PayPal Holdings, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures . Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), our principal executive officer and our principal financial officer have concluded that as of December 31, 2022, the end of the period covered by this report, our disclosure controls and procedures were effective. Management’s report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in Internal Control - Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2022. The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Form 10-K. Changes in internal controls over financial reporting. There were no changes in our internal controls over financial reporting as defined in Exchange Act Rule 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022. 56 Table of Contents ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022. 57 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements Page Number Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 59 Consolidated Balance Sheets 61 Consolidated Statements of Income (Loss) 62 Consolidated Statements of Comprehensive Income (Loss) 63 Consolidated Statements of Stockholders’ Equity 64 Consolidated Statements of Cash Flows 65 Notes to Consolidated Financial Statements 67 2. Financial Statement Schedule Schedule II—Valuation and Qualifying Accounts 121 All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. 3. Exhibits Required by Item 601 of Regulation S-K 122 The information required by this Item is set forth in the Index of Exhibits that precedes the signature page of this Annual Report. 58 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of PayPal Holdings, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of PayPal Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income (loss), of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2022 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Changes in Accounting Principles As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses on financial instruments in 2020. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 59 Table of Contents Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loans Receivable As described in Notes 1 and 11 to the consolidated financial statements, as of December 31, 2022, the Company recorded total loans and interest receivable of $7,431 million, net of an allowance of $598 million. The allowance for loans receivable is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio. The loss models incorporate various portfolio attributes, as well as macroeconomic factors such as forecasted trends in unemployment, retail e-commerce sales, and household disposable income. The forecasted macroeconomic factors are sourced externally, using a single scenario to reflect the economic conditions applicable to a particular period. Management also includes qualitative adjustments that incorporate incremental information not captured in the expected credit loss models. The principal considerations for our determination that performing procedures relating to the allowance for loans receivable is a critical audit matter are (i) the high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence relating to certain models which apply macroeconomic forecasts to estimate expected credit losses; and (ii) the audit effort involved in the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowance for loans receivable, including controls over certain models which apply macroeconomic forecasts to estimate expected credit losses. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for estimating the allowance for loans receivable. Testing management’s process included (i) evaluating the appropriateness of the methodology and certain models; (ii) testing the completeness and accuracy of certain data used in the estimate; and (iii) evaluating the reasonableness of management’s application of macroeconomic forecasts to estimate expected credit losses. /s/ PricewaterhouseCoopers LLP San Jose, California February 9, 2023 We have served as the Company’s auditor since 2000. 60 Table of Contents PayPal Holdings, Inc. CONSOLIDATED BALANCE SHEETS As of December 31, 2022 2021 (In millions, except par value) ASSETS Current assets: Cash and cash equivalents $ 7,776 $ 5,197 Short-term investments 3,092 4,303 Accounts receivable, net 963 800 Loans and interest receivable, net of allowances of $ 598 and $ 491 as of December 31, 2022 and 2021, respectively 7,431 4,846 Funds receivable and customer accounts 36,357 36,141 Prepaid expenses and other current assets 1,898 1,287 Total current assets 57,517 52,574 Long-term investments 5,018 6,797 Property and equipment, net 1,730 1,909 Goodwill 11,209 11,454 Intangible assets, net 788 1,332 Other assets 2,455 1,737 Total assets $ 78,717 $ 75,803 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 126 $ 197 Funds payable and amounts due to customers 40,107 38,841 Accrued expenses and other current liabilities 4,055 3,755 Income taxes payable 813 236 Total current liabilities 45,101 43,029 Deferred tax liability and other long-term liabilities 2,925 2,998 Long-term debt 10,417 8,049 Total liabilities 58,443 54,076 Commitments and contingencies (Note 13) Equity: Common stock, $ 0.0001 par value; 4,000 shares authorized; 1,136 and 1,168 shares outstanding as of December 31, 2022 and 2021, respectively — — Preferred stock, $ 0.0001 par value; 100 shares authorized, unissued — — Treasury stock at cost, 173 and 132 shares as of December 31, 2022 and 2021, respectively ( 16,079 ) ( 11,880 ) Additional paid-in-capital 18,327 17,208 Retained earnings 18,954 16,535 Accumulated other comprehensive income (loss) ( 928 ) ( 136 ) Total equity 20,274 21,727 Total liabilities and equity $ 78,717 $ 75,803 The accompanying notes are an integral part of these consolidated financial statements. 61 Table of Contents PayPal Holdings, Inc. CONSOLIDATED STATEMENTS OF INCOME (LOSS) Year Ended December 31, 2022 2021 2020 (In millions, except for per share amounts) Net revenues $ 27,518 $ 25,371 $ 21,454 Operating expenses: Transaction expense 12,173 10,315 7,934 Transaction and credit losses 1,572 1,060 1,741 Customer support and operations 2,120 2,075 1,778 Sales and marketing 2,257 2,445 1,861 Technology and development 3,253 3,038 2,642 General and administrative 2,099 2,114 2,070 Restructuring and other charges 207 62 139 Total operating expenses 23,681 21,109 18,165 Operating income 3,837 4,262 3,289 Other income (expense), net ( 471 ) ( 163 ) 1,776 Income before income taxes 3,366 4,099 5,065 Income tax expense (benefit) 947 ( 70 ) 863 Net income (loss) $ 2,419 $ 4,169 $ 4,202 Net income (loss) per share: Basic $ 2.10 $ 3.55 $ 3.58 Diluted $ 2.09 $ 3.52 $ 3.54 Weighted average shares: Basic 1,154 1,174 1,173 Diluted 1,158 1,186 1,187 The accompanying notes are an integral part of these consolidated financial statements. 62 Table of Contents PayPal Holdings, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended December 31, 2022 2021 2020 (In millions) Net income (loss) $ 2,419 $ 4,169 $ 4,202 Other comprehensive income (loss), net of reclassification adjustments: Foreign currency translation adjustments (“CTA”) ( 305 ) ( 72 ) ( 48 ) Net investment hedges CTA (losses) gains, net ( 25 ) — 55 Tax benefit on net investment hedges CTA losses, net 6 — — Unrealized (losses) gains on cash flow hedges, net ( 88 ) 522 ( 329 ) Tax benefit (expense) on unrealized (losses) gains on cash flow hedges, net 4 ( 26 ) 4 Unrealized (losses) gains on investments, net ( 504 ) ( 98 ) 9 Tax benefit (expense) on unrealized (losses) gains on investments, net 120 22 ( 2 ) Other comprehensive income (loss), net of tax ( 792 ) 348 ( 311 ) Comprehensive income (loss) $ 1,627 $ 4,517 $ 3,891 The accompanying notes are an integral part of these consolidated financial statements. 63 Table of Contents PayPal Holdings, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Noncontrolling Interest Total Equity (In millions) Balances at December 31, 2019 1,173 $ ( 6,872 ) $ 15,588 $ ( 173 ) $ 8,342 $ 44 $ 16,929 Adoption of current expected credit loss standard — — — — ( 178 ) — ( 178 ) Net income — — — — 4,202 — 4,202 Foreign CTA — — — ( 48 ) — — ( 48 ) Net investment hedge CTA gain — — — 55 — — 55 Unrealized losses on cash flow hedges, net — — — ( 329 ) — — ( 329 ) Tax benefit on unrealized losses on cash flow hedges, net — — — 4 — — 4 Unrealized gains on investments, net — — — 9 — — 9 Tax expense on unrealized gains on investments, net — — — ( 2 ) — — ( 2 ) Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 11 — ( 365 ) — — — ( 365 ) Common stock repurchased ( 12 ) ( 1,635 ) — — — — ( 1,635 ) Stock-based compensation — — 1,421 — — — 1,421 Balances at December 31, 2020 1,172 $ ( 8,507 ) $ 16,644 $ ( 484 ) $ 12,366 $ 44 $ 20,063 Net income — — — — 4,169 — 4,169 Foreign CTA — — — ( 72 ) — — ( 72 ) Unrealized gains on cash flow hedges, net — — — 522 — — 522 Tax expense on unrealized gains on cash flow hedges, net — — — ( 26 ) — — ( 26 ) Unrealized losses on investments, net — — — ( 98 ) — — ( 98 ) Tax benefit on unrealized losses on investments, net — — — 22 — — 22 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 11 — ( 881 ) — — — ( 881 ) Common stock repurchased ( 15 ) ( 3,373 ) — — — — ( 3,373 ) Stock-based compensation — — 1,445 — — — 1,445 Change in noncontrolling interest — — — — — ( 44 ) ( 44 ) Balances at December 31, 2021 1,168 $ ( 11,880 ) $ 17,208 $ ( 136 ) $ 16,535 $ — $ 21,727 Net income — — — — 2,419 — 2,419 Foreign CTA — — — ( 305 ) — — ( 305 ) Net investment hedge CTA losses, net — — — ( 25 ) — — ( 25 ) Tax benefit on net investment hedges CTA losses, net — — — 6 — — 6 Unrealized losses on cash flow hedges, net — — — ( 88 ) — — ( 88 ) Tax benefit on unrealized losses on cash flow hedges, net — — — 4 — — 4 Unrealized losses on investments, net — — — ( 504 ) — — ( 504 ) Tax benefit on unrealized losses on investments, net — — — 120 — — 120 Common stock and stock-based awards issued, net of shares withheld for employee taxes 9 — ( 195 ) — — — ( 195 ) Common stock repurchased ( 41 ) ( 4,199 ) — — — — ( 4,199 ) Stock-based compensation — — 1,313 — — — 1,313 Other — — 1 — — — 1 Balances at December 31, 2022 1,136 $ ( 16,079 ) $ 18,327 $ ( 928 ) $ 18,954 $ — $ 20,274 The accompanying notes are an integral part of these consolidated financial statements. 64 Table of Contents PayPal Holdings, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 2021 2020 (In millions) Cash flows from operating activities: Net income (loss) $ 2,419 $ 4,169 $ 4,202 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Transaction and credit losses 1,572 1,060 1,741 Depreciation and amortization 1,317 1,265 1,189 Stock-based compensation 1,261 1,376 1,376 Deferred income taxes ( 811 ) ( 482 ) 165 Net (gains) losses on strategic investments 304 ( 46 ) ( 1,914 ) Other 205 100 47 Changes in assets and liabilities: Accounts receivable ( 163 ) ( 222 ) ( 100 ) Transaction loss allowance for cash losses, net ( 1,230 ) ( 1,178 ) ( 1,120 ) Other current assets and non-current assets 118 ( 486 ) ( 171 ) Accounts payable ( 35 ) ( 31 ) ( 4 ) Income taxes payable 373 73 ( 230 ) Other current liabilities and non-current liabilities 483 199 1,038 Net cash provided by operating activities 5,813 5,797 6,219 Cash flows from investing activities: Purchases of property and equipment ( 706 ) ( 908 ) ( 866 ) Proceeds from sales of property and equipment 5 5 120 Purchases and originations of loans receivable ( 28,170 ) ( 13,420 ) ( 6,098 ) Principal repayment of loans receivable 24,903 11,826 6,392 Purchases of investments ( 20,219 ) ( 40,116 ) ( 41,513 ) Maturities and sales of investments 23,411 39,698 30,908 Acquisitions, net of cash and restricted cash acquired — ( 2,763 ) ( 3,609 ) Funds receivable ( 2,813 ) 193 ( 1,552 ) Collateral posted related to derivative instruments, net ( 19 ) 336 ( 327 ) Other investing activities 187 — — Net cash used in investing activities ( 3,421 ) ( 5,149 ) ( 16,545 ) Cash flows from financing activities: Proceeds from issuance of common stock 143 162 137 Purchases of treasury stock ( 4,199 ) ( 3,373 ) ( 1,635 ) Tax withholdings related to net share settlements of equity awards ( 336 ) ( 1,036 ) ( 521 ) Borrowings under financing arrangements 3,475 272 6,966 Repayments under financing arrangements ( 1,686 ) ( 361 ) ( 3,000 ) Funds payable and amounts due to customers 1,498 3,572 10,597 Collateral received related to derivative instruments, net ( 6 ) 207 ( 38 ) Other financing activities 1 — ( 52 ) Net cash (used in) provided by financing activities ( 1,110 ) ( 557 ) 12,454 Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 155 ) ( 102 ) 169 Net change in cash, cash equivalents, and restricted cash 1,127 ( 11 ) 2,297 Cash, cash equivalents, and restricted cash at beginning of period 18,029 18,040 15,743 Cash, cash equivalents, and restricted cash at end of period $ 19,156 $ 18,029 $ 18,040 65 Table of Contents PayPal Holdings, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued) Year Ended December 31, 2022 2021 2020 (In millions) Supplemental cash flow disclosures: Cash paid for interest $ 280 $ 231 $ 190 Cash paid for income taxes, net $ 878 $ 474 $ 565 The table below reconciles cash, cash equivalents, and restricted cash as reported in the consolidated balance sheets to the total of the same amounts shown in the consolidated statements of cash flows: Cash and cash equivalents $ 7,776 $ 5,197 $ 4,794 Short-term and long-term investments 17 109 24 Funds receivable and customer accounts 11,363 12,723 13,222 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows $ 19,156 $ 18,029 $ 18,040 The accompanying notes are an integral part of these consolidated financial statements. 66 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, continue to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including 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 consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The noncontrolling interest reported in a prior period was a component of equity on our consolidated balance sheets and represented the equity interests not owned by PayPal, and was recorded for consolidated entities we controlled and of which we owned less than 100%. Noncontrolling interest was not presented separately on our consolidated statements of income (loss) as the amount was de minimis. Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our 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 consolidated statements of income (loss). Our investment balance is included in long-term investments on our 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 these VIEs were included in our 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 December 31, 2022. See “Note 12—Debt” for additional information. 67 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As of December 31, 2022 and December 31, 2021, the carrying value of our investments in nonconsolidated VIEs was $ 128 million and $ 74 million, respectively, and is included as non-marketable equity securities applying the equity method of accounting in long-term investments on our consolidated balance sheets. Our maximum exposure to loss related to our nonconsolidated VIEs, which represents funded commitments and any future funding commitments, was $ 232 million and $ 205 million as of December 31, 2022 and 2021, respectively. In the opinion of management, these consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements for all periods presented. