option. 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 (loss) 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, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 (In millions) Funds receivable and customer accounts $ 847 $ 2,327 Short-term investments $ — $ 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, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Funds receivable and customer accounts $ ( 70 ) $ ( 45 ) $ ( 213 ) $ ( 85 ) Short-term investments $ — $ ( 18 ) $ — $ ( 25 ) ASSETS MEASURED AND RECORDED AT FAIR VALUE ON A NON-RECURRING BASIS The following tables summarize our assets held as of September 30, 2022 and December 31, 2021 for which a non-recurring fair value measurement was recorded during the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively: September 30, 2022 Significant Other Observable Inputs (Level 2) (In millions) Non-marketable equity investments measured using the Measurement Alternative (1) $ 1,054 $ 1,054 Other assets (2) 128 128 Total $ 1,182 $ 1,182 (1) Excludes non-marketable equity investments of $ 711 million accounted for under the Measurement Alternative for which no observable price changes occurred during the nine months ended September 30, 2022. (2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the nine months ended September 30, 2022. See “Note 6—Leases” for additional information. December 31, 2021 Significant Other Observable Inputs (Level 2) (In millions) Non-marketable equity investments measured using the Measurement Alternative (1) $ 611 $ 611 Other assets (2) 86 86 Total $ 697 $ 697 (1) Excludes non-marketable equity investments of $ 657 million accounted for under the Measurement Alternative for which no observable price changes occurred during the year ended December 31, 2021. (2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the year ended December 31, 2021. See “Note 6—Leases” for additional information. 29 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) We measure the non-marketable equity investments accounted for under the Measurement Alternative at cost minus impairment, if any, adjusted for observable price changes in orderly transactions for an identical or similar investment in the same issuer. Impairment losses on ROU lease assets related to office operating leases are calculated initially using estimated rental income per square foot derived from observable market data. 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 long-term debt related to borrowings on our credit facilities, are carried at amortized cost, which approximates their fair value. Our notes receivable had a carrying value of approximately $ 404 million and fair value of approximately $ 337 million as of September 30, 2022. Our notes receivable had a carrying value of approximately $ 381 million and fair value of approximately $ 424 million as of December 31, 2021. Our long-term debt (including current portion) in the form of fixed rate notes had a carrying value of approximately $ 10.3 billion and fair value of approximately $ 9.2 billion as of September 30, 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. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1; restricted cash, time deposits, certain customer accounts, and long-term debt (including current portion) would be classified as Level 2; and the remaining financial instruments would be classified as Level 3 in the fair value hierarchy. NOTE 10— DERIVATIVE INSTRUMENTS SUMMARY OF DERIVATIVE INSTRUMENTS Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. We do not use any derivative instruments for trading or speculative purposes. Cash flow hedges We have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency exchange risk. 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 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. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same, we conclude the hedge will be perfectly effective. We do not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We report cash flows arising from derivative instruments consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. 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. 30 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) As of September 30, 2022, we estimated that $ 504 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, 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. Gains and losses on derivatives held after we discontinue our cash flow hedges and on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates. Net investment hedge 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 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 flows 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 We have a foreign currency exposure management program in which we use foreign currency exchange contracts to offset the foreign currency exchange risk of our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities. The gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities are recorded in other income (expense), net, which are offset by the gains and losses on these foreign currency exchange contracts. The cash flows associated with our non-designated derivatives used to hedge foreign currency denominated monetary assets and liabilities are classified in cash flows from operating activities on our condensed consolidated statements of cash flows. 