PayPal Holdings, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS PayPal Holdings, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2023 December 31, 2022 (In millions, except par value) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 6,816 $ 7,776 Short-term investments 4,731 3,092 Accounts receivable, net 988 963 Loans and interest receivable, held for sale 2,165 — Loans and interest receivable, net of allowances of $ 555 and $ 598 as of September 30, 2023 and December 31, 2022, respectively 5,066 7,431 Funds receivable and customer accounts 34,641 36,264 Prepaid expenses and other current assets 2,228 1,898 Total current assets 56,635 57,424 Long-term investments 3,855 5,018 Property and equipment, net 1,529 1,730 Goodwill 10,935 11,209 Intangible assets, net 564 788 Other assets 2,922 2,455 Total assets $ 76,440 $ 78,624 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 131 $ 126 Funds payable and amounts due to customers 38,641 40,014 Accrued expenses and other current liabilities 3,533 4,055 Income taxes payable 1,137 813 Total current liabilities 43,442 45,008 Deferred tax liability and other long-term liabilities 2,618 2,925 Long-term debt 10,640 10,417 Total liabilities 56,700 58,350 Commitments and contingencies (Note 13) Equity: Common stock, $ 0.0001 par value; 4,000 shares authorized; 1,080 and 1,136 shares outstanding as of September 30, 2023 and December 31, 2022, respectively — — Preferred stock, $ 0.0001 par value; 100 shares authorized, unissued — — Treasury stock at cost, 237 and 173 shares as of September 30, 2023 and December 31, 2022, respectively ( 20,513 ) ( 16,079 ) Additional paid-in-capital 19,307 18,327 Retained earnings 21,798 18,954 Accumulated other comprehensive income (loss) ( 852 ) ( 928 ) Total equity 19,740 20,274 Total liabilities and equity $ 76,440 $ 78,624 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions, except per share data) (Unaudited) Net revenues $ 7,418 $ 6,846 $ 21,745 $ 20,135 Operating expenses: Transaction expense 3,603 2,988 10,427 8,849 Transaction and credit losses 446 367 1,286 1,184 Customer support and operations 474 509 1,454 1,579 Sales and marketing 442 544 1,343 1,733 Technology and development 739 801 2,203 2,431 General and administrative 507 463 1,505 1,584 Restructuring and other charges 39 56 227 182 Total operating expenses 6,250 5,728 18,445 17,542 Operating income 1,168 1,118 3,300 2,593 Other income (expense), net 73 460 318 ( 337 ) Income before income taxes 1,241 1,578 3,618 2,256 Income tax expense 221 248 774 758 Net income (loss) $ 1,020 $ 1,330 $ 2,844 $ 1,498 Net income (loss) per share: Basic $ 0.93 $ 1.15 $ 2.56 $ 1.29 Diluted $ 0.93 $ 1.15 $ 2.55 $ 1.29 Weighted average shares: Basic 1,094 1,154 1,111 1,159 Diluted 1,098 1,157 1,115 1,163 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) (Unaudited) Net income (loss) $ 1,020 $ 1,330 $ 2,844 $ 1,498 Other comprehensive income (loss), net of reclassification adjustments: Foreign currency translation adjustments (“CTA”) ( 70 ) ( 206 ) ( 306 ) ( 601 ) Net investment hedges CTA gains, net 35 97 231 253 Tax expense on net investment hedges CTA gains, net ( 8 ) ( 23 ) ( 53 ) ( 59 ) Unrealized gains (losses) on cash flow hedges, net 109 138 ( 25 ) 348 Tax (expense) benefit on unrealized gains (losses) on cash flow hedges, net ( 6 ) ( 7 ) 1 ( 18 ) Unrealized gains (losses) on investments, net 110 ( 157 ) 298 ( 614 ) Tax (expense) benefit on unrealized gains (losses) on investments, net ( 26 ) 41 ( 70 ) 146 Other comprehensive income (loss), net of tax 144 ( 117 ) 76 ( 545 ) Comprehensive income (loss) $ 1,164 $ 1,213 $ 2,920 $ 953 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Equity (In millions) (Unaudited) Balances at December 31, 2022 1,136 $ ( 16,079 ) $ 18,327 $ ( 928 ) $ 18,954 $ 20,274 Net income — — — — 795 795 Foreign CTA — — — ( 20 ) — ( 20 ) Net investment hedges CTA gains, net — — — 27 — 27 Tax expense on net investment hedges CTA gains, net — — — ( 6 ) — ( 6 ) Unrealized losses on cash flow hedges, net — — — ( 111 ) — ( 111 ) Tax benefit on unrealized losses on cash flow hedges, net — — — 6 — 6 Unrealized gains on investments, net — — — 175 — 175 Tax expense on unrealized gains on investments, net — — — ( 41 ) — ( 41 ) Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 5 — ( 157 ) — — ( 157 ) Common stock repurchased ( 19 ) ( 1,443 ) — — — ( 1,443 ) Stock-based compensation — — 359 — — 359 Balances at March 31, 2023 1,122 $ ( 17,522 ) $ 18,529 $ ( 898 ) $ 19,749 $ 19,858 Net income — — — — 1,029 1,029 Foreign CTA — — — ( 216 ) — ( 216 ) Net investment hedges CTA gains, net — — — 169 — 169 Tax expense on net investment hedges CTA gains, net — — — ( 39 ) — ( 39 ) Unrealized losses on cash flow hedges, net — — — ( 23 ) — ( 23 ) Tax benefit on unrealized losses on cash flow hedges, net — — — 1 — 1 Unrealized gains on investments, net — — — 13 — 13 Tax expense on unrealized gains on