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the year ended December 31, 2022. Reclassifications Beginning with the fourth quarter of 2022, we reclassified certain cash flows related to our collateral security arrangements for derivative instruments from cash flows from operating activities to cash flows from investing activities and cash flows from financing activities within the consolidated statements of cash flows. Prior period amounts have been reclassified to conform to the current period presentation. The current period presentation classifies all changes in collateral posted and collateral received related to derivative instruments on our consolidated statements of cash flows as cash flows from investing activities and cash flows from financing activities, respectively. We believe that the current period presentation provides a more meaningful representation of the nature of the cash flows and allows for greater transparency as the cash flows related to the derivatives impact operating cash flows upon settlement exclusive of the offsetting cash flows from collateral. The following tables present the effects of the changes on the presentation of these cash flows to the previously reported consolidated statements of cash flows: Year Ended December 31, 2021 (In millions) As Previously Reported (1) Adjustments Reclassified Net cash provided by (used in): Operating activities (2) $ 6,340 $ ( 543 ) $ 5,797 Investing activities (3) ( 5,485 ) 336 ( 5,149 ) Financing activities (4) ( 764 ) 207 ( 557 ) Effect of exchange rates on cash, cash equivalents, and restricted cash ( 102 ) — ( 102 ) Net decrease in cash, cash equivalents, and restricted cash $ ( 11 ) $ — $ ( 11 ) (1) As reported in our 2021 Form 10-K filed with the SEC on February 3, 2022. (2) Financial statement lines impacted in operating activities were “Other current assets and non-current assets” and “Other current liabilities and non-current liabilities,” which decreased by $ 336 million and $ 207 million, respectively, to arrive at the reclassified amounts. (3) Financial statement line impacted in investing activities was “Collateral posted related to derivative instruments, net.” (4) Financial statement line impacted in financing activities was “Collateral received related to derivative instruments, net.” 68 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Year Ended December 31, 2020 (In millions) As Previously Reported (1) Adjustments Reclassified Net cash provided by (used in): Operating activities (2) $ 5,854 $ 365 $ 6,219 Investing activities (3) ( 16,218 ) ( 327 ) ( 16,545 ) Financing activities (4) 12,492 ( 38 ) 12,454 Effect of exchange rates on cash, cash equivalents, and restricted cash 169 — 169 Net increase in cash, cash equivalents, and restricted cash $ 2,297 $ — $ 2,297 (1) As reported in our 2021 Form 10-K filed with the SEC on February 3, 2022. (2) Financial statement lines impacted in operating activities were “other current assets and non-current assets” and “other current liabilities and non-current liabilities,” which increased by $ 327 million and $ 38 million, respectively, to arrive at the reclassified amounts. (3) Financial statement line impacted in investing activities was “Collateral posted related to derivative instruments, net.” (4) Financial statement line impacted in financing activities was “Collateral received related to derivative instruments, net.” Use of estimates The preparation of consolidated financial statements in conformity with United States (“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 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, the valuation of goodwill and intangible assets, and the valuation of strategic investments. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. Actual results could materially differ from these estimates. Cash and cash equivalents Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are comprised of primarily bank deposits, government and agency securities, and commercial paper. Investments Short-term investments include time deposits and available-for-sale debt securities with original maturities of greater than three months but less than one year when purchased or maturities of one year or less on the reporting date. Long-term investments include time deposits and available-for-sale debt securities with maturities exceeding one year on the reporting date, as well as our strategic investments. Our available-for-sale debt securities are reported at fair value using the specific identification method. Unrealized gains and losses are reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits. We elect to account for available-for-sale debt securities denominated in currencies other than the functional currency of our subsidiaries, underlying funds receivable and customer accounts, short-term investments, and long-term investments, under the fair value option as further discussed in “Note 9—Fair Value Measurement of Assets and Liabilities.” The changes in fair value related to initial measurement and subsequent changes in fair value are included in earnings as a component of other income (expense), net. 69 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Our strategic investments consist of marketable equity securities, which are publicly traded, and non-marketable equity securities, which are primarily investments in privately held companies. Marketable equity securities have readily determinable fair values with changes in fair value recorded in other income (expense), net. Non-marketable equity securities include investments that do not have a readily determinable fair value, as well as equity method investments. The investments that do not have readily determinable fair value are measured at cost minus impairment, if any, and are adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). Non-marketable equity securities also include our investments where we have the ability to exercise significant influence, but not control, over the investee and account for these securities using the equity method of accounting. 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 consolidated statements of income (loss). We assess whether an impairment loss on our non-marketable, measurement alternative investments has occurred based on qualitative factors such as the companies’ financial condition and business outlook, industry performance, regulatory, economic or technological environment, and other relevant events and factors affecting the company. We assess whether an other-than-temporary impairment loss on our equity method investments has occurred due to declines in fair value or other market conditions. When indicators of impairment exist, we estimate the fair value of our non-marketable equity securities using the market approach and/or the income approach. Estimating fair value requires judgment and use of estimates such as discount rates, forecasted cash flows, and market data of comparable companies, among others. If any impairment is identified for non-marketable equity securities or impairment is considered other-than-temporary for our equity method investments, we write down the investment to its fair value and record the corresponding charge through other income (expense), net in our consolidated statements of income (loss). Our available-for-sale debt securities in an unrealized loss position are written down to fair value through a charge to other income (expense), net in our consolidated statements of income (loss) if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis. For the remaining available-for-sale debt securities in an unrealized loss position, if we identify that the decline in fair value has resulted from credit losses, taking into consideration changes to the rating of the security by rating agencies, implied yields versus benchmark yields, and the extent to which fair value is less than amortized cost, among other factors, we estimate the present value of cash flows expected to be collected. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any portion of impairment not related to credit losses is recognized in other comprehensive income (loss). Loans and interest receivable, net Loans and interest receivable, net represents merchant receivables originated under our PayPal Working Capital (“PPWC”) product and PayPal Business Loan (“PPBL”) product and consumer loans originated under our PayPal Credit and installment credit products. PayPal Credit consists of revolving credit products. In the U.S., PPWC, PPBL, and consumer interest-bearing installment products are provided under a program agreement we have with an independent chartered financial institution (“partner institution”). The partner institution extends credit to merchants for the PPWC and PPBL products and to consumers for interest-bearing installment products and we purchase the related receivables originated by the partner institution. For our merchant finance products outside the U.S., we extend working capital advances and loans in Europe through our Luxembourg banking subsidiary, and working capital loans in Australia through an Australian subsidiary. In the U.S., we extend certain short-term, interest-free, installment loans to consumers through a U.S. subsidiary. For our international consumer credit products, we extend credit in Europe through our Luxembourg banking subsidiary, and in Australia and Japan, through local subsidiaries. As part of our arrangement with the partner institution in the U.S., we sell back a participation interest in the pool of receivables for the PPWC, PPBL, and consumer interest-bearing installment products. The partner institution has no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the partner institution have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of receivables. All risks of loss are shared pro rata based on participation interests held among all participating stakeholders. We account for the asset transfer as a sale and derecognize the portion of the participation interests for which control has been surrendered. For this arrangement, gains or losses on the sale of the participation interests are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer. 70 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, therefore resulting in a troubled debt restructuring (“TDR”). Refer to “Note 11—Loans and Interest Receivable” for further information related to TDRs. Loans, advances, and interest and fees receivable are reported at their outstanding balances, net of any participation interests sold and unamortized deferred origination costs. We maintain the servicing rights for the entire pool of consumer and merchant receivables outstanding and receive a market-based service fee for servicing the assets underlying the participation interest sold. We offer both revolving and installment credit products to our consumers. The terms of our consumer relationships require us to submit monthly bills to the consumer detailing loan repayment requirements. The terms also allow us to charge the consumer interest and fees in certain circumstances. Due to the relatively small dollar amount of individual loans and interest receivable, we do not require collateral on these balances. Another partner institution is the exclusive issuer of the PayPal Credit consumer financing program in the U.S. We do not hold an ownership interest in the receivables generated through the program and therefore, do not record these receivables on our consolidated financial statements. PayPal earns a revenue share on the portfolio of consumer receivables owned by the partner institution, which is recorded in revenues from other value added services on our consolidated statements of income (loss). Allowance for loans and interest receivable The allowance for loans and interest receivable represents our estimate of current expected credit losses inherent in our portfolio of loans and interest receivables. Increases to the allowance for loans receivable are reflected as a component of transaction and credit losses on our consolidated statements of income (loss). Increases to the allowance for interest and fees receivable are reflected as a reduction of net revenues on our consolidated statements of income (loss), or as a reduction of deferred revenue when interest and fees are billed at the inception of a loan or advance. The evaluation process to assess the adequacy of allowances is subject to numerous estimates and judgments. The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) effective January 1, 2020. The allowance for merchant loans, advances, and interest and fees receivable is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio. In the third quarter of 2022, our expected credit loss models for our merchant receivables were updated. These changes did not have a material impact on our provision recorded in the year ended December 31, 2022. The merchant loss models incorporate various portfolio attributes including geographic region, first borrowing versus repeat borrowing, delinquency, internally developed risk ratings, and vintage, as well as macroeconomic factors such as forecasted trends in unemployment and retail e-commerce sales (and through the second quarter of 2022, benchmark credit card charge-off rates.) The forecasted macroeconomic factors are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. The reasonable and supportable forecast period for merchant products that we have included in our projected loss rates for 2022 and 2021, which approximates the estimated life of the loans, is approximately 2.5 to 3.5 years. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our merchant receivables. We also include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses. The allowance for current expected credit losses on interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency, and period of origination, among other factors. 71 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The allowance for consumer loans and interest receivable is primarily based on expectations of credit losses based on historical lifetime loss data. The allowance for loans and interest receivable for our revolving credit product also incorporates macroeconomic forecasts applied to the portfolio. The consumer loss models incorporate various portfolio attributes including geographic region, loan term, delinquency, credit rating, vintage, and for the revolving credit portfolio macroeconomic factors such as forecasted trends in unemployment and household disposable income. The forecasted macroeconomic factors are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. The reasonable and supportable forecast period for revolving products and installment products that we have included in our projected loss rates for 2022, which approximates the estimated life of the loans, is approximately 2 years and approximately 7 months to 3.5 years, respectively. In 2021, the reasonable and supportable forecast periods were consistent with 2022 except for installment products, which had an estimated life of 7 months to 2.5 years. Projected loss rates, inclusive of historical loss data and, for the revolving credit portfolio macroeconomic factors, are derived based on and applied to the principal amount of our consumer receivables. We also include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses, such as expectations of macroeconomic conditions not captured in the loss models for our installment products. The allowance for current expected credit losses on interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency, and period of origination, among other factors. Customer accounts We hold all customer balances, both in the U.S. and internationally, as direct claims against us which are reflected on our consolidated balance sheets as a liability classified as amounts due to customers. Certain jurisdictions where PayPal operates require us to hold eligible liquid assets, as defined by applicable regulatory requirements and commercial law in these jurisdictions, equal to at least 100 % of the aggregate amount of all customer balances. Therefore, we restrict the use of the assets underlying the customer balances to meet these regulatory requirements and separately classify the assets as customer accounts in our consolidated balance sheets. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers. Customer funds for which PayPal is an agent and custodian on behalf of our customers are not reflected on our consolidated balance sheets. These funds include U.S. dollar funds which are deposited at one or more third-party financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) and are eligible for FDIC pass-through insurance (subject to applicable limits). Under applicable accounting standards, we are an agent when facilitating cryptocurrency transactions on behalf of our customers. Cryptocurrencies held on behalf of our customers are not PayPal’s assets and therefore, are not reflected as cryptocurrency assets on our consolidated balance sheets; however, we recognize a crypto asset safeguarding liability with a corresponding safeguarding asset to reflect our obligation to safeguard the cryptocurrencies held on behalf of our customers. In June 2018, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”) agreed that PayPal’s management may designate up to 35 % of European customer balances held in our Luxembourg banking subsidiary to fund European and U.S. credit activities. In August 2022, the CSSF approved PayPal’s management designating up to 50 % of such balances to fund our credit activities through the end of February 2023. During the year ended December 31, 2022, an additional $ 1.1 billion was approved to fund our credit activities. As of December 31, 2022, the cumulative amount approved by management to be designated to fund credit activities aggregated to $ 3.8 billion and represented approximately 37 % of European customer balances made available for our corporate use at that date as determined by applying financial regulations maintained by the CSSF. At the time PayPal’s management designates the European customer balances held in our Luxembourg banking subsidiary to be used to extend credit, the balances are classified as cash and cash equivalents and no longer classified as customer accounts on our consolidated balance sheets. The remaining assets underlying the customer balances remain separately classified as customer accounts on our consolidated balance sheets. We identify these customer accounts separately from corporate funds and maintain them in interest and non-interest bearing bank deposits, time deposits, and available-for-sale debt securities. Customer balances deposited with our partners on a short-term basis in advance of customer transactions and used to fulfill our direct obligation under amounts due to customers are classified as cash and cash equivalents within our customer accounts classification on our consolidated balance sheets. See “Note 8—Funds Receivable and Customer Accounts and Investments” for additional information related to customer accounts. We present changes in funds receivable and customer accounts as cash flows from investing activities in our consolidated statements of cash flows based on the nature of the activity underlying our customer accounts. 