31 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) FAIR VALUE OF DERIVATIVE CONTRACTS The fair value of our outstanding derivative instruments as of September 30, 2022 and December 31, 2021 was as follows: Balance Sheet Location September 30, 2022 December 31, 2021 (In millions) Derivative Assets: Foreign currency exchange contracts designated as hedging instruments Other current assets $ 638 $ 205 Foreign currency exchange contracts designated as hedging instruments Other assets (non-current) 223 21 Foreign currency exchange contracts not designated as hedging instruments Other current assets 154 78 Total derivative assets $ 1,015 $ 304 Derivative Liabilities: Foreign currency exchange contracts designated as hedging instruments Other current liabilities $ 39 $ 27 Foreign currency exchange contracts not designated as hedging instruments Other current liabilities 148 103 Total derivative liabilities $ 187 $ 130 MASTER NETTING AGREEMENTS - RIGHTS OF SET-OFF Under master netting agreements with certain counterparties to our foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. 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 $ 74 million as of September 30, 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 posted and received: September 30, 2022 December 31, 2021 (In millions) Cash collateral posted (1) $ 9 $ 5 Cash collateral received (2) $ 639 $ 209 (1) Right to reclaim cash collateral related to our derivative liabilities recognized in other current assets on our condensed consolidated balance sheets. (2) Obligation to return counterparty cash collateral related to our derivative assets recognized in other current liabilities on our condensed consolidated balance sheets. 32 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) EFFECT OF DERIVATIVE CONTRACTS ON CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table provides the location in the condensed consolidated statements of income (loss) and amount of recognized gains or losses related to our derivative instruments: Three Months Ended September 30, 2022 2021 (In millions) Net revenues Other income (expense), net Net revenues Other income (expense), net Total amounts presented in the condensed consolidated statements of income (loss) in which the effects of cash flow hedges and net investment hedges are recorded $ 6,846 $ 460 $ 6,182 $ 122 Gains (losses) on derivatives in cash flow hedging relationship: Amount of gains (losses) on foreign currency exchange contracts reclassified from AOCI 156 — ( 44 ) — Gains on derivatives in net investment hedging relationship: Amount of gains on foreign currency exchange contracts excluded from the assessment of effectiveness — 27 — — Gains (losses) on derivatives not designated as hedging instruments: Amount of gains on foreign currency exchange contracts — 52 — 111 Amount of losses on equity derivative contracts (1) — ( 174 ) — — Total gains (losses) $ 156 $ ( 95 ) $ ( 44 ) $ 111 (1) During the three months ended September 30, 2022, equity derivative contracts were entered into and matured which related to the sale of marketable equity securities related to a strategic investment. Nine Months Ended September 30, 2022 2021 (In millions) Net revenues Other income (expense), net Net revenues Other income (expense), net Total amounts presented in the condensed consolidated statements of income (loss) in which the effects of cash flow hedges and net investment hedges are recorded $ 20,135 $ ( 337 ) $ 18,453 $ 181 Gains (losses) on derivatives in cash flow hedging relationship: Amount of gains (losses) on foreign exchange contracts reclassified from AOCI 310 — ( 192 ) — Gains on derivatives in net investment hedging relationship: Amount of gains on foreign exchange contracts excluded from the assessment of effectiveness — 53 — — Gains (losses) on derivatives not designated as hedging instruments: Amount of gains on foreign exchange contracts — 160 — 109 Amount of losses on equity derivative contracts (1) — ( 174 ) — — Total gains (losses) $ 310 $ 39 $ ( 192 ) $ 109 (1) During the nine months ended September 30, 2022, equity derivative contracts were entered into and matured which related to the sale of marketable equity securities related to a strategic investment. The cash flows associated with the equity derivative contracts were classified in cash flows from investing activities on our condensed consolidated statements of cash flows. 33 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 (loss): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Unrealized gains on foreign exchange contracts designated as cash flow hedges $ 294 $ 160 $ 658 $ 242 Unrealized gains on foreign exchange contracts designated as net investment hedges 97 — 253 — Total unrealized gains recognized from derivative contracts designated as hedging instruments in the condensed consolidated statements of comprehensive income (loss) $ 391 $ 160 $ 911 $ 242 NOTIONAL AMOUNTS OF DERIVATIVE CONTRACTS Derivative transactions are measured in terms of the notional amount; however, this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the underlying basis on which the value of foreign currency exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives: September 30, 2022 December 31, 2021 (In millions) Foreign exchange contracts designated as hedging instruments $ 8,341 $ 5,349 Foreign exchange contracts not designated as hedging instruments 10,249 20,414 Total $ 18,590 $ 25,763 NOTE 11— LOANS AND INTEREST RECEIVABLE CONSUMER RECEIVABLES We offer revolving and installment credit products as a funding option for consumers in certain checkout transactions on our payments platform. 