investments, net — — — ( 3 ) — ( 3 ) Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 2 — 39 — — 39 Common stock repurchased ( 22 ) ( 1,542 ) — — — ( 1,542 ) Stock-based compensation — — 375 — — 375 Balances at June 30, 2023 1,102 $ ( 19,064 ) $ 18,943 $ ( 996 ) $ 20,778 $ 19,661 Net income — — — — 1,020 1,020 Foreign CTA — — — ( 70 ) — ( 70 ) Net investment hedge CTA gains, net — — — 35 — 35 Tax expense on net investment hedges CTA gains, net — — — ( 8 ) — ( 8 ) Unrealized gains on cash flow hedges, net — — — 109 — 109 Tax expense on unrealized gains on cash flow hedges, net — — — ( 6 ) — ( 6 ) Unrealized gains on investments, net — — — 110 — 110 Tax expense on unrealized gains on investments, net — — — ( 26 ) — ( 26 ) Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 1 — ( 28 ) — — ( 28 ) Common stock repurchased ( 23 ) ( 1,449 ) — — — ( 1,449 ) Stock-based compensation — — 392 — — 392 Balances at September 30, 2023 1,080 $ ( 20,513 ) $ 19,307 $ ( 852 ) $ 21,798 $ 19,740 7 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—(continued) Common Stock Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Equity (In millions) (Unaudited) Balances at December 31, 2021 1,168 $ ( 11,880 ) $ 17,208 $ ( 136 ) $ 16,535 $ 21,727 Net income — — — — 509 509 Foreign CTA — — — ( 95 ) — ( 95 ) Net investment hedges CTA gains, net — — — 21 — 21 Tax expense on net investment hedges CTA gains, net — — — ( 5 ) — ( 5 ) Unrealized losses on cash flow hedges, net — — — ( 3 ) — ( 3 ) Unrealized losses on investments, net — — — ( 293 ) — ( 293 ) Tax benefit on unrealized losses on investments, net — — — 67 — 67 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 4 — ( 273 ) — — ( 273 ) Common stock repurchased ( 11 ) ( 1,500 ) — — — ( 1,500 ) Stock-based compensation — — 447 — — 447 Other — — 1 — — 1 Balances at March 31, 2022 1,161 $ ( 13,380 ) $ 17,383 $ ( 444 ) $ 17,044 $ 20,603 Net loss — — — — ( 341 ) ( 341 ) Foreign CTA — — — ( 300 ) — ( 300 ) Net investment hedges CTA gains, net — — — 135 — 135 Tax expense on net investment hedges CTA gains, net — — — ( 31 ) — ( 31 ) Unrealized gains on cash flow hedges, net — — — 213 — 213 Tax expense on unrealized gains on cash flow hedges, net — — — ( 11 ) — ( 11 ) Unrealized losses on investments, net — — — ( 164 ) — ( 164 ) Tax benefit on unrealized losses on investments, net — — — 38 — 38 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 3 — 51 — — 51 Common stock repurchased ( 8 ) ( 750 ) — — — ( 750 ) Stock-based compensation — — 324 — — 324 Balances at June 30, 2022 1,156 $ ( 14,130 ) $ 17,758 $ ( 564 ) $ 16,703 $ 19,767 Net income — — — — 1,330 1,330 Foreign CTA — — — ( 206 ) — ( 206 ) Net investment hedges CTA gains, net — — — 97 — 97 Tax expense on net investment hedges CTA gains, net — — — ( 23 ) — ( 23 ) Unrealized gains on cash flow hedges, net — — — 138 — 138 Tax expense on unrealized gains on cash flow hedges, net — — — ( 7 ) — ( 7 ) Unrealized losses on investments, net — — — ( 157 ) — ( 157 ) Tax benefit on unrealized losses on investments, net — — — 41 — 41 Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes 1 — ( 14 ) — — ( 14 ) Common stock repurchased ( 10 ) ( 939 ) — — — ( 939 ) Stock-based compensation — — 237 — — 237 Balances at September 30, 2022 1,147 $ ( 15,069 ) $ 17,981 $ ( 681 ) $ 18,033 $ 20,264 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2023 2022 (In millions) (Unaudited) Cash flows from operating activities: Net income (loss) $ 2,844 $ 1,498 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Transaction and credit losses 1,286 1,184 Depreciation and amortization 809 991 Stock-based compensation 1,087 967 Deferred income taxes ( 439 ) ( 538 ) Net (gains) losses on strategic investments ( 205 ) 163 Adjustments to loans and interest receivable, held for sale 49 — Other ( 267 ) 514 Originations of loans receivable, held for sale ( 5,705 ) — Proceeds from repayments of loans receivable, originally classified as held for sale 3,676 — Changes in assets and liabilities: Accounts receivable ( 35 ) ( 89 ) Accounts payable ( 6 ) ( 55 ) Income taxes payable ( 31 ) 109 Other assets and liabilities ( 834 ) ( 522 ) Net cash provided by operating activities 2,229 4,222 Cash flows from investing activities: Purchases of property and equipment ( 478 ) ( 548 ) Proceeds from sales of property and equipment 44 5 Purchases and originations of loans receivable ( 19,802 ) ( 19,167 ) Proceeds from repayments of loans receivable, originally classified as held for investment 21,319 17,164 Purchases of investments ( 14,975 ) ( 16,455 ) Maturities and sales of investments 16,110 16,770 Funds receivable ( 1,016 ) ( 1,085 ) Collateral posted related to derivative instruments, net 8 ( 3 ) Other investing activities 76 30 Net cash provided by (used in) investing activities 1,286 ( 3,289 ) Cash flows from financing activities: Proceeds from issuance of common stock 82 86 Purchases of treasury stock ( 