72 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Funds receivable and funds payable Funds receivable and funds payable arise due to the time required to initiate collection from and clear transactions through external payment networks. When customers fund their PayPal account using their bank account, credit card, debit card, or withdraw funds from their PayPal account to their bank account or through a debit card transaction, there is a clearing period before the cash is received or settled, usually one to three business days for U.S. transactions and generally up to five business days for international transactions. In addition, a portion of our customers’ funds are settled directly to their bank account. These funds are also classified as funds receivable and funds payable and arise due to the time required to initiate collection from and clear transactions through external payment networks. Property and equipment Property and equipment consists primarily of computer equipment, software and website development costs, land and buildings, leasehold improvements, and furniture and fixtures. Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets; generally, one to four years for computer equipment and software, including capitalized software and website development costs, three years for furniture and fixtures, up to 30 years for buildings and building improvements, and the shorter of five years or the non-cancelable term of the lease for leasehold improvements. Direct costs incurred to develop software for internal use and website development costs, including those costs incurred in expanding and enhancing our payments platform, are capitalized and amortized generally over an estimated useful life of three years and are recorded as amortization within the financial statement captions aligned with the internal organizations that are the primary beneficiaries of such assets. We capitalized $ 511 million and $ 462 million of internally developed software and website development costs for the years ended December 31, 2022 and 2021, respectively. Amortization expense for these capitalized costs was $ 426 million, $ 366 million, and $ 322 million for the years ended December 31, 2022, 2021, and 2020, respectively. Costs related to the maintenance of internal use software and website development costs are expensed as incurred. Leases We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other current liabilities and deferred tax liability and other long-term liabilities on our consolidated balance sheets. For sale-leaseback transactions, we evaluate the sale and the lease arrangement based on our conclusion as to whether control of the underlying asset has been transferred, and recognize the sale-leaseback as either a sale transaction or under the financing method. The financing method requires the asset to remain on our consolidated balance sheets throughout the term of the lease and the proceeds to be recognized as a financing obligation. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate and therefore we use an incremental borrowing rate for specific terms on a collateralized basis using information available on the commencement date in determining the present value of lease payments. The ROU asset calculation includes lease payments to be made and excludes lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain we will exercise that option. When we reach a decision to exercise a lease renewal or termination option, we recognize the associated impact to the ROU asset and lease liability. Lease expense for operating leases is recognized on a straight-line basis over the lease term. We evaluate ROU assets related to leases for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an ROU asset may not be recoverable. When a decision has been made to exit a lease prior to the contractual term or to sublease that space, we evaluate the asset for impairment and recognize the associated impact to the ROU asset and related expense, if applicable. The evaluation is performed at the asset group level initially and when appropriate, at the lowest level of identifiable cash flows, which is at the individual lease level. Undiscounted cash flows expected to be generated by the related ROU assets are estimated over the ROU assets’ useful lives. If the evaluation indicates that the carrying amount of the ROU assets may not be recoverable, any potential impairment is measured based upon the fair value of the related ROU asset or asset group as determined by appropriate valuation techniques. 73 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases, where applicable. In addition, we have elected to apply the practical expedients related to lease classification, hindsight, and land easement. We apply a single portfolio approach to account for the ROU assets and lease liabilities. Goodwill and intangible assets Goodwill is tested for impairment, at a minimum, on an annual basis at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The fair value of the reporting unit may be estimated using income and market approaches. The discounted cash flow method, a form of the income approach, uses expected future operating results and a market participant discount rate. The market approach uses comparable company prices and other relevant information generated by market transactions (either publicly traded entities or mergers and acquisitions) to develop pricing metrics to be applied to historical and expected future operating results of the reporting unit. Failure to achieve these expected results, changes in the discount rate, or market pricing metrics may cause a future impairment of goodwill at the reporting unit level. We conducted our annual impairment test of goodwill as of August 31, 2022 and 2021. We determined that no adjustment to the carrying value of goodwill of our reporting unit was required. As of December 31, 2022, we determined that no events occurred, or circumstances changed from August 31, 2022 through December 31, 2022 that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Intangible assets consist of acquired customer list and user base intangible assets, marketing related intangibles, developed technology, and other intangible assets. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from two to seven years . No significant residual value is estimated for intangible assets. Impairment of long-lived assets We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future undiscounted cash flow the asset is expected to generate. Allowance for transaction losses We are exposed to transaction losses due to credit card and other payment misuse as well as nonperformance from sellers who accept payments through PayPal. We establish an allowance for estimated losses arising from completing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, purchase protection program claims, and account takeovers. This allowance represents an accumulation of the estimated amounts of probable transaction losses as of the reporting date, including those which we have not yet identified. The allowance is monitored regularly and is updated based on actual loss data. The allowance is based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, and the mix of transaction and loss types, as applicable. Additions to the allowance are reflected as a component of transaction and credit losses on our consolidated statements of income (loss). The allowance for transaction losses is included in accrued expenses and other current liabilities on our consolidated balance sheets. 74 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Allowance for negative customer balances Negative customer balances occur primarily when there are insufficient funds in a customer’s PayPal account to cover charges applied for Automated Clearing House returns, debit card transactions, and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, which are generally within the scope of our protection programs. Negative customer balances can be cured by the customer by adding funds to their account, receiving payments, or through back-up funding sources. We also utilize third-party collection agencies. For negative customer balances that are not expected to be cured or otherwise collected, we provide an allowance for expected losses. The allowance represents expected losses based on historical trends involving collection and write-off patterns, internal factors including our experience with similar cases, other known facts and circumstances, and reasonable and supportable macroeconomic forecasts, as applicable. Loss rates are derived using historical loss data for each delinquency bucket using a roll rate model that captures the losses and the likelihood that a negative customer balance will be written off as the delinquency age of such balance increases. The loss rates are then applied to the outstanding negative customer balances. Once the quantitative calculation is performed, we review the adequacy of the allowance and determine if qualitative adjustments need to be considered. We write-off negative customer balances in the month in which the balance becomes outstanding for 120 days. Write-offs that are recovered are recorded as a reduction to our allowance for negative customer balances. Negative customer balances are included in other current assets, net of the allowance on our consolidated balance sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and credit losses on our consolidated statements of income (loss). Derivative instruments See “Note 10—Derivative Instruments” for information related to the derivative instruments. Fair value measurements We measure certain financial assets and liabilities at fair value on a recurring basis and certain financial and non-financial assets and liabilities at fair value on a non-recurring basis when a change in fair value or impairment is evidenced. Fair value is defined as the price received to sell an asset or paid to transfer a liability in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is estimated by maximizing the use of observable inputs and minimizing the use of unobservable inputs. The categorization within the following three-level fair value hierarchy for our recurring and non-recurring fair value measurements is based upon the lowest level of input that is available and significant to the fair value measurement: • Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2 - Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be market-corroborated. • Level 3 - Unobservable inputs that cannot be directly corroborated by observable market data and that typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. See “Note 9—Fair Value Measurement of Assets and Liabilities” for additional information related to our fair value measurements. Crypto asset safeguarding liability and corresponding safeguarding asset See “Note 7—Other Financial Statement Details” for information related to our crypto asset safeguarding liability and corresponding safeguarding asset. 75 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Concentrations of risk Our cash, cash equivalents, short-term investments, accounts receivable, loans and interest receivable, net, funds receivable and customer accounts, long-term investments, and long-term notes receivable, are potentially subject to concentration of credit risk. Cash, cash equivalents, and customer accounts are placed with financial institutions that management believes are of high credit quality. In addition, funds receivable are generated primarily with financial institutions which management believes are of high credit quality. We invest our cash, cash equivalents, and customer accounts primarily in highly liquid, highly rated instruments which are uninsured. We have corporate deposit balances with financial services institutions which exceed the FDIC insurance limit of $250,000. As part of our cash management process, we perform periodic evaluations of the relative credit standing of these financial institutions. Our accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. Our loans and interest receivable are derived from merchant and consumer financing activities for customers located in the U.S. and internationally. Our long-term notes receivable is derived from deferred proceeds associated with the sale of our U.S. consumer credit receivables portfolio to a partner institution in 2018. As of December 31, 2022 and 2021, one customer accounted for 20 % and 25 % of net accounts receivables, respectively. No customer accounted for more than 10% of net loans receivable as of December 31, 2022 and 2021. At December 31, 2022 and 2021, one partner institution accounted for our long-term notes receivable balance, which represented 18 % and 22 % of other assets, respectively. During the years ended December 31, 2022, 2021, and 2020, no customer accounted for more than 10% of net revenues. During the years ended December 31, 2022, 2021, and 2020, we earned approximately 2 %, 6 %, and 13 % of revenue, respectively, from customers on eBay’s Marketplaces platform. No other source of revenue represented more than 10% of our revenue. Revenue recognition See “Note 2—Revenue” for information related to our revenue recognition. Advertising expense We expense the cost of producing advertisements at the time production occurs and expense the cost of communicating advertisements in the period during which the advertising space or airtime is used as sales and marketing expense. Online advertising expenses are recognized based on the terms of the individual agreements, which are generally over the greater of the ratio of the number of impressions delivered over the total number of contracted impressions, on a pay-per-click basis, or on a straight-line basis over the term of the contract. Advertising expense totaled $ 518 million, $ 740 million, and $ 654 million for the years ended December 31, 2022, 2021, and 2020, respectively. Defined contribution savings plans We have a defined contribution savings plan in the U.S. which qualifies under Section 401(k) of the Internal Revenue Code (“Code”). Our non-U.S. employees are covered by other savings plans. Expenses related to our defined contribution savings plans are recorded when services are rendered by our employees. Stock-based compensation We determine compensation expense associated with restricted stock units, performance based restricted stock units, and restricted stock awards based on the estimated fair value of our common stock on the date of grant. We determine compensation expense associated with stock options based on the estimated grant date fair value method using the Black-Scholes valuation model. We generally recognize compensation expense using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest. Accordingly, stock-based compensation expense for the years ended December 31, 2022, 2021, and 2020 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behavior of our employees as well as trends of actual forfeitures. 76 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Foreign currency Many of our foreign subsidiaries have designated the local currency of their respective countries as their functional currency. Assets and liabilities of our non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenues and expenses of our non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars using daily exchange rates. Gains and losses resulting from these translations are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains and losses from the remeasurement of foreign currency transactions into the functional currency are recognized as other income (expense), net in our consolidated statements of income (loss). Income taxes We account for income taxes using an asset and liability approach which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. We account for Global Intangible Low-Taxed Income as a current-period expense when incurred. Other income (expense), net Other income (expense), net includes: (i) interest income, which consists of interest earned on corporate cash and cash equivalents and short-term and long-term investments, (ii) interest expense, which consists of interest expense, fees, and amortization of debt discount on our long-term debt (including current portion) and credit facilities, (iii) realized and unrealized gains (losses) on strategic investments, which includes changes in fair value related to our marketable equity securities and observable price changes and impairments on our non-marketable equity securities, and (iv) other, which primarily includes foreign currency exchange gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities, and fair value changes on the derivative contracts not designated as hedging instruments. Recent accounting guidance In March 2022, the Financial Accounting Standards Board (“FASB”) issued 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 were not materially impacted upon adoption. We adopted this guidance effective January 1, 2023 on a prospective basis and will provide additional disclosures as required. 