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 in their PayPal wallet. Additionally, we offer installment credit products at the time of checkout in various markets, 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. Beginning in June 2022, we purchase receivables related to long-term installment loans extended to U.S. consumers by an independent chartered financial institution and are responsible for servicing functions related to that portfolio. During the nine months ended September 30, 2022, we purchased approximately $ 106 million in credit receivables. As of September 30, 2022 and December 31, 2021, the outstanding balance of consumer receivables, which consisted of revolving and installment loans and interest receivable, was $ 4.4 billion and $ 3.8 billion, respectively, net of the participation interest sold to the independent chartered financial institution of $ 5 million and nil , 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 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 data, including the consumer’s prior repayment history with our credit products where available. We use delinquency status and trends to assist in making (or, for long-term installment loans in the U.S., to assist the independent chartered financial institution 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. 34 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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, 2022 (In millions, except percentages) Installment Loans Amortized Cost Basis Revolving Loans Amortized Cost Basis 2022 2021 2020 2019 2018 Total Percent Current $ 1,567 $ 2,543 $ 169 $ — $ — $ — $ 4,279 96.3 % 30 - 59 Days 24 23 2 — — — 49 1.1 % 60 - 89 Days 17 19 2 — — — 38 0.8 % 90 - 179 Days 33 40 5 — — — 78 1.8 % Total (1) $ 1,641 $ 2,625 $ 178 $ — $ — $ — $ 4,444 100 % (1) Excludes receivables from other consumer credit products of $ 30 million at September 30, 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 % Total (1) $ 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 nine months ended September 30, 2022 and 2021: September 30, 2022 September 30, 2021 Consumer Loans Receivable Interest Receivable Total Allowance (1) Consumer Loans Receivable Interest Receivable Total Allowance (1) (In millions) Beginning balance $ 243 $ 43 $ 286 $ 299 $ 53 $ 352 Provisions 198 9 207 ( 52 ) — ( 52 ) Charge-offs ( 149 ) ( 22 ) ( 171 ) ( 78 ) ( 13 ) ( 91 ) Recoveries 14 — 14 25 — 25 Other (2) ( 41 ) ( 6 ) ( 47 ) — — — Ending balance $ 265 $ 24 $ 289 $ 194 $ 40 $ 234 (1) Excludes allowances from other consumer credit products of $ 2 million and $ 3 million at September 30, 2022 and 2021, respectively. (2) Includes amounts related to foreign currency remeasurement. The provision for the nine months ended September 30, 2022 was primarily attributable to originations in the consumer receivable portfolio. Qualitative adjustments were made to account for limitations in our current expected credit loss models due to uncertainty with respect to macroeconomic conditions and the financial health of our borrowers. 35 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The increase in charge-offs for the nine months ended September 30, 2022 compared to the same period in the prior year was due to the expansion of our short-term installment products. The provision for current expected credit losses relating to our consumer receivable portfolio is recognized in transaction and credit losses on our condensed consolidated statements of income (loss). The provision for interest receivable for interest earned on our consumer receivable portfolio is recognized in revenues from other value added services as a reduction to revenue. Loans receivable continue to accrue interest until they are charged off. We charge off consumer receivable balances in the month in which a customer’s balance becomes 180 days past the billing date or contractual repayment date. Bankrupt accounts are charged off within 60 days after receipt of notification of bankruptcy. Charge-offs are recorded as a reduction to our allowance for loans and interest receivable and subsequent recoveries, if any, are recorded as an increase to the allowance for loans and interest receivable. MERCHANT RECEIVABLES 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 our merchant finance offerings. We purchase receivables related to credit extended to U.S. merchants by WebBank and are responsible for servicing functions related to that portfolio. During the nine months ended September 30, 2022 and 2021, we purchased approximately $ 2.3 billion and $ 1.3 billion in credit receivables, respectively. As of September 30, 2022 and December 31, 2021, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $ 2.0 billion and $ 1.4 billion, respectively, net of the participation interest sold to WebBank of $ 91 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. Loans and advances are repaid through a fixed percentage of the merchant’s future payment volume that PayPal processes. Through our PPBL product, we provide merchants access to short-term business financing for a fixed fee based on an evaluation of the applying business as well as the business owner. PPBL repayments are collected through periodic payments until the balance has been satisfied. 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. 