4,395 ) ( 3,189 ) Tax withholdings related to net share settlements of equity awards ( 225 ) ( 321 ) Borrowings under financing arrangements 829 3,346 Repayments under financing arrangements ( 942 ) ( 1,686 ) Funds payable and amounts due to customers ( 1,277 ) ( 659 ) Collateral received related to derivative instruments, net ( 65 ) 437 Other financing activities — 1 Net cash (used in) provided by financing activities ( 5,993 ) ( 1,985 ) 9 Table of Contents PayPal Holdings, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(continued) Nine Months Ended September 30, 2023 2022 (In millions) (Unaudited) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 95 ) ( 253 ) Net change in cash, cash equivalents, and restricted cash ( 2,573 ) ( 1,305 ) Cash, cash equivalents, and restricted cash at beginning of period 19,156 18,029 Cash, cash equivalents, and restricted cash at end of period $ 16,583 $ 16,724 Supplemental cash flow disclosures: Cash paid for interest $ 167 $ 114 Cash paid for income taxes, net $ 1,058 $ 666 The table below reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows: Cash and cash equivalents $ 6,816 $ 6,659 Short-term investments 6 21 Funds receivable and customer accounts 9,761 10,044 Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows $ 16,583 $ 16,724 The accompanying notes are an integral part of these condensed consolidated financial statements. 10 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1— OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OVERVIEW AND ORGANIZATION PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform that enables digital payments and simplifies commerce experiences on behalf of merchants and consumers worldwide. PayPal is committed to democratizing financial services to help improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world. Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world in the markets we serve, anytime, on any platform, and using any device when sending payments or getting paid, including person-to-person payments. We operate globally and in a rapidly evolving regulatory environment characterized by a heightened focus by regulators globally on all aspects of the payments industry, including countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. The laws and regulations applicable to us, including those enacted prior to the advent of digital payments, 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 condensed consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our condensed consolidated statements of income (loss). Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our condensed consolidated statements of income (loss). Our investment balance is included in long-term investments on our condensed consolidated balance sheets. We determine at the inception of each investment, and re-evaluate if certain events occur, whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine an investment is in a VIE, we then assess if we are the primary beneficiary, which would require consolidation. As of September 30, 2023 and December 31, 2022, no VIEs qualified for consolidation as the structures of these entities do not provide us with the ability to direct activities that would significantly impact their economic performance. As of September 30, 2023 and December 31, 2022, the carrying value of our investments in nonconsolidated VIEs was $ 160 million and $ 128 million, respectively, and is included as non-marketable equity securities applying the equity method of accounting in long-term investments on our condensed consolidated balance sheets. Our maximum exposure to loss related to our nonconsolidated VIEs, which represents funded commitments and any future funding commitments, was $ 246 million and $ 232 million as of September 30, 2023 and December 31, 2022, respectively. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on February 10, 2023. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the condensed consolidated financial statements for all interim periods presented. Certain amounts for prior periods have been reclassified to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2023. 11 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 condensed 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 condensed 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 table presents the effects of the changes on the presentation of these cash flows to the previously reported condensed consolidated statements of cash flows: Nine Months Ended September 30, 2022 (In millions) As Previously Reported (1) Adjustments Reclassified Net cash provided by (used in): Operating activities (2) $ 4,656 $ ( 434 ) $ 4,222 Investing activities (3) ( 3,286 ) ( 3 ) ( 3,289 ) Financing activities (4) ( 2,422 ) 437 ( 1,985 ) Effect of exchange rates on cash, cash equivalents, and restricted cash ( 253 ) — ( 253 ) Net decrease in cash, cash equivalents, and