77 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 was 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 were 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 new accounting pronouncements have had, or will have, a material impact on our 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. TRANSACTION REVENUES We earn transaction revenues primarily from fees paid by our customers to receive payments on our platform. These fees may have a fixed and variable component. The variable component is generally a percentage of the value of the payment amount and is known at the time the transaction is processed. For a portion of our transactions, the variable component of the fee is eligible for reimbursement when the underlying transaction is approved for a refund. We estimate the amount of fee refunds that will be processed each quarter and record a provision against our transaction revenues. The volume of activity processed on our payments platform, which results in transaction revenue, is referred to as Total Payment Volume (“TPV”). We earn additional fees from merchants and consumers on transactions where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their bank account or debit card, to facilitate the purchase and sale of cryptocurrencies, as contractual compensation from sellers that violate our contractual terms (for example, through fraud or counterfeiting), and other miscellaneous fees. Our transaction revenues are also reduced by certain incentives provided to our customers. Our contracts with our customers are usually open-ended and can be terminated by either party without a termination penalty after the notice period has lapsed. Therefore, our contracts are defined at the transaction level and do not extend beyond the service already provided. Our contracts generally renew automatically without any significant material rights. Some of our contracts include tiered pricing, which are based primarily on volume. The fee charged per transaction is adjusted up or down if the volume processed for a specified period is different from prior period defined volumes. We have concluded that this volume-based pricing approach does not constitute a future material right since the discount is within a range typically offered to a class of customers with similar volume. We do not have any capitalized contract costs and we do not carry any material contract balances. Our primary service comprises a single performance obligation to complete payments on our payments platform for our customers. Using our risk assessment tools, we perform a transaction risk assessment on individual transactions to determine whether a transaction should be authorized for completion on our payments platform. When we authorize a transaction, we become obligated to our customer to complete the payment transaction. 78 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) We recognize fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments on our payments platform. We bear primary responsibility for the fulfillment of the payment service, contract directly with our customers, control the product specifications, and define the value proposal from our services. Further, we have full discretion in determining the fee charged to our customers, which is independent of the costs we incur in instances where we may utilize payment processors or other financial institutions to perform services on our behalf. We therefore bear full margin risk when completing a payment transaction. These fees paid to payment processors and other financial institutions are recognized as transaction expense. We are also responsible for providing customer support. To promote engagement and acquire new users on our platform, we may provide incentives to merchants and consumers in various forms including discounts on fees, rebates, rewards, and coupons. Evaluating whether an incentive is a payment to a customer requires judgment. Incentives that are determined to be consideration payable to a customer or paid on behalf of a customer are recognized as a reduction of revenue. Certain incentives paid to users that are not our customers are classified as sales and marketing expense. 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. These protection programs do not provide a separate service to our customers and we estimate and record associated costs in transaction and credit losses during the period the payment transaction is completed. REVENUES FROM OTHER VALUE ADDED SERVICES We earn revenues from other value added services, which are comprised primarily of revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services that we provide to our merchants and consumers. These contracts typically have one performance obligation which is provided and recognized over the term of the contract. The transaction price is generally fixed and known at the end of each reporting period; however, for some agreements, it may be necessary to estimate the transaction price using the expected value method. Revenue earned from other value added services is recorded on a net basis when we are considered the agent with respect to processing transactions. We also earn revenues from interest and fees earned on our portfolio of loans receivable and interest earned on certain assets underlying customer balances. Interest and fees earned on the portfolio of loans receivable are computed and recognized based on the effective interest method and are presented net of any required reserves and amortization of deferred origination costs. 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 regularly 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. 79 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table presents our revenue disaggregated by primary geographical market and category: Year Ended December 31, 2022 2021 2020 (In millions) Primary geographical markets U.S. $ 15,807 $ 13,712 $ 11,013 United Kingdom (“U.K.”) 2,071 2,340 2,340 Other countries (1) 9,640 9,319 8,101 Total net revenues (2) $ 27,518 $ 25,371 $ 21,454 Revenue category Transaction revenues $ 25,206 $ 23,402 $ 19,918 Revenues from other value added services 2,312 1,969 1,536 Total net revenues (2) $ 27,518 $ 25,371 $ 21,454 (1) No single country included in the other countries category generated more than 10% of total revenue. (2) Total net revenues include $ 1.3 billion, $ 425 million, and $ 597 million for the years ended December 31, 2022, 2021, and 2020, 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 party paying our PayPal fee is located. 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: Year Ended December 31, 2022 2021 2020 (In millions, except per share amounts) Numerator: Net income (loss) $ 2,419 $ 4,169 $ 4,202 Denominator: Weighted average shares of common stock — basic 1,154 1,174 1,173 Dilutive effect of equity incentive awards 4 12 14 Weighted average shares of common stock — diluted 1,158 1,186 1,187 Net income (loss) per share: Basic $ 2.10 $ 3.55 $ 3.58 Diluted $ 2.09 $ 3.52 $ 3.54 Common stock equivalents excluded from net income (loss) per diluted share because their effect would have been anti-dilutive or potentially dilutive 13 2 1 80 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 4— BUSINESS COMBINATIONS There were no acquisitions accounted for as business combinations or divestitures completed in 2022. ACQUISITIONS COMPLETED IN 2021 During the year ended December 31, 2021, we completed five acquisitions reflecting 100 % of the equity interests of the acquired companies, for an aggregate purchase price of $ 3.1 billion. 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 expanded our capabilities and relevance in Japan. The following table summarizes the final 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. Goodwill was not deductible for income tax purposes. 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. 81 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. ACQUISITIONS COMPLETED IN 2020 During the year ended December 31, 2020, we completed one acquisition reflecting 100 % of the equity interests of the acquired company, for a purchase price of $ 3.6 billion. Honey Science Corporation We completed our acquisition of Honey Science Corporation (“Honey”) in January 2020 by acquiring all outstanding shares for total consideration of approximately $ 4.0 billion, consisting of approximately $ 3.6 billion in cash and approximately $ 400 million in assumed restricted stock, restricted stock units, and stock options, subject to vesting conditions. Honey was acquired to enhance our value proposition by allowing us to further simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants. The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed: (In millions) Goodwill $ 2,962 Customer lists and user base 115 Marketing related 30 Developed technology 572 Total intangibles $ 717 Accounts receivable, net 50 Deferred tax liabilities, net ( 58 ) Other net liabilities ( 36 ) Total purchase price $ 3,635 The intangible assets acquired consist primarily of customer contracts, trade name/trademarks, and developed technology with estimated useful lives of three years . The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill and is attributable to the workforce of Honey and the synergies expected to arise from the acquisition through continued customer acquisition, cross selling initiatives, and product enhancements. Goodwill was not deductible for income tax purposes. In connection with the acquisition, we assumed restricted stock, restricted stock units, and options with an approximate grant date fair value of $ 400 million, which represents post-business combination expense. The equity granted was a combination of shares issued to certain former Honey employees subject to a holdback arrangement and assumed Honey employee grants, which vest over a period of up to four years and are subject to continued employment. 82 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 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 years ended December 31, 2022 and 2021: December 31, 2020 Goodwill Acquired Adjustments December 31, 2021 Goodwill Acquired Adjustments December 31, 2022 (In millions) Total goodwill $ 9,135 2,355 ( 36 ) $ 11,454 — ( 245 ) $ 11,209 The goodwill acquired during 2021 was attributable to the five acquisitions completed within 2021 as described in “Note 4—Business Combinations.” The adjustments to goodwill during 2022 and 2021 pertained primarily to foreign currency translation adjustments. INTANGIBLE ASSETS The components of identifiable intangible assets were as follows: December 31, 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 $ 1,664 $ ( 1,092 ) $ 572 7 $ 1,726 $ ( 919 ) $ 807 7 Marketing related 395 ( 339 ) 56 5 405 ( 315 ) 90 5 Developed technology 1,099 ( 1,048 ) 51 3 1,109 ( 822 ) 287 3 All other 438 ( 329 ) 109 7 454 ( 306 ) 148 7 Intangible assets, net $ 3,596 $ ( 2,808 ) $ 788 $ 3,694 $ ( 2,362 ) $ 1,332 Amortization expense for intangible assets was $ 471 million, $ 443 million, and $ 451 million for the years ended December 31, 2022, 2021, and 2020, respectively. Expected future intangible asset amortization as of December 31, 2022 was as follows: Fiscal years: (In millions) 2023 $ 214 2024 196 2025 160 2026 103 2027 65 Thereafter 50 $ 788 83 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 December 31, 2022, we had no finance leases. The components of lease expense were as follows: Year Ended December 31, 2022 2021 2020 (In millions) Lease expense Operating lease expense $ 171 $ 170 $ 166 Sublease income ( 8 ) ( 8 ) ( 6 ) Lease expense, net $ 163 $ 162 $ 160 Supplemental cash flow information related to leases was as follows: Year Ended December 31, 2022 2021 2020 (In millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 172 $ 167 $ 159 ROU lease assets obtained in exchange for new operating lease liabilities $ 131 $ 124 $ 345 Other non-cash ROU lease asset activity $ ( 52 ) $ ( 21 ) $ ( 23 ) Supplemental balance sheet information related to leases was as follows: As of December 31, 2022 2021 (In millions, except weighted-average figures) Operating ROU lease assets $ 574 $ 659 Current operating lease liabilities 151 142 Operating lease liabilities 569 620 Total operating lease liabilities $ 720 $ 762 Weighted-average remaining lease term — operating leases 5.7 years 6.1 years Weighted-average discount rate — operating leases 3 % 3 % 84 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Future minimum lease payments for our operating leases as of December 31, 2022 were as follows: Operating Leases Fiscal years: (In millions) 2023 $ 169 2024 155 2025 114 2026 103 2027 90 Thereafter 147 Total $ 778 Less: present value discount ( 58 ) Lease liability $ 720 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. We recognize rent expense under such agreements on a straight-line basis. Rent expense for the years ended December 31, 2022, 2021, and 2020 totaled $ 202 million, $ 192 million, and $ 172 million, respectively. In the first quarter of 2020, we entered into a sale-leaseback arrangement as the seller-lessee for a data center as the buyer-lessor obtained control of the facility. We sold the data center and simultaneously entered into an operating lease agreement with the purchaser for the right to use the facility for 8 years. The Company received proceeds of approximately $ 119 million, net of selling costs, which resulted in a de minimis net gain on the sale transaction. In the years ended December 31, 2022, 2021 and 2020, we incurred asset impairment charges of $ 81 million, $ 26 million, and $ 30 million, respectively, within restructuring and other charges on our consolidated statements of income (loss). The impairments included a reduction to our ROU lease assets in the amount of $ 52 million, $ 21 million, and $ 23 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. As of December 31, 2022, we entered into an additional operating lease for real estate, which will commence in the second quarter of 2023 or later with minimum lease payments aggregating to $ 12 million and a lease term of 6 years. 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. 85 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 consolidated balance sheet. We also recognize a corresponding safeguarding asset which is recorded in prepaid expenses and other current assets on our 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, as applicable. As of December 31, 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 December 31, 2022 (in millions): Bitcoin $ 291 Ethereum 250 Other 63 Crypto asset safeguarding liability $ 604 Crypto asset safeguarding asset $ 604 PROPERTY AND EQUIPMENT, NET As of December 31, 2022 2021 (In millions) Property and equipment, net: Computer equipment and software $ 3,380 $ 3,298 Internal use software and website development costs 3,814 3,301 Land and buildings 388 380 Leasehold improvements 364 379 Furniture and fixtures 141 146 Development in progress and other 25 86 Total property and equipment, gross 8,112 7,590 Accumulated depreciation and amortization ( 6,382 ) ( 5,681 ) Total property and equipment, net $ 1,730 $ 1,909 Depreciation and amortization expense was $ 846 million, $ 822 million, and $ 738 million for the years ended December 31, 2022, 2021, and 2020, respectively. Net changes in accounts payable on our consolidated statements of cash flows includes non-cash investing activities associated with property and equipment; the impact of which was a decrease of $ 36 million and $ 27 million in 2022 and 2021, respectively, and an increase of $ 17 million in 2020. 86 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Geographical information The following table summarizes long-lived assets based on geography, which consist of property and equipment, net and operating lease ROU assets: As of December 31, 2022 2021 (In millions) Long-lived assets: U.S. $ 1,910 $ 2,050 Other countries 394 518 Total long-lived assets $ 2,304 $ 2,568 Long-lived assets attributed to the U.S. and other countries are based upon the country in which the asset is located or owned. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2022: Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Investments Foreign Currency Translation Adjustment ( “ CTA ”) Net Investment Hedges CTA Gains (Losses) Estimated Tax (Expense) Benefit Total (In millions) Beginning balance $ 199 $ ( 87 ) $ ( 270 ) $ 24 $ ( 2 ) $ ( 136 ) Other comprehensive income (loss) before reclassifications 374 ( 499 ) ( 305 ) ( 25 ) 130 ( 325 ) Less: Amount of gain reclassified from AOCI 462 5 — — — 467 Net current period other comprehensive income (loss) ( 88 ) ( 504 ) ( 305 ) ( 25 ) 130 ( 792 ) Ending balance $ 111 $ ( 591 ) $ ( 575 ) $ ( 1 ) $ 128 $ ( 928 ) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2021: Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Investments Foreign CTA Net Investment Hedges CTA Gains (Losses) Estimated Tax (Expense) Benefit Total (In millions) Beginning balance $ ( 323 ) $ 11 $ ( 198 ) $ 24 $ 2 $ ( 484 ) Other comprehensive income (loss) before reclassifications 332 ( 98 ) ( 72 ) — ( 4 ) 158 Less: Amount of loss reclassified from AOCI ( 190 ) — — — — ( 190 ) Net current period other comprehensive income (loss) 522 ( 98 ) ( 72 ) — ( 4 ) 348 Ending balance $ 199 $ ( 87 ) $ ( 270 ) $ 24 $ ( 2 ) $ ( 136 ) 87 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2020: Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Investments Foreign CTA Net Investment Hedges CTA Gains (Losses) Estimated Tax (Expense) Benefit Total (In millions) Beginning balance $ 6 $ 2 $ ( 150 ) $ ( 31 ) $ — $ ( 173 ) Other comprehensive income (loss) before reclassifications ( 309 ) 9 ( 48 ) 55 2 ( 291 ) Less: Amount of gain reclassified from AOCI 20 — — — — 20 Net current period other comprehensive income (loss) ( 329 ) 9 ( 48 ) 55 2 ( 311 ) Ending balance $ ( 323 ) $ 11 $ ( 198 ) $ 24 $ 2 $ ( 484 ) 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 Statements of Income (Loss) Year Ended December 31, 2022 2021 2020 (In millions) Gains (losses) on cash flow hedges — foreign currency exchange contracts $ 462 $ ( 190 ) $ 20 Net revenues Unrealized gains (losses) on investments 5 — — Other income (expense), net 467 ( 190 ) 20 Income before income taxes — — — Income tax expense (benefit) Total reclassifications for the period $ 467 $ ( 190 ) $ 20 Net income (loss) OTHER INCOME (EXPENSE), NET The following table reconciles the components of other income (expense), net for the periods presented below: Year Ended December 31, 2022 2021 2020 (In millions) Interest income $ 174 $ 57 $ 88 Interest expense ( 304 ) ( 232 ) ( 209 ) Net gains (losses) on strategic investments ( 304 ) 46 1,914 Other ( 37 ) ( 34 ) ( 17 ) Other income (expense), net $ ( 471 ) $ ( 163 ) $ 1,776 Refer to “Note 1 — Overview and Summary of Significant Accounting Policies” for details on the composition of these balances. 88 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (In millions) Funds receivable and customer accounts: Cash and cash equivalents $ 11,363 $ 12,723 Time deposits 95 334 Available-for-sale debt securities 17,349 18,336 Funds receivable 7,550 4,748 Total funds receivable and customer accounts $ 36,357 $ 36,141 Short-term investments: Time deposits $ 482 $ 590 Available-for-sale debt securities 2,593 3,604 Restricted cash 17 109 Total short-term investments $ 3,092 $ 4,303 Long-term investments: Time deposits $ 55 $ 45 Available-for-sale debt securities 2,817 3,545 Strategic investments 2,146 3,207 Total long-term investments $ 5,018 $ 6,797 As of December 31, 2022 and 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: December 31, 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 $ 8,736 $ — $ ( 252 ) $ 8,484 Foreign government and agency securities 1,479 — ( 44 ) 1,435 Corporate debt securities 1,637 — ( 82 ) 1,555 Asset-backed securities 1,324 — ( 26 ) 1,298 Municipal securities 410 — ( 3 ) 407 Commercial paper 3,702 1 ( 14 ) 3,689 Short-term investments: U.S. government and agency securities 815 — ( 3 ) 812 Foreign government and agency securities 435 — ( 11 ) 424 Corporate debt securities 641 — ( 14 ) 627 Asset-backed securities 415 — ( 9 ) 406 Commercial paper 324 — — 324 Long-term investments: U.S. government and agency securities 493 — ( 36 ) 457 Foreign government and agency securities 386 — ( 22 ) 364 Corporate debt securities 987 — ( 58 ) 929 Asset-backed securities 1,085 — ( 18 ) 1,067 Total available-for-sale debt securities (2) $ 22,869 $ 1 $ ( 592 ) $ 22,278 (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.” 89 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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.” Gross amortized cost and estimated fair value balances exclude accrued interest receivable on available-for-sale debt securities, which totaled $ 65 million and $ 36 million at December 31, 2022 and 2021, respectively, and were included in other current assets on our consolidated balance sheets. 90 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As of December 31, 2022 and 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: December 31, 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 $ 3,730 $ ( 89 ) $ 4,246 $ ( 163 ) $ 7,976 $ ( 252 ) Foreign government and agency securities 410 ( 11 ) 997 ( 34 ) 1,407 ( 45 ) Corporate debt securities 9 ( 1 ) 1,545 ( 81 ) 1,554 ( 82 ) Asset-backed securities 773 ( 11 ) 508 ( 14 ) 1,281 ( 25 ) Municipal securities 264 ( 3 ) 50 — 314 ( 3 ) Commercial paper 3,079 ( 14 ) — — 3,079 ( 14 ) Short-term investments: U.S. government and agency securities 345 — 73 ( 3 ) 418 ( 3 ) Foreign government and agency securities 61 — 362 ( 11 ) 423 ( 11 ) Corporate debt securities 97 ( 2 ) 465 ( 12 ) 562 ( 14 ) Asset-backed securities 175 ( 2 ) 217 ( 7 ) 392 ( 9 ) Commercial paper 224 — — — 224 — Long-term investments: U.S. government and agency securities — — 457 ( 36 ) 457 ( 36 ) Foreign government and agency securities 31 ( 2 ) 333 ( 20 ) 364 ( 22 ) Corporate debt securities 85 ( 6 ) 834 ( 52 ) 919 ( 58 ) Asset-backed securities 872 ( 9 ) 195 ( 9 ) 1,067 ( 18 ) Total available-for-sale debt securities $ 10,155 $ ( 150 ) $ 10,282 $ ( 442 ) $ 20,437 $ ( 592 ) (1) “—” Denotes gross unrealized loss or fair value of less than $1 million in a given position. 91 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 years ended December 31, 2022 and 2021. Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows: December 31, 2022 Amortized Cost Fair Value (In millions) One year or less $ 11,591 $ 11,470 After one year through five years 9,232 8,790 After five years through ten years 1,968 1,941 After ten years 78 77 Total $ 22,869 $ 22,278 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 consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), net on our consolidated statements of income (loss). Marketable equity securities totaled $ 323 million and $ 1.9 billion as of December 31, 2022 and 2021, respectively, including the impact of the sale of marketable equity securities during the year ended December 31, 2022. 92 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Our non-marketable equity securities are recorded in long-term investments on our consolidated balance sheets. As of December 31, 2022 and 2021, we had non-marketable equity securities of $ 136 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. 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 consolidated statements of income (loss). The carrying value of our non-marketable equity securities totaled $ 1.8 billion and $ 1.3 billion as of December 31, 2022 and 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 years ended December 31, 2022 and 2021 were as follows: Year Ended December 31, 2022 2021 (In millions) Carrying amount, beginning of period $ 1,268 $ 779 Adjustments related to non-marketable equity securities: Net additions (1) 100 133 Gross unrealized gains 423 356 Gross unrealized losses and impairments ( 104 ) — Carrying amount, end of period $ 1,687 $ 1,268 (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 December 31, 2022 and 2021, respectively: December 31, 2022 December 31, 2021 (In millions) Cumulative gross unrealized gains $ 1,137 $ 733 Cumulative gross unrealized losses and impairments $ ( 131 ) $ ( 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 December 31, 2022 and 2021, respectively: Year Ended December 31, 2022 2021 (In millions) Net unrealized gains (losses) $ 79 $ ( 46 ) 93 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 December 31, 2022 and 2021: December 31, 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) $ 932 $ — $ 932 Short-term investments (2) : U.S. government and agency securities 812 — 812 Foreign government and agency securities 424 — 424 Corporate debt securities 627 — 627 Asset-backed securities 406 — 406 Commercial paper 324 — 324 Total short-term investments 2,593 — 2,593 Funds receivable and customer accounts (3) : Cash and cash equivalents 192 — 192 U.S. government and agency securities 8,484 — 8,484 Foreign government and agency securities 1,777 — 1,777 Corporate debt securities 1,694 — 1,694 Asset-backed securities 1,298 — 1,298 Municipal securities 407 — 407 Commercial paper 3,689 — 3,689 Total funds receivable and customer accounts 17,541 — 17,541 Derivatives 244 — 244 Crypto asset safeguarding asset 604 — 604 Long-term investments (2),(4) : U.S. government and agency securities 457 — 457 Foreign government and agency securities 364 — 364 Corporate debt securities 929 — 929 Asset-backed securities 1,067 — 1,067 Marketable equity securities 323 323 — Total long-term investments 3,140 323 2,817 Total financial assets $ 25,054 $ 323 $ 24,731 Liabilities: Derivatives $ 298 $ — $ 298 Crypto asset safeguarding liability 604 — 604 Total financial liabilities $ 902 $ — $ 902 (1) Excludes cash of $ 6.8 billion not measured and recorded at fair value. (2) Excludes restricted cash of $ 17 million and time deposits of $ 537 million not measured and recorded at fair value. (3) Excludes cash, time deposits, and funds receivable of $ 18.8 billion underlying funds receivable and customer accounts not measured and recorded at fair value. (4) Excludes non-marketable equity securities of $ 1.8 billion measured using the Measurement Alternative or equity method accounting. 94 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. 95 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As of December 31, 2022 and 2021, we did not have any assets or liabilities requiring measurement at fair value on a recurring basis 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 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 December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (In millions) Funds receivable and customer accounts $ 481 $ 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 years ended December 31, 2022 and 2021 : Year Ended December 31, 2022 2021 (In millions) Funds receivable and customer accounts $ ( 149 ) $ ( 101 ) Short-term investments $ — $ ( 30 ) ASSETS MEASURED AND RECORDED AT FAIR VALUE ON A NON-RECURRING BASIS The following tables summarize our assets held as of December 31, 2022 and 2021 for which a non-recurring fair value measurement was recorded during the years ended December 31, 2022 and 2021, respectively: December 31, 2022 Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) (In millions) Non-marketable equity securities measured using the Measurement Alternative (1) $ 987 $ 589 $ 398 Other assets (2) 165 165 — Total $ 1,152 $ 754 $ 398 (1) Excludes non-marketable equity securities of $ 700 million accounted for under the Measurement Alternative for which no observable price changes occurred during the year ended December 31, 2022. (2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the year ended December 31, 2022. See “Note 6—Leases” for additional information. December 31, 2021 Significant Other Observable Inputs (Level 2) (In millions) Non-marketable equity securities measured using the Measurement Alternative (1) $ 611 $ 611 Other assets (2) 86 86 Total $ 697 $ 697 (1) Excludes non-marketable equity securities 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. 96 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) We measure the non-marketable equity securities 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. Non-marketable equity securities that have been remeasured during the period based on observable price changes are classified within Level 2 in the fair value hierarchy because we estimate the fair value based on valuation methods which only include significant inputs that are observable, such as the observable transaction price at the transaction date. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3 as we estimate fair value using significant unobservable inputs such as discount rates, forecasted cash flows, and market data of comparable companies, among others. We evaluate ROU assets related to leases for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an ROU asset may not be recoverable. 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, and the impaired asset is classified within Level 2 in the fair value hierarchy. 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 $ 441 million and fair value of approximately $ 396 million as of December 31, 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 $ 9.5 billion as of December 31, 2022. Our fixed rate notes had a carrying value of approximately $ 9.0 billion and fair value of approximately $ 9.3 billion as of December 31, 2021. 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. 97 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 consolidated statements of cash flows. As of December 31, 2022, we estimated that $ 110 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 years ended December 31, 2022, 2021, and 2020, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction. 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 hedges 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 gains and losses on the portion of the derivatives 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 consolidated statements of cash flows. We have no t reclassified any gains or losses related to 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 consolidated statements of cash flows. 98 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) FAIR VALUE OF DERIVATIVE CONTRACTS The fair value of our outstanding derivative instruments as of December 31, 2022 and 2021 was as follows: Balance Sheet Location As of December 31, 2022 2021 Derivative Assets: (In millions) Foreign currency exchange contracts designated as hedging instruments Other current assets $ 167 $ 205 Foreign currency exchange contracts designated as hedging instruments Other assets (non-current) 15 21 Foreign currency exchange contracts not designated as hedging instruments Other current assets 62 78 Total derivative assets $ 244 $ 304 Derivative Liabilities: Foreign currency exchange contracts designated as hedging instruments Other current liabilities $ 68 $ 27 Foreign currency exchange contracts designated as hedging instruments Other long-term liabilities 133 — Foreign currency exchange contracts not designated as hedging instruments Other current liabilities 97 103 Total derivative liabilities $ 298 $ 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 consolidated balance sheets. Rights of set-off associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities of $ 70 million as of December 31, 2022 and $ 102 million as of December 31, 2021. We have entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The following table provides the collateral exchanged posted and received: December 31, 2022 December 31, 2021 (In millions) Cash collateral posted (1) $ 24 $ 5 Cash collateral received (2) $ 203 $ 209 (1) Right to reclaim cash collateral related to our derivative liabilities recognized in other current assets on our consolidated balance sheets. (2) Obligation to return counterparty cash collateral related to our derivative assets recognized in other current liabilities on our consolidated balance sheets. 99 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EFFECT OF DERIVATIVE CONTRACTS ON CONSOLIDATED FINANCIAL STATEMENTS The following table provides the location in the consolidated statements of income (loss) and amount of recognized gains or losses related to our derivative instruments: Year Ended December 31, 2022 2021 2020 (In millions) Net revenues Other income (expense), net Net revenues Other income (expense), net Net revenues Other income (expense), net Total amounts presented in the consolidated statements of income (loss) in which the effects of derivatives are recorded $ 27,518 $ ( 471 ) $ 25,371 $ ( 163 ) $ 21,454 $ 1,776 Gains (losses) on derivatives in cash flow hedging relationship: Amount of gains (losses) on foreign exchange contracts reclassified from AOCI 462 — ( 190 ) — 20 — Gains on derivatives in net investment hedging relationship: Amount of gains on foreign exchange contracts excluded from the assessment of effectiveness — 84 — — — — Gains (losses) on derivatives not designated as hedging instruments: Amount of gains (losses) on foreign exchange contracts — 118 — 144 — ( 110 ) Amount of losses on equity derivative contracts (1) — ( 174 ) — — — ( 64 ) Total gains (losses) $ 462 $ 28 $ ( 190 ) $ 144 $ 20 $ ( 174 ) (1) During the years ended December 31, 2022 and December 31, 2020, 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 consolidated statements of cash flows. 