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. We calculate the repayment rate of the merchant’s future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For PPBL, we receive fixed periodic payments over the contractual term of the loan, which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period, as well as the credit quality of our merchant loans and advances that we extend or purchase, so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a loan or advance, we use, among other indicators, risk models developed internally which utilize information obtained from multiple internal and external data sources to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount and the related interest or fee. 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 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. 36 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Merchant receivables delinquency and allowance The following tables present the delinquency status of 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 expected repayment date or contractual repayment date, as applicable. September 30, 2022 (In millions, except percentages) 2022 2021 2020 2019 2018 Total Percent Current $ 1,691 $ 57 $ 70 $ 52 $ 3 $ 1,873 93.4 % 30 - 59 Days 35 10 5 4 — 54 2.7 % 60 - 89 Days 16 7 3 3 — 29 1.4 % 90 - 179 Days 21 13 4 4 — 42 2.1 % 180+ Days — 2 2 4 — 8 0.4 % Total $ 1,763 $ 89 $ 84 $ 67 $ 3 $ 2,006 100 % December 31, 2021 (In millions, except percentages) 2021 2020 2019 2018 2017 Total Percent Current $ 1,100 $ 129 $ 95 $ 3 $ — $ 1,327 91.8 % 30 - 59 Days 24 12 12 1 — 49 3.4 % 60 - 89 Days 10 8 7 — — 25 1.7 % 90 - 179 Days 10 11 11 1 — 33 2.3 % 180+ Days — 4 7 1 — 12 0.8 % Total (1) $ 1,144 $ 164 $ 132 $ 6 $ — $ 1,446 100 % (1) Balances include the impact of modification programs offered by the Company as a part of our novel coronavirus (“COVID-19”) pandemic 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 nine months ended September 30, 2022 and 2021: September 30, 2022 September 30, 2021 Merchant Loans and Advances Interest and Fees Receivable Total Allowance Merchant Loans and Advances Interest and Fees Receivable Total Allowance (In millions) Beginning balance $ 192 $ 9 $ 201 $ 440 $ 43 $ 483 Provisions 31 9 40 ( 87 ) ( 19 ) ( 106 ) Charge-offs ( 75 ) ( 6 ) ( 81 ) ( 145 ) ( 11 ) ( 156 ) Recoveries 27 — 27 31 — 31 Ending balance $ 175 $ 12 $ 187 $ 239 $ 13 $ 252 The provision for the nine months ended September 30, 2022 was primarily attributable to originations in the merchant portfolio. 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 nine months ended September 30, 2022 compared to the same period in the prior year was due to the charge-off of accounts that experienced financial difficulties as a result of the COVID-19 pandemic in the prior period and improved credit quality of our merchant loan portfolio due to modifications in the acceptable risk parameters, which included stricter eligibility requirements. 37 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) In the third quarter of 2022, our expected credit loss models for the merchant receivables were updated. The expected credit loss models utilize certain macroeconomic factors such as forecasted trends in unemployment and retail sales, and no longer consider benchmark credit card charge-off rates. These changes did not have a material impact on our provision recorded in the period. 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. We charge off the receivables outstanding under our PPBL product when the repayments are 180 days past the contractual repayment date. We charge off the receivables outstanding under our PPWC product when the repayments are 180 days past our expectation of repayments and the merchant has not made a payment in the last 60 days, or when the repayments are 360 days past due regardless of whether the merchant has made a payment in the last 60 days. 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 in accrued expenses and other current liabilities on our condensed consolidated balance sheets. Charge-offs are recorded as a reduction to our allowance for loans and interest receivable and subsequent recoveries, if any, are recorded as an increase to the allowance for loans and interest receivable. Troubled debt restructurings In certain 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 would be unable to collect all amounts due. These modifications are intended to provide merchants with financial relief, and help enable us to mitigate losses. These modifications include an increase in term by approximately 1 to 5.5 years while moving the delinquency status to current. The fee on certain of these loans or advances remains unchanged over the extended term. 