restricted cash $ ( 1,305 ) $ — $ ( 1,305 ) (1) As reported in our Form 10-Q for the quarter ended September 30, 2022 filed with the SEC on November 4, 2022. (2) Financial statement line impacted in operating activities was “Other assets and liabilities.” (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 condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and credit losses, income taxes, loss contingencies, revenue recognition, 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. Loans and interest receivable, held for sale Loans and interest receivable, held for sale, represents a portion of our installment consumer receivables that we intend to sell. This portfolio includes the substantial majority of the United Kingdom (“U.K.”) and other European buy now, pay later loan receivables. In June 2023, we entered into a multi-year agreement with a global investment firm to sell up to € 40 billion of U.K. and other European buy now, pay later loan receivables, consisting of eligible loans and interest receivable, held for sale at the closing of the transaction and a forward-flow arrangement for the sale of future originations of eligible loans over a 24 -month commitment period (together, “eligible consumer installment receivables”). Following the closing of this transaction, which is expected to occur in the fourth quarter of 2023, the global investment firm will become the owner of the eligible consumer installment receivables and we will no longer hold an ownership interest in these receivables. We will maintain the servicing rights and receive a servicing fee for the entire pool of the eligible consumer installment receivables outstanding. 12 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Loans and interest receivable, held for sale are recorded at the lower of cost or fair value, determined on an aggregate basis, with valuation changes and any associated charge-offs recorded in restructuring and other charges on our condensed consolidated statements of income (loss). Prior to the decision to sell, this portfolio was reported at outstanding principal balances, net of allowances, including unamortized deferred origination costs and estimated collectible interest and fees. At the time of reclassification, any previously recorded allowance for credit losses for loans and interest receivable outstanding was reversed, resulting in a decrease of approximately $ 33 million in transaction and credit losses in our condensed consolidated statements of income (loss) for the nine months ended September 30, 2023. Interest income on interest bearing held-for-sale loans is accrued and recognized based on the contractual rate of interest. Recently adopted accounting guidance In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures (Topic 326): Financial Instruments – Credit Losses . This amended guidance eliminated the accounting designation of a loan modification as a TDR and the measurement guidance for TDRs. The amendments also enhanced existing disclosure requirements and introduced new requirements related to modifications of receivables due from borrowers experiencing financial difficulty. Additionally, this guidance required entities to disclose gross charge-offs by year of origination for financing receivables, such as loans and interest receivable. The amended guidance was effective for fiscal years beginning after December 15, 2022 and was required to be applied prospectively, except for the recognition and measurement of TDRs, which could be applied on a modified retrospective basis. We adopted this guidance effective January 1, 2023 on a prospective basis. Our financial statements were not materially impacted upon adoption. For additional information, see “Note 11—Loans and Interest Receivable.” There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable. We do not believe any of these accounting pronouncements have had, or will have, a material impact on our condensed consolidated financial statements or disclosures. NOTE 2— REVENUE We enable our customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our payments platform and from other value added services. Our revenues are classified into two categories: transaction revenues and revenues from other value added services. DISAGGREGATION OF REVENUE We determine operating segments based on how our chief operating decision maker (“CODM”) manages the business, makes operating decisions around the allocation of resources, and evaluates operating performance. Our CODM is our Chief Executive Officer, who 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. 13 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table presents our revenue disaggregated by primary geographical market and category: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Primary geographical markets U.S. $ 4,257 $ 3,978 $ 12,614 $ 11,512 Other countries (1) 3,161 2,868 9,131 8,623 Total net revenues (2) $ 