100 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table provides the amount of pre-tax unrealized gains or losses included in the assessment of hedge effectiveness related to our derivative instruments designated as hedging instruments that are recognized in other comprehensive income (loss): Year Ended December 31, 2022 2021 2020 (In millions) Unrealized gains (losses) on foreign exchange contracts designated as cash flow hedges $ 374 $ 332 $ ( 309 ) Unrealized (losses) gains on foreign exchange contracts designated as net investment hedges ( 25 ) — 55 Total unrealized gains (losses) recognized from derivative contracts designated as hedging instruments in the consolidated statements of comprehensive income (loss) $ 349 $ 332 $ ( 254 ) 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: Year Ended December 31, 2022 2021 (In millions) Foreign exchange contracts designated as hedging instruments $ 7,149 $ 5,349 Foreign exchange contracts not designated as hedging instruments 11,840 20,414 Total $ 18,989 $ 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., several markets across 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 interest-bearing installment loans extended to U.S. consumers by a partner institution and are responsible for servicing functions related to that portfolio. During the year ended December 31, 2022, we purchased approximately $ 381 million in consumer receivables. As of December 31, 2022 and 2021, the outstanding balance of consumer receivables, which consisted of revolving and installment loans and interest receivable, was $ 5.9 billion and $ 3.8 billion, respectively, net of the participation interest sold to the partner institution of $ 17 million and nil , respectively. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information on this participation arrangement. 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 interest-bearing installment loans in the U.S., to assist the partner 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. 101 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following tables present the delinquency status of consumer loans and interest receivable by year of origination. The amounts are based on the number of days past the billing date for revolving loans or contractual repayment date for installment loans. The “current” category represents balances that are within 29 days of the billing date or contractual repayment date, as applicable. December 31, 2022 (In millions, except percentages) Revolving Loans Amortized Cost Basis Installment Loans Amortized Cost Basis 2022 2021 2020 2019 2018 Total Percent Current $ 1,850 $ 3,726 $ 123 $ — $ — $ — $ 5,699 97.1 % 30 - 59 Days 23 26 2 — — — 51 0.9 % 60 - 89 Days 15 20 2 — — — 37 0.6 % 90 - 179 Days 34 47 4 — — — 85 1.4 % Total (1) $ 1,922 $ 3,819 $ 131 $ — $ — $ — $ 5,872 100 % (1) Excludes receivables from other consumer credit products of $ 11 million at December 31, 2022. December 31, 2021 (In millions, except percentages) Revolving Loans Amortized Cost Basis Installment 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 years ended December 31, 2022 and 2021: December 31, 2022 December 31, 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 292 15 307 20 10 30 Charge-offs ( 216 ) ( 29 ) ( 245 ) ( 116 ) ( 20 ) ( 136 ) Recoveries 21 — 21 28 — 28 Other (2) ( 18 ) ( 4 ) ( 22 ) 12 — 12 Ending balance $ 322 $ 25 $ 347 $ 243 $ 43 $ 286 (1) Excludes allowances from other consumer credit products of $ 3 million and $ 4 million at December 31, 2022 and 2021, respectively. (2) Includes amounts related to foreign currency remeasurement and, for the year ended December 31, 2021, initial allowance for purchased credit deteriorated (“PCD”) loans acquired during the period. A portion of the Paidy loan portfolio acquired was determined to be purchase credit deteriorated as the loans were 30 days or more past due. As such, we recorded current expected credit losses on the PCD loans. 102 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The provision for the year ended December 31, 2022 was primarily attributable to growth 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. The increase in charge-offs for the year ended December 31, 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 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, except for the U.S. consumer interest-bearing installment receivables, which are charged off 120 days past the 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 PPWC and PPBL products, which we collectively refer to as our merchant finance offerings. We purchase receivables related to credit extended to U.S. merchants by a partner institution and are responsible for servicing functions related to that portfolio. During the years ended December 31, 2022 and 2021, we purchased approximately $ 3.2 billion and $ 1.8 billion in merchant receivables, respectively. As of December 31, 2022 and 2021, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $ 2.1 billion and $ 1.4 billion, respectively, net of the participation interest sold to the partner institution of $ 97 million and $ 63 million, respectively. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information on this participation arrangement. 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 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 the partner institution 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. 103 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. December 31, 2022 (In millions, except percentages) 2022 2021 2020 2019 2018 Total Percent Current $ 1,826 $ 20 $ 57 $ 42 $ 2 $ 1,947 90.7 % 30 - 59 Days 63 7 3 4 — 77 3.6 % 60 - 89 Days 34 4 4 2 — 44 2.0 % 90 - 179 Days 55 9 3 3 — 70 3.3 % 180+ Days 1 2 2 3 — 8 0.4 % Total (1) $ 1,979 $ 42 $ 69 $ 54 $ 2 $ 2,146 100 % 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 years ended December 31, 2022 and 2021: December 31, 2022 December 31, 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 109 18 127 ( 116 ) ( 22 ) ( 138 ) Charge-offs ( 105 ) ( 9 ) ( 114 ) ( 173 ) ( 12 ) ( 185 ) Recoveries 34 — 34 41 — 41 Ending balance $ 230 $ 18 $ 248 $ 192 $ 9 $ 201 The provision for the year ended December 31, 2022 was primarily attributable to originations in the merchant portfolio and a slight deterioration in credit quality of loans outstanding. Qualitative adjustments were made to account for uncertainty around the effectiveness of loan modification programs made available to merchants in previous years, as described further below. The decrease in the charge-offs for the year ended December 31, 2022 compared to the prior year was due to the charge-off of accounts in 2021 that experienced financial difficulties as a result of the COVID-19 pandemic. 104 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For merchant loans and advances, the determination of delinquency is based on the current expected or contractual repayment period of the loan or advance and fixed interest or fee payment as compared to the original expected or contractual repayment period. 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 on our consolidated statements of income (loss), 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 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 consolidated statements of income (loss) in the years ended December 31, 2022 and 2021. Allowances for TDRs are assessed separately from other loans and advances within our portfolio and are determined by estimating current expected credit losses utilizing the modified term and interest rate assumptions. Historical loss estimates are utilized in addition to macroeconomic assumptions to determine expected credit loss rates. Further, we may include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses. During the year ended December 31, 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 year ended December 31, 2021: Year Ended December 31, 2021 Number of Accounts (in thousands) Outstanding Balances (1) (in millions) Weighted Average Payment Term Extensions (in months) Loans and interest receivable 3 $ 45 36 (1) Balances are as of modification date. 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 years ended December 31, 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. In May 2020, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $ 4.0 billion. Interest on these notes is payable on June 1 and December 1 of each year, beginning on December 1, 2020. 105 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In September 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $ 5.0 billion. Interest on these notes is payable in arrears semiannually (payable on April 1 and October 1). 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.” We may redeem the Notes in whole, at any time, or in part, from time to time, prior to maturity, at their redemption prices. 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 amounts, 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, acquisitions of businesses, assets, or strategic investments. 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 consolidated statements of income (loss). As of December 31, 2022 and 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: As of December 31, Maturities Effective Interest Rate 2022 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 ( 74 ) ( 50 ) Less: current portion of term debt (1) ( 418 ) ( 999 ) Total carrying amount of term debt $ 9,926 $ 7,951 (1) The current portion of term debt is included within accrued expenses and other current liabilities on our consolidated balance sheets. 106 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and amortization of the debt discount. The interest expense recorded for the Notes, including amortization of the debt discount, debt issuance costs, and debt extinguishment net gains, was $ 290 million, $ 224 million, and $ 190 million for the years ended December 31, 2022, 2021, and 2020, respectively. CREDIT FACILITIES Five-year revolving credit facility In September 2019, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $ 5.0 billion, five-year revolving credit facility that includes a $ 150 million letter of credit sub-facility and a $ 500 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time. Loans borrowed under the Credit Agreement are available in U.S. dollar, Euro, British pound, Canadian dollar, and Australian dollar, and in each case subject to the sub-limits and other limitations provided in the Credit Agreement. We may also, subject to the agreement of the applicable lenders and satisfaction of specified conditions, increase the commitments under the revolving credit facility by up to $ 2.0 billion. Subject to specific conditions, we may designate one or more of our subsidiaries as additional borrowers under the Credit Agreement, provided PayPal Holdings, Inc. guarantees the portion of borrowings made available and other obligations of any such subsidiaries under the Credit Agreement. As of December 31, 2022, certain subsidiaries were designated as additional borrowers. Funds borrowed under the Credit Agreement may be used for working capital, capital expenditures, acquisitions, and other purposes not in contravention with the Credit Agreement. We are obligated to pay interest on loans under the Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the Credit Agreement bear interest at either (i) the applicable eurocurrency rate plus a margin (based on our public debt ratings) ranging from 0.875 % to 1.375 %, (ii) the applicable overnight rate plus a margin (based on our public debt ratings) ranging from 0.875 % to 1.375 %, (iii) a formula based on the prime rate, the federal funds effective rate, or London Interbank Offered Rate plus a margin (based on our public debt ratings) ranging from zero to 0.375 %, or (iv) a formula based on the Euro Short-Term Rate (“ESTR”) or the Sterling Overnight Index Average (“SONIA”) rate plus a margin (based on our public debt ratings) ranging from 0.875 % to 1.375 %. In January 2022, an amendment to the agreement was signed which provides for the additional borrowing rate option of utilizing SONIA or ESTR rates. The Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2024, unless the commitments are terminated earlier. The 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 the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio. In March 2020, we drew down $ 3.0 billion under the Credit Agreement. In May 2020, we repaid the $ 3.0 billion using proceeds from the May 2020 debt issuance. As of December 31, 2022, no borrowings or letters of credit were outstanding under the Credit Agreement. Accordingly, at December 31, 2022, $ 5.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions to borrowing. The total interest expense and fees we recorded related to the Credit Agreement was approximately $ 16 million for the year ended December 31, 2020. 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 $ 686 million as of December 31, 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 in February 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. 107 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In the year ended December 31, 2022, ¥ 64.3 billion (approximately $ 491 million) was drawn down under the Paidy Credit Agreement, which was recorded in long-term debt on our consolidated balance sheet. Accordingly, at December 31, 2022, ¥ 25.7 billion (approximately $ 195 million) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing. During the year ended December 31, 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. 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 year ended December 31, 2022. Other available facilities We also maintain uncommitted credit facilities in various regions throughout the world, which had a borrowing capacity of approximately $ 80 million and $ 90 million in the aggregate, as of December 31, 2022 and 2021, respectively. This available credit includes facilities where we can withdraw and utilize the funds at our discretion for general corporate purposes. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of December 31, 2022, the majority of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing. FUTURE PRINCIPAL PAYMENTS As of December 31, 2022, the future principal payments associated with our term debt were as follows (in millions): 2023 $ 418 2024 1,250 2025 1,000 2026 1,250 2027 500 Thereafter 6,000 Total $ 10,418 NOTE 13— COMMITMENTS AND CONTINGENCIES COMMITMENTS As of December 31, 2022 and 2021, approximately $ 4.9 billion and $ 4.1 billion, respectively, 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 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. 108 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 for the year ended December 31, 2022. Except as otherwise noted for the proceedings described in this Note 13, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. 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 routinely report to the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) on payments we have rejected or blocked pursuant to legal requirements under OFAC sanctions regulations. Between January 2013 and January 2022, we voluntarily disclosed to OFAC transactions that were inadvertently processed and identified as possible violations of OFAC sanctions regulations and responded to subpoenas and information requests related to certain of these transactions. In January 2023, OFAC notified us that it had completed its review of these matters and closed them with the issuance of a cautionary letter with no monetary penalties or sanctions. 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. 109 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, including treatment of consumers who request payments but accidentally designate an unintended recipient. The CIDs request the production of documents and answers to written questions. We are cooperating with the CFPB in connection with these CIDs. We previously 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 requested the production of documents, written reports, and answers to written questions. We have been informed by the CFPB that this matter has been formally closed without action. 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. In January 2023, we received notice of an administrative proceeding and a related request for information from the German Federal Cartel Office (“FCO”) related to terms in PayPal (Europe) S.à.r.l. et Cie, S.C.A.’s contractual terms with merchants in Germany prohibiting surcharging and requiring parity presentation of PayPal relative to other payment methods. We are cooperating with the FCO in connection with this proceeding. 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 moved to dismiss the SAC on November 3, 2022, and briefing is ongoing. 110 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. On January 11, 2023, the Court appointed Caisse de dépôt et placement du Québec as lead plaintiff and renamed the action In re PayPal Holdings, Inc. Securities Litigation (“PPH Securities Action”). The PPH 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 PPH 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 PPH Securities Action seeks unspecified compensatory damages on behalf of the putative class members. 