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 (loss) in the nine months ended September 30, 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 may include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses. During the three and nine months ended September 30, 2022, merchant loans, advances, and interest and fees receivables which have been modified as TDRs were de minimis. The following table shows merchant loans, advances and interest and fees receivables which were 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 (in months) 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 Number of Accounts (in thousands) Outstanding Balances (1) (in millions) Weighted Average Payment Term Extensions (in months) Loans and interest receivable 3 $ 43 36 (1) Balances are as of modification date. 38 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) A merchant is considered in payment default after a modification when the merchant’s payment becomes 60 days past their expected or contractual repayment date. For loans or advances 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, 2022 and 2021, the amount of merchant loans, advances, and interest and fees receivables classified as TDRs that have subsequently defaulted on payments was de minimis. NOTE 12— DEBT FIXED RATE NOTES In May 2022, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $ 3.0 billion. Interest on these notes is payable on June 1 and December 1 of each year, beginning on December 1, 2022. We may redeem the notes in whole, at any time, or in part, from time to time, prior to maturity, at the redemption price. Upon the occurrence of both a change of control of the Company and a downgrade of the notes below an investment grade rating, we will be required to offer to repurchase each series of notes at a price equal to 101 % of the then outstanding principal amount, plus accrued and unpaid interest. The notes are subject to covenants including limitations on our ability to create liens on our assets, enter into sale and leaseback transactions, and merge or consolidate with another entity, in each case subject to certain exceptions, limitations, and qualifications. Proceeds from the issuance of these notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses or assets or strategic investments. In May 2020 and September 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $ 4.0 billion and $ 5.0 billion, respectively. The notes issued from the May 2022, May 2020, and September 2019 debt issuances are senior unsecured obligations and are collectively referred to as the “Notes.” In May 2022, we repurchased certain notes under the September 2019 and May 2020 debt issuances prior to maturity through tender offers. In addition, in June 2022, we redeemed the outstanding balance of the notes maturing in September 2022 through a make-whole redemption. We repurchased and redeemed $ 1.6 billion of outstanding notes, as described above, which resulted in de minimis debt extinguishment net gains that were recorded as interest expense within other income (expense), net on our condensed consolidated statement of income (loss). 39 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) As of September 30, 2022 and December 31, 2021, we had an outstanding aggregate principal amount of $ 10.4 billion and $ 9.0 billion, respectively, related to the Notes. The following table summarizes the Notes: Maturities Effective Interest Rate September 30, 2022 December 31, 2021 (in millions) September 2019 debt issuance of $ 5.0 billion: Fixed-rate 2.200 % notes 9/26/2022 2.39 % $ — $ 1,000 Fixed-rate 2.400 % notes 10/1/2024 2.52 % 1,250 1,250 Fixed-rate 2.650 % notes 10/1/2026 2.78 % 1,250 1,250 Fixed-rate 2.850 % notes 10/1/2029 2.96 % 1,500 1,500 May 2020 debt issuance of $ 4.0 billion: Fixed-rate 1.350 % notes 6/1/2023 1.55 % 418 1,000 Fixed-rate 1.650 % notes 6/1/2025 1.78 % 1,000 1,000 Fixed-rate 2.300 % notes 6/1/2030 2.39 % 1,000 1,000 Fixed-rate 3.250 % notes 6/1/2050 3.33 % 1,000 1,000 May 2022 debt issuance of $ 3.0 billion: Fixed-rate 3.900 % notes 6/1/2027 4.06 % 500 — Fixed-rate 4.400 % notes 6/1/2032 4.53 % 1,000 — Fixed-rate 5.050 % notes 6/1/2052 5.14 % 1,000 — Fixed-rate 5.250 % notes 6/1/2062 5.34 % 500 — Total term debt $ 10,418 $ 9,000 Unamortized premium (discount) and issuance costs, net ( 76 ) ( 50 ) Less: current portion of long-term debt (1) ( 418 ) ( 999 ) Total carrying amount of long-term debt $ 9,924 $ 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, debt issuance costs, and debt extinguishment net gains, was $ 83 million and $ 206 million for the three and nine months ended September 30, 2022, respectively. 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. CREDIT FACILITIES 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. In September 2022, the Paidy Credit Agreement was modified to increase the borrowing capacity by ¥ 30.0 billion for a total borrowing capacity of ¥ 90.0 billion (approximately $ 623 million as of September 30, 2022.) Borrowings under the Paidy Credit Agreement are for use by Paidy for working capital, capital expenditures, and other permitted purposes. 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 % to 0.60 %. 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. 40 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) In the nine months ended September 30, 2022, ¥ 45.8 billion (approximately $ 317 million) was drawn down under the Paidy Credit Agreement, which was recorded in long-term debt on our condensed consolidated balance sheet. Accordingly, at September 30, 2022, ¥ 44.2 billion (approximately $ 306 million) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing. During the three and nine months ended September 30, 2022, the total interest expense and fees we recorded related to the Paidy Credit Agreement were de minimis. 