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 PPH 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. 111 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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) or regulators 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. 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 and audit 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 December 31, 2022 and 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. 112 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. 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 December 31, 2022 and 2021, the allowance for transaction losses was $ 66 million and $ 121 million, respectively. The allowance for negative customer balances was $ 212 million and $ 234 million at December 31, 2022 and 2021, respectively. The following table shows changes in the allowance for transaction losses and negative customer balances related to our protection programs for the years ended December 31, 2022 and 2021: As of December 31, 2022 2021 (In millions) Beginning balance $ 355 $ 414 Provision 1,170 1,153 Realized losses ( 1,417 ) ( 1,331 ) Recoveries 170 119 Ending balance $ 278 $ 355 NOTE 14— STOCK REPURCHASE PROGRAMS In April 2017, our Board of Directors authorized a stock repurchase program that provided for the repurchase of up to $ 5 billion of our common stock, with no expiration from the date of authorization. In July 2018, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $ 10 billion of our common stock, with no expiration from the date of authorization. This program became effective in the first quarter of 2020 upon completion of the April 2017 stock repurchase program. In June 2022, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $ 15 billion of our common stock, with no expiration from the date of authorization. Our stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, may also be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions, including accelerated share repurchase agreements, or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. Moreover, any stock repurchases are subject to market conditions and other uncertainties, and we cannot predict if or when any stock repurchases will be made. We may terminate our stock repurchase programs at any time without prior notice. During the year ended December 31, 2022, we repurchased approximately 41 million shares of our common stock for approximately $ 4.2 billion at an average cost of $ 103.47 . These shares were purchased in the open market under our stock repurchase program authorized in July 2018. As of December 31, 2022, a total of approximately $ 861 million and $ 15.0 billion remained available for future repurchases of our common stock under our July 2018 and June 2022 stock repurchase programs, respectively. During the year ended December 31, 2021, we repurchased approximately 15 million shares of our common stock for approximately $ 3.4 billion at an average cost of $ 219.75 . These shares were purchased in the open market under our stock repurchase program authorized in July 2018. As of December 31, 2021, a total of approximately $ 5.1 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program. 113 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) During the year ended December 31, 2020, we repurchased approximately 12 million shares of our common stock for approximately $ 1.6 billion at an average cost of $ 136.19 . These shares were purchased in the open market under our stock repurchase programs authorized in April 2017 and July 2018. As of December 31, 2020, a total of approximately $ 8.4 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program. Shares of common stock repurchased for the periods presented were recorded as treasury stock for the purposes of calculating net income (loss) per share and were accounted for under the cost method. No repurchased shares of common stock have been retired. NOTE 15— STOCK-BASED AND EMPLOYEE SAVINGS PLANS EQUITY INCENTIVE PLANS Under the terms of the Amended and Restated PayPal Holdings, Inc. 2015 Equity Incentive Award Plan (the “Plan”), equity awards, including restricted stock units (“RSUs”), restricted stock awards, performance based restricted stock units (“PBRSUs”), stock options, deferred stock units, and stock payments, may be granted to our directors, officers, and employees. At December 31, 2022, 47 million shares were authorized under the Plan and approximately 31 million shares were available for future grant. Shares issued as a result of stock option exercises and the release of stock awards were funded primarily with the issuance of new shares of common stock. In 2022, the Company adopted a plan for which equity-based incentive awards may be granted to new employees (the “Inducement Plan”). Grants under the Inducement Plan are in addition to the Plan mentioned above. As of December 31, 2022, 5 million shares were authorized under the Inducement Plan and approximately 3 million shares were available for future grant. RSUs are granted to eligible employees under the Plan. RSUs issued prior to January 1, 2022 generally vest in equal annual installments over a period of three years . RSUs issued on or after January 1, 2022 generally vest over three years at a rate of 33 % after one year , then in equal quarterly installments thereafter. RSUs are subject to an employee’s continuing service to us, and do not have an expiration date. The cost of RSUs granted is determined using the fair market value of PayPal’s common stock on the date of grant. Certain of our executives and non-executives are eligible to receive PBRSUs, which are equity awards that may be earned based on an initial target number. The final number of PBRSUs may vest and settle depending on the Company’s performance against pre-established performance metrics over a predefined performance period. PBRSUs granted under the Plan generally have one to three-year performance periods with cliff vesting following the completion of the performance period, subject to the Compensation Committee’s approval of the level of achievement against the pre-established performance targets. Over the performance period, the number of PBRSUs that may be issued and related stock-based compensation expense that is recognized is adjusted upward or downward based upon the probability of achieving the approved performance targets against the performance metrics. Depending on the probability of achieving the pre-established performance targets, the number of PBRSUs issued could range from 0 % to 200 % of the target amount. All stock options under the Plan were assumed in connection with acquisitions on the same terms and conditions (including vesting) applicable to such acquired companies’ equity awards. The cost of stock options was determined using the Black-Scholes option pricing model. EMPLOYEE STOCK PURCHASE PLAN Under the terms of the Employee Stock Purchase Plan (“ESPP”), shares of our common stock may be purchased over an offering period with a maximum duration of two years at 85 % of the lower of the fair market value on the first day of the applicable offering period or on the last business day of each six-month purchase period within the offering period. Employees may contribute between 2 % and 10 % of their gross compensation during an offering period to purchase shares, but not more than the statutory limitation of $25,000 per year. All company stock purchased through the ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and diluted net income (loss) per share. For the years ended December 31, 2022, 2021, and 2020, our employees purchased 1.9 million, 1.4 million, and 1.7 million shares under the ESPP at an average per share price of $ 73.20 , $ 114.36 , and $ 80.36 , respectively. As of December 31, 2022, approximately 46 million shares were reserved for future issuance under the ESPP. 114 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) RSU, PBRSU, AND RESTRICTED STOCK ACTIVITY The following table summarizes RSU, PBRSU, and restricted stock activity under the Plan and the Inducement Plan as of December 31, 2022 and changes during the year ended December 31, 2022: Units Weighted Average Grant-Date Fair Value (per share) (In thousands, except per share amounts) Outstanding at January 1, 2022 17,534 $ 172.55 Awarded and assumed (1) 17,238 $ 105.20 Vested (1) ( 9,930 ) $ 145.75 Forfeited/cancelled (2) ( 5,254 ) $ 147.81 Outstanding at December 31, 2022 19,588 $ 133.27 Expected to vest 17,507 (1) Includes approximately 0.5 million of additional PBRSUs issued during 2022 due to the achievement of company performance metrics on awards granted in previous years. (2) Includes approximately 1.0 million of PBRSUs cancelled during 2022 resulting from a change in the method of payout of the Company portion of our Annual Incentive Plan from equity to cash for certain employees. During the years ended December 31, 2022, 2021, and 2020, the aggregate intrinsic value of RSUs and PBRSUs vested under the Plan was $ 935 million, $ 3.4 billion, and $ 1.7 billion, respectively. In the year ended December 31, 2022, the Company granted 1.5 million PBRSUs with a one-year performance period (fiscal 2022) of which 1.0 million were subsequently cancelled due to the change in method of payout as mentioned above. As such, 0.5 million will become fully vested following the completion of the performance period in February 2023 ( one year from the annual incentive award cycle grant date). In the year ended December 31, 2022, the Company also granted 1.1 million PBRSUs with a three-year performance period. In the year ended December 31, 2021, the Company granted 0.7 million PBRSUs with a one-year performance period (fiscal 2021), which became fully vested following the completion of the performance period in February 2022 ( one year from the annual incentive award cycle grant date), and 0.5 million PBRSUs with a three-year performance period. STOCK OPTION ACTIVITY The following table summarizes stock option activity of our employees under the Plan for the year ended December 31, 2022: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands, except per share amounts and years) Outstanding at January 1, 2022 339 $ 17.55 Assumed 3 $ 55.55 Exercised ( 190 ) $ 20.62 Forfeited/expired/cancelled ( 11 ) $ 13.66 Outstanding at December 31, 2022 141 $ 14.56 4.93 $ 8,080 Expected to vest 24 $ 23.89 7.46 $ 1,172 Options exercisable 117 $ 12.60 4.40 $ 6,875 115 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The weighted average grant date fair value of options assumed from acquisitions during the years ended December 31, 2022, 2021, and 2020 was $ 147.92 , $ 237.26 and $ 108.61 , respectively. The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock at December 31, 2022. During the years ended December 31, 2022, 2021, and 2020, the aggregate intrinsic value of options exercised under the Plan was $ 16 million, $ 81 million, and $ 66 million, respectively, determined as of the date of option exercise. At December 31, 2022, substantially all outstanding options were in-the-money. STOCK-BASED COMPENSATION EXPENSE Stock-based compensation expense for the Plan and the Inducement Plan is measured based on estimated fair value at the time of grant, and recognized over the award’s vesting period. T he impact on our results of operations of recording stock-based compensation expense under the Plan for the years ended December 31, 2022, 2021, and 2020 was as follows: Year Ended December 31, 2022 2021 2020 (In millions) Customer support and operations $ 269 $ 263 $ 250 Sales and marketing 151 175 172 Technology and development 512 515 529 General and administrative 383 468 460 Total stock-based compensation expense $ 1,315 $ 1,421 $ 1,411 Capitalized as part of internal use software and website development costs $ 52 $ 68 $ 48 Income tax benefit recognized for stock-based compensation arrangements $ 209 $ 221 $ 226 As of December 31, 2022, there was approximately $ 1.4 billion of unearned stock-based compensation estimated to be expensed primarily from 2023 through 2025. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase, or cancel all or a portion of the remaining unearned stock-based compensation expense. Future unearned stock-based compensation will increase to the extent we grant additional equity awards, change the mix of equity awards we grant, or assume unvested equity awards in connection with acquisitions. EMPLOYEE SAVINGS PLANS Under the terms of the PayPal Holdings, Inc. Deferred Compensation Plan, which also qualifies under Section 401(k) of the Code, participating U.S. employees may contribute up to 50 % of their eligible compensation, but not more than statutory limits. Under the PayPal plan, eligible employees received one dollar for each dollar contributed, up to 4 % of each employee’s eligible salary, subject to a maximum employer contribution per employee of $ 12,200 in 2022 and $ 11,600 in both 2021 and 2020. Our non-U.S. employees are covered by other savings plans. For the years ended December 31, 2022, 2021, and 2020, the matching contribution expense for our U.S. and international savings plans was approximately $ 83 million, $ 81 million, and $ 72 million, respectively. NOTE 16— INCOME TAXES The components of income before income taxes are as follows: Year Ended December 31, 2022 2021 2020 (In millions) United States $ ( 155 ) $ 290 $ 1,504 International 3,521 3,809 3,561 Income before income taxes $ 3,366 $ 4,099 $ 5,065 116 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The income tax expense (benefit) is composed of the following: Year Ended December 31, 2022 2021 2020 (In millions) Current: Federal $ 688 $ 6 $ 310 State and local 104 80 143 Foreign 966 326 245 Total current portion of income tax expense $ 1,758 $ 412 $ 698 Deferred: Federal $ ( 563 ) $ ( 401 ) $ 259 State and local ( 101 ) ( 45 ) ( 32 ) Foreign ( 147 ) ( 36 ) ( 62 ) Total deferred portion of income tax expense (benefit) ( 811 ) ( 482 ) 165 Income tax expense (benefit) $ 947 $ ( 70 ) $ 863 The following is a reconciliation of the difference between the effective income tax rate and the federal statutory rate: Year Ended December 31, 2022 2021 2020 Federal statutory rate 21.0 % 21.0 % 21.0 % Domestic income taxed at different rates ( 0.6 ) % ( 1.7 ) % — % State taxes, net of federal benefit — % 0.9 % 2.2 % Foreign income taxed at different rates ( 12.2 ) % ( 13.4 ) % ( 7.4 ) % Stock-based compensation expense 4.1 % ( 7.3 ) % ( 1.2 ) % Tax credits ( 0.4 ) % ( 2.4 ) % ( 2.0 ) % Change in valuation allowances 2.2 % 0.5 % 0.1 % Intra-group transfer of intellectual property 10.0 % 0.7 % 4.1 % Other 4.0 % — % 0.2 % Effective income tax rate 28.1 % ( 1.7 ) % 17.0 % For the year ended December 31, 2022, the difference between the effective income tax rate of 28.1 % and the U.S. federal statutory rate of 21% to income before income taxes was primarily the result of tax expense related to the intra-group transfer of intellectual property and non-deductible stock-based compensation, partially offset by foreign income taxed at different rates. For the year ended December 31, 2021, the difference between the effective income tax rate of ( 1.7 )% and the U.S. federal statutory rate of 21% to income before income taxes was primarily the result of foreign income taxed at different rates and stock-based compensation deductions. For the year ended December 31, 2020, the difference between the effective income tax rate of 17.0 % and the U.S. federal statutory rate of 21% to income before income taxes was primarily the result of foreign income taxed at different rates, partially offset by tax expense related to the intra-group transfer of intellectual property. 117 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets and liabilities consist of the following: As of December 31, 2022 2021 (In millions) Deferred tax assets: Net operating loss and credit carryforwards $ 355 $ 317 Accruals, allowances, and prepaids 427 622 Lease liabilities 173 176 Partnership investment — 5 Stock-based compensation 154 188 Net unrealized losses 151 23 Acquired intangibles 38 — Fixed assets and other intangibles 655 84 Total deferred tax assets 1,953 1,415 Valuation allowance ( 341 ) ( 274 ) Net deferred tax assets $ 1,612 $ 1,141 Deferred tax liabilities: Unremitted foreign earnings $ ( 42 ) $ ( 35 ) Acquired intangibles — ( 240 ) ROU lease assets ( 138 ) ( 154 ) Partnership investment ( 12 ) — Net unrealized gains ( 135 ) ( 351 ) Total deferred tax liabilities ( 327 ) ( 780 ) Net deferred tax assets $ 1,285 $ 361 The following table shows the deferred tax assets and liabilities within our consolidated balance sheets: As of December 31, 2022 2021 Balance Sheet Location (In millions) Total deferred tax assets (non-current) Other assets $ 1,310 $ 547 Total deferred tax liabilities (non-current) Deferred tax liability and other long-term liabilities ( 25 ) ( 186 ) Total net deferred tax assets $ 1,285 $ 361 As of December 31, 2022, our federal, state, and foreign net operating loss carryforwards for income tax purposes were approximately $ 6 million, $ 156 million, and $ 634 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Code. If not utilized, the federal net operating loss carryforwards will begin to expire in 2025, and the state net operating loss carryforwards will begin to expire in 2023. Approximately $ 197 million of the foreign net operating loss carryforwards will begin to expire in 2024, $ 191 million will begin to expire in 2034, and $ 246 million may be carried forward indefinitely. As of December 31, 2022, our federal and state tax credit carryforwards for income tax purposes were approximately $ 24 million and $ 374 million, respectively. If not utilized, the federal tax credits will begin to expire in 2029. Approximately $ 49 million of the state tax credits will begin to expire from 2023 through 2028, $ 8 million will begin to expire in 2038, and $ 317 million may be carried forward indefinitely. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. We have elected the tax law ordering approach to assess the realizability of our net operating losses. During the years ended December 31, 2022 and 2021, we increased our valuation allowance by $ 67 million and $ 108 million, respectively, and during the year ended December 31, 2020, we decreased our valuation allowance by $ 18 million. At December 31, 2022, 2021, and 2020, we maintained a valuation allowance with respect to our net deferred tax assets in certain states, operating losses in certain state and foreign jurisdictions, and certain federal and state tax credits that we believe are not likely to be realized. 118 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) At December 31, 2022, none of our approximately $ 11.0 billion of unremitted foreign earnings are considered to be indefinitely reinvested. We have accrued $ 42 million of deferred U.S. state income and foreign withholding taxes on the $ 11.0 billion of undistributed foreign earnings. We benefit from agreements concluded in certain jurisdictions, most significantly Singapore. In December 2019, a new agreement was concluded in Singapore. The new agreement took effect January 1, 2021 and will be in effect from 2021 through 2030. This agreement results in significantly lower rates of taxation on certain classes of income and requires various thresholds of investment and employment in those jurisdictions. We review our compliance on an annual basis to ensure we continue to meet our obligations under this agreement. This agreement resulted in tax savings of approximately $ 510 million, $ 327 million, and $ 596 million in 2022, 2021, and 2020, respectively. The benefit of this agreement on our net income (loss) per share (diluted) was approximately $ 0.44 , $ 0.28 , and $ 0.50 in 2022, 2021, and 2020, respectively. The following table reflects changes in unrecognized tax benefits for the periods presented below: Year Ended December 31, 2022 2021 2020 (In millions) Gross amounts of unrecognized tax benefits as of the beginning of the period $ 1,678 $ 1,479 $ 1,141 Increases related to prior period tax positions 52 172 92 Decreases related to prior period tax positions ( 185 ) ( 187 ) ( 78 ) Increases related to current period tax positions 337 232 360 Settlements ( 2 ) ( 15 ) ( 34 ) Statute of limitation expirations ( 3 ) ( 3 ) ( 2 ) Gross amounts of unrecognized tax benefits as of the end of the period $ 1,877 $ 1,678 $ 1,479 If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $ 1.2 billion. For the years ended December 31, 2022, 2021, and 2020, we recognized net interest and penalties of $ 119 million, $ 6 million, and $ 40 million, respectively, related to uncertain tax positions in income tax expense. This expense is reflected in the “Other” line of our effective income tax rate schedule. The amount of interest and penalties accrued as of December 31, 2022 and 2021 was approximately $ 342 million and $ 212 million, respectively. We are subject to taxation in the U.S. and various state and foreign jurisdictions. We are currently under examination by certain tax authorities for the 2010 to 2021 tax years. The material jurisdictions in which we are subject to examination by tax authorities for tax years after 2009 primarily include the U.S. (Federal and California), Australia, Germany, India, Israel, and Singapore. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from our open examinations. Although the timing of the resolution of these audits is uncertain, we do not expect the total amount of unrecognized tax benefits as of December 31, 2022 will materially change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. In connection with our separation from eBay in 2015, we entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement. Under the tax matters agreement, eBay is generally responsible for all additional taxes (and will be entitled to all related refunds of taxes) imposed on eBay and its subsidiaries (including subsidiaries that were transferred to PayPal pursuant to the separation) arising after the separation date with respect to the taxable periods (or portions thereof) ended on or prior to July 17, 2015, except for those taxes for which PayPal has reflected an unrecognized tax benefit in its financial statements on the separation date. 119 Table of Contents PayPal Holdings, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. This effort focused on reducing redundant operations and simplifying our organizational structure. The associated restructuring charges in 2022 were $ 121 million. We primarily incurred employee severance and benefits costs, as well as associated consulting costs under the 2022 strategic reduction. The strategic actions associated with this plan were substantially completed by the fourth quarter of 2022. The following table summarizes the restructuring reserve activity during the year ended December 31, 2022: Employee Severance and Benefits and Other Associated Costs (In millions) Accrued liability as of January 1, 2022 $ 5 Charges 121 Payments ( 102 ) Accrued liability as of December 31, 2022 $ 24 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 in 2021 and 2020 were $ 27 million, and $ 109 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 real estate and facility capacity requirements due to our new and evolving work models. We incurred asset impairment charges of $ 81 million, $ 26 million, and $ 30 million in 2022, 2021, and 2020, 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. NOTE 18— SUBSEQUENT EVENTS In January 2023, management initiated a global workforce reduction intended to focus resources on core strategic priorities, and improve our cost structure and operating efficiency. We estimate that this reduction will impact approximately 7 % of our employees and will result in approximately $ 100 million of restructuring charges, primarily related to employee severance and benefits costs. The actions associated with this plan are expected to be substantially completed by the first quarter of 2023. 120 Table of Contents FINANCIAL STATEMENT SCHEDULE The Financial Statement Schedule II—VALUATION AND QUALIFYING ACCOUNTS is filed as part of this Annual Report on Form 10-K. Balance at Beginning of Period Charged/ (Credited) to Net Income Charged to Other Accounts (1) Charges Utilized/ (Write-offs) Balance at End of Period (In millions) Allowance for Transaction Losses and Negative Customer Balances Year Ended December 31, 2020 $ 399 $ 1,135 $ — $ ( 1,120 ) $ 414 Year Ended December 31, 2021 $ 414 $ 1,153 $ — $ ( 1,212 ) $ 355 Year Ended December 31, 2022 $ 355 $ 1,170 $ — $ ( 1,247 ) $ 278 Allowance for Loans and Interest Receivable Year Ended December 31, 2020 $ 258 $ 689 $ 210 $ ( 319 ) $ 838 Year Ended December 31, 2021 $ 838 $ ( 104 ) $ — $ ( 243 ) $ 491 Year Ended December 31, 2022 $ 491 $ 437 $ — $ ( 330 ) $ 598 (1) The amount is related to the impact of the adjustment recorded for adoption of the current expected credit loss standard. 121 Table of Contents INDEX OF EXHIBITS Incorporated by Reference Exhibit Number Exhibit Description Filed with this Form 10-K Form Date Filed 2.01 Separation and Distribution Agreement by and between eBay Inc. and PayPal Holdings, Inc. 10-12B/A 6/26/2015 3.01 PayPal Holdings, Inc. Restated Certificate of Incorporation 10-Q 7/27/2017 3.02 PayPal Holdings, Inc. Amended and Restated Bylaws effective January 17, 2019 8-K 1/18/2019 4.01 Description of Securities 10-K 2/6/2020 4.02 Indenture, dated as of September 26, 2019, by and between PayPal Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee 8-K 9/26/2019 4.03 Officer’s Certificate, dated as of September 26, 2019, pursuant to the Indenture, dated as of September 26, 2019, by and between PayPal Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee 8-K 9/26/2019 4.04 Form of 2022 Note (included in Exhibit 4.03) 8-K 9/26/2019 4.05 Form of 2024 Note (included in Exhibit 4.03) 8-K 9/26/2019 4.06 Form of 2026 Note (included in Exhibit 4.03) 8-K 9/26/2019 4.07 Form of 2029 Note (included in Exhibit 4.03) 8-K 9/26/2019 4.08 Officer’s Certificate, dated as of May 18, 2020, pursuant to the Indenture, dated as of September 26, 2019, by and between PayPal Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee 8-K 5/18/2020 4.09 Form of 2023 Note (included in Exhibit 4.08) 8-K 5/18/2020 4.10 Form of 2025 Note (included in Exhibit 4.08) 8-K 5/18/2020 4.11 Form of 2030 Note (included in Exhibit 4.08) 8-K 5/18/2020 4.12 Form of 2050 Note (included in Exhibit 4.08) 8-K 5/18/2020 4.13 Officer’s Certificate, dated as of May 23, 2022, pursuant to the Indenture, dated as of September 26, 2019, by and between PayPal Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee 8-K 5/23/2022 4.14 Form of 2027 Note (included in Exhibit 4.2) 8-K 5/23/2022 4.15 Form of 2032 Note (included in Exhibit 4.2) 8-K 5/23/2022 4.16 Form of 2052 Note (included in Exhibit 4.2) 8-K 5/23/2022 4.17 Form of 2062 Note (included in Exhibit 4.2) 8-K 5/23/2022 10.01 Tax Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc. dated July 17, 2015 8-K 7/20/2015 10.02 Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan Europe Limited, as the Administrative Agents 8-K 9/12/2019 10.03 364-Day Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent 8-K 9/12/2019 10.04+ PayPal Employee Incentive Plan, as amended and restated DEF 14A 4/14/2016 10.05+ PayPal Holdings, Inc. Amended and Restated 2015 Equity Incentive Award Plan 8-K 5/25/2018 10.06+ PayPal Holdings, Inc. Amended and Restated Deferred Compensation Plan effective November 6, 2018 10-K 2/7/2019 122 Table of Contents Incorporated by Reference Exhibit Number Exhibit Description Filed with this Form 10-K Form Date Filed 10.07+ PayPal Holdings, Inc. Executive Change in Control and Severance Plan, as amended and restated, effective as of September 27, 2021 10-Q 11/9/2021 10.08+ Form of Indemnity Agreement between PayPal Holdings, Inc. and individual directors and officers 10-12B/A 5/14/2015 10.09+ Form of Global Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan 10-12B/A 5/14/2015 10.10+ Form of Global Performance Based Restricted Stock Unit Award Grant Notice and Performance Based Restricted Stock Unit Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan, as amended and restated 10-Q 4/27/2017 10.11+ Form of Global Notice of Grant of Stock Option and Stock Option Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan 10-12B/A 5/14/2015 10.12+ Form of Director Annual Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan 10-12B/A 5/14/2015 10.13+ Form of Electing Director Quarterly Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan 10-12B/A 5/14/2015 10.14+ PayPal Holdings, Inc. Amended and Restated Employee Stock Purchase Plan 8-K 5/25/2018 10.15+ Amendment to PayPal Holdings, Inc. Amended and Restated Employee Stock Purchase Plan 10-Q 11/9/2021 10.16+ PayPal Holdings, Inc. 2022 Inducement Plan 10-Q 8/2/2022 10.1 7 + Offer Letter dated September 29, 2014 between eBay Inc. and Daniel Schulman 10-12B/A 5/14/2015 10.1 8 + Amendment dated December 31, 2014 to Offer Letter between eBay Inc. and Daniel Schulman 10-12B/A 5/14/2015 10.1 9 + Letter dated April 7, 2015 from eBay Inc. to Louise Pentland 10-K 2/11/2016 10. 20 + Letter dated April 13, 2015 from eBay Inc. to Jonathan Auerbach 10-K 2/11/2016 10.2 1 + Letter Agreement dated July 29, 2015 between John Rainey and PayPal Holdings, Inc. 10-Q 10/29/2015 10.2 2 + Letter Agreement, dated April 17, 2016, between Aaron Karczmer and PayPal Holdings, Inc. 10-Q 4/27/2017 10.2 3 + Letter Agreement effective February 20, 2019 between Mark Britto and PayPal Holdings, Inc. 10-Q 4/25/2019 10.24+ Letter Agreement effective July 13, 2022, between Blake Jorgensen and PayPal Holdings, Inc. 10-Q 8/2/2022 10.25+ Letter Agreement dated June 15, 2022 between Gabrielle Rabinovitch and PayPal Holdings, Inc. 8-K 6/17/2022 10.26+ Letter Agreement dated September 27, 2022 between Gabrielle Rabinovitch and PayPal Holdings, Inc. 8-K 10/3/2022 10.27+ Letter Agreement dated September 1, 2022 between John Kim and PayPal Holdings, Inc. 10-Q 11/3/2022 10.2 8 + Independent Director Compensation Policy 10-K 2/5/2021 10.2 9 + PayPal Holdings, Inc. Executive Change in Control and Severance Plan, as amended and restated 10-Q 7/29/2021 123 Table of Contents Incorporated by Reference Exhibit Number Exhibit Description Filed with this Form 10-K Form Date Filed 10.30 First Amendment, dated as of March 23, 2020, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan Europe Limited, as the Administrative Agents 10-Q 5/7/2020 10.31 First Amendment, dated as of March 23, 2020, to the 364-Day Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as the Administrative Agent 10-Q 5/7/2020 10.32 Joinder Agreement, dated as of March 25, 2020, among PayPal International Treasury Centre S.à r.l., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents 10-Q 5/7/2020 10.33 Joinder Agreement, dated as of March 25, 2020, among PayPal (Europe) S.à r.l. et Cie, S.C.A., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents 10-Q 5/7/2020 10.34 Joinder Agreement, dated as of March 27, 2020, among PayPal Pte. Ltd., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents 10-Q 5/7/2020 10.35 Joinder Agreement, dated as of March 31, 2020, among PayPal Australia Pty Limited, PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents 10-Q 5/7/2020 10.36 Second Amendment, dated as of January 7, 2022, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan AG, as the Administrative Agents 10-K 2/3/2022 21.01 List of Subsidiaries X 22.01 PricewaterhouseCoopers LLP consent X 23.01 Power of Attorney (see signature page) X 31.01 Certification of PayPal Holdings, Inc.’s Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 X 31.02 Certification of PayPal Holdings, Inc.’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 X 32.01 Certification of PayPal Holdings, Inc.’s Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 X 124 Table of Contents Incorporated by Reference Exhibit Number Exhibit Description Filed with this Form 10-K Form Date Filed 32.02 Certification of PayPal Holdings, Inc.’s Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 X 101 The following financial information related to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) the related Notes to Consolidated Financial Statements X 104 Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101 X + Indicates a management contract or compensatory plan or arrangement 125 Table of Contents ITEM 16. FORM 10-K SUMMARY None. 126 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 9, 2023. PayPal Holdings, Inc. By: /s/ Daniel H. Schulman Name: Title: Daniel H. Schulman President, Chief Executive Officer and Director Table of Contents POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel H. Schulman, Gabrielle Rabinovitch, Bimal Patel, Brian Y. Yamasaki and Jeffrey W. Karbowski, and each or any one of them, each with the power of substitution, his or her attorney-in-fact, to sign any amendments to this report, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 9, 2023. Principal Executive Officer: Principal Financial Officer: By: /s/ Daniel H. Schulman By: /s/ Gabrielle Rabinovitch Daniel H. Schulman Gabrielle Rabinovitch President, Chief Executive Officer and Director Acting Chief Financial Officer and Senior Vice President, Investor Relations and Treasurer Principal Accounting Officer: By: /s/ Jeffrey W. Karbowski Jeffrey W. Karbowski Vice President, Chief Accounting Officer Additional Directors By: /s/ Rodney C. Adkins By: /s/ Jonathan Christodoro Rodney C. Adkins Jonathan Christodoro Director Director By: /s/ John J. Donahoe By: /s/ David W. Dorman John J. Donahoe David W. Dorman Director Director By: /s/ Belinda Johnson By: /s/ Enrique Lores Belinda Johnson Enrique Lores Director Director By: /s/ Gail J. McGovern By: /s/ Deborah M. Messemer Gail J. McGovern Deborah M. Messemer Director Director By: /s/ David M. Moffett By: /s/ Ann M. Sarnoff David M. Moffett Ann M. Sarnoff Director Director By: /s/ Frank D. Yeary Frank D. Yeary Director