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 nine months ended September 30, 2022. FUTURE PRINCIPAL PAYMENTS As of September 30, 2022, the future principal payments associated with our term debt were as follows (in millions): Remaining 2022 $ — 2023 418 2024 1,250 2025 1,000 2026 1,250 Thereafter 6,500 Total $ 10,418 Other than as provided above, there were no significant changes to the information disclosed in our 2021 Form 10-K. 41 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 13— COMMITMENTS AND CONTINGENCIES COMMITMENTS As of both September 30, 2022 and December 31, 2021, approximately $ 4.1 billion of unused credit was available to PayPal Credit account holders in the U.K. 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. LITIGATION AND REGULATORY MATTERS Overview We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages or penalties or may require us to change or adopt certain business practices. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements at that time. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. 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, 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. Determining legal reserves or possible losses from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. We may be exposed to losses in excess of the amount recorded, and such amounts could be material. If any of our estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our business, financial position, results of operations, or cash flows. Regulatory proceedings We are required to comply with U.S. economic and trade sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009 and 2013, prior to the implementation of our real-time transaction scanning program. Subsequently, we have self-reported additional transactions that were inadvertently processed but subsequently identified as possible violations, and we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business. 42 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) PayPal Australia Pty Limited (“PPAU”) self-reported a potential violation to the Australian Transaction Reports and Analysis Centre (“AUSTRAC”) on May 22, 2019. This self-reported matter relates to PPAU incorrectly filing required international funds transfer instructions (“IFTIs”) over a period of time under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (“AML/CTF Act”). On September 23, 2019, PPAU received a notice from AUSTRAC requiring that PPAU appoint an external auditor (a partner of a firm which is not our independent auditor) to review certain aspects of PPAU’s compliance with its obligations under the AML/CTF Act. The external auditor was appointed on November 1, 2019. As required under the terms of AUSTRAC’s notice, as amended, PPAU issued to AUSTRAC the external auditor’s interim reports on December 31, 2019, March 13, 2020, May 6, 2020, and July 7, 2020 and a final report on August 31, 2020. AUSTRAC has notified PPAU that its enforcement team is investigating the matters reported upon by the external auditor in its August 31, 2020 final report. AUSTRAC continues to engage with PPAU regarding the transaction categories it considers reportable under the AML/CTF Act as IFTIs. 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. We cannot estimate the potential impact, if any, on our business or financial statements at this time. In the event an adverse outcome arises from any associated enforcement proceeding, or other further matter initiated by AUSTRAC, including in relation to AUSTRAC’s determination of reportable IFTIs, then this could result in enforceable undertakings, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business. We have received Civil Investigative Demands (“CIDs”) from the Consumer Financial Protection Bureau (“CFPB”) related to Venmo’s unauthorized funds transfers and collections processes, and related matters. The CIDs request the production of documents and answers to written questions. We are cooperating with the CFPB in connection with these CIDs. We have received a CID from the CFPB related to the marketing and use of PayPal Credit in connection with certain merchants that provide educational services (the “CFPB PayPal Credit Matter”). The CID requests the production of documents, written reports, and answers to written questions. We are cooperating with the CFPB in connection with this CID. 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 PayPal-branded card programs (the “SEC Debit Card Program Matter”). We are cooperating with the SEC Enforcement Division in connection with this investigation. 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. 43 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Legal proceedings On August 20, 2021, a putative securities class action captioned Kang v. PayPal Holdings, Inc., et al. , Case No. 21-cv-06468, was filed in the U.S. District Court for the Northern District of California (the “Kang Securities Action”). The Kang 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. The Kang 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 former Chief Financial Officer. The complaint alleges that certain public statements made by the Company during the Class Period were rendered materially false and misleading (which, allegedly, caused the Company’s stock to trade at artificially inflated prices) by the defendants’ failure to disclose that, among other things, PayPal’s business practices with respect to PayPal Credit and regarding interchange rates paid to its bank partner related to its bank-issued co-branded debit cards were non-compliant with applicable laws and/or regulations. The Kang 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 former 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. On August 8, 2022, the court granted Defendants’ motion to dismiss the amended complaint in its entirety, and granted Lead Plaintiff’s request for leave to file a further amended complaint. On September 16, 2022, Lead Plaintiff filed a Second Amended Complaint (the “SAC”), which asserts the same claims against the same Defendants based on the same alleged conduct as the prior complaint. Defendants’ motion to dismiss the SAC is due on November 3, 2022, and briefing is ongoing. On December 16, 2021 and January 19, 2022, two related putative shareholder derivative actions captioned Pang v. Daniel Schulman, et al. , Case No. 21-cv-09720, and Lalor v. Daniel Schulman, et al. , Case No. 22-cv-00370, respectively, were filed in the U.S. District Court for the Northern District of California (the “California Derivative Actions”), purportedly on behalf of the Company. On August 2, 2022, a related putative shareholder derivative action captioned Jefferson v. Daniel Schulman, et al. , No. 2022-0684, was filed in the Court of Chancery for the State of Delaware (the “Delaware Derivative Action,” and collectively with the California Derivative Actions, the “Derivative Actions”), purportedly on behalf of the Company. The Derivative Actions are based on the same alleged facts and circumstances as the Kang Securities Action, and name certain of our officers, including our Chief Executive Officer and former 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 two California Derivative Actions and staying them until all motions to dismiss in the Kang Securities Action are resolved. On October 4, 2022, a putative securities class action captioned Defined Benefit Plan of the Mid-Jersey Trucking Industry and Teamsters Local 701 Pension and Annuity Fund v. PayPal Holdings, Inc., et al. , Case No. 22-cv-5864, was filed in the U.S. District Court for the District of New Jersey (the “MJT Securities Action”). The MJT Securities Action asserts claims relating to our public statements with respect to net new active accounts (“NNA”) results and guidance, and the detection of illegitimately created accounts. The MJT Securities Action purports to be brought on behalf of purchasers of the Company’s stock between February 3, 2021 and February 1, 2022 (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 former Chief Financial Officer. The complaint alleges that certain public statements made by the Company during the Class Period were rendered materially false and misleading (which, allegedly, caused the Company’s stock to trade at artificially inflated prices) by the defendants’ failure to disclose that, among other things, the Company’s incentive campaigns were susceptible to fraud and led to the creation of illegitimate accounts, which allegedly affected the Company’s NNA results and guidance. The MJT Securities Action seeks unspecified compensatory damages on behalf of the putative class members. Motions for investors seeking appointment as lead plaintiff are due on December 5, 2022. 44 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) On November 2, 2022, a putative shareholder derivative action captioned Shah v. Daniel Schulman, et al., Case No. 22-cv-1445, was filed in the U.S. District Court for the District of Delaware, (the “Shah Action”), purportedly on behalf of the Company. The Shah Action is based on the same alleged facts and circumstances as the MJT Securities Action, and names certain of our officers, including our Chief Executive Officer and former Chief Financial Officer, and members of our Board of Directors, as defendants. The Shah Action alleges claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, waste of corporate assets, and violations of the Securities Exchange Act of 1934, and seeks to recover damages on behalf of the Company. General matters Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions, particularly in cases where we are introducing new products or services in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time-consuming and costly to defend and resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements on unfavorable terms or make substantial payments to settle claims or to satisfy damages awarded by courts. From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules, or policies, that our practices, prices, rules, policies, or customer/user agreements violate applicable law; or that we have acted unfairly or not acted in conformity with such prices, rules, policies, or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and legal review and 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 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. INDEMNIFICATION PROVISIONS Our agreements with eBay governing our separation from eBay provide for specific indemnity and liability obligations for both eBay and us. Disputes between eBay and us have arisen and others may arise in the future, and an adverse outcome in such matters could materially and adversely impact our business, results of operations, and financial condition. In addition, the indemnity rights we have against eBay under the agreements may not be sufficient to protect us, and our indemnity obligations to eBay may be significant. 45 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) In the ordinary course of business, we include indemnification provisions in certain of our agreements with parties with whom we have commercial relationships. 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 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. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular situation. PayPal has participated in the U.S. Government’s Paycheck Protection Program administered by the U.S. Small Business Administration. Loans made under this program are funded by an independent chartered financial institution that we partner with. 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, 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. PROTECTION PROGRAMS We provide merchants and consumers with protection programs for certain transactions completed on our payments platform. These programs are intended to protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our purchase protection program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. 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 an unauthorized transfer of a customer’s cryptocurrency, the 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, 2022 and December 31, 2021, the allowance for transaction losses was $ 71 million and $ 121 million, respectively. The allowance for negative customer balances was $ 217 million and $ 234 million at September 30, 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 and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in millions) Beginning balance $ 378 $ 366 $ 355 $ 414 Provision 254 293 956 847 Realized losses ( 394 ) ( 313 ) ( 1,157 ) ( 964 ) Recoveries 50 41 134 90 Ending balance $ 288 $ 387 $ 288 $ 387 46 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 14— STOCK REPURCHASE PROGRAMS During the nine months ended September 30, 2022, we repurchased approximately 29 million shares of our common stock for approximately $ 3.2 billion at an average cost of $ 110.75 . These shares were purchased in the open market under our stock repurchase program authorized in July 2018. In June 2022, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $ 15.0 billion of our common stock, with no expiration from the date of authorization. As of September 30, 2022, a total of approximately $ 1.9 billion and $ 15.0 billion remained available for future repurchases of our common stock under our July 2018 and June 2022 stock repurchase programs, respectively. NOTE 15— STOCK-BASED PLANS STOCK-BASED COMPENSATION EXPENSE 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, 2022 and 2021 was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In millions) Customer support and operations $ 56 $ 56 $ 196 $ 205 Sales and marketing 27 38 114 134 Technology and development 115 117 380 403 General and administrative 41 100 317 348 Total stock-based compensation expense $ 239 $ 311 $ 1,007 $ 1,090 Capitalized as part of internal use software and website development costs $ 12 $ 17 $ 40 $ 51 NOTE 16— INCOME TAXES Our effective tax rate for the three and nine months ended September 30, 2022 was 16 % and 34 %, respectively. Our effective tax rate for the three and nine months ended September 30, 2021 was 7 % and 1 %, respectively. The difference between our effective tax rate and the U.S. federal statutory rate of 21% in the current periods was primarily the result of foreign income taxed at different rates, and for the nine months ended September 30, 2022, tax expense related to the intra-group transfer of intellectual property. The difference between our effective tax rate and the U.S. federal statutory rate of 21% for the three and nine months ended September 30, 2021 was primarily the result of foreign income taxed at different rates and discrete tax adjustments, including tax benefits related to stock-based compensation. NOTE 17— RESTRUCTURING AND OTHER CHARGES 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 reducing redundant operations and simplifying our organizational structure. The associated restructuring charges during the three and nine months ended September 30, 2022 were $ 23 million and $ 114 million, respectively. We primarily incurred employee severance and benefits costs, as well as associated consulting costs under the 2022 strategic reduction. The strategic actions and cash payments associated with this plan are expected to be substantially completed by the fourth quarter of 2022. 47 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table summarizes the restructuring reserve activity during the nine months ended September 30, 2022: Employee Severance and Benefits and Other Associated Costs (In millions) Accrued liability as of January 1, 2022 $ 5 Charges 114 Payments ( 78 ) Accrued liability as of September 30, 2022 $ 41 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. The associated restructuring charges during the three and nine months ended September 30, 2021 were nil and $ 27 million, respectively. We primarily incurred employee severance and benefits costs, as well as associated consulting costs under the 2020 strategic reduction, which was substantially completed in 2021. Additionally, we are continuing to review our facility needs due to our new and evolving work models. We incurred asset impairment charges of $ 29 million and $ 64 million in the three and nine months ended September 30, 2022, respectively, and nil and $ 26 million in the three and nine months ended September 30, 2021, respectively, due to exiting of certain leased properties which resulted in a reduction of ROU lease assets and related leasehold improvements. See “Note 6—Leases” for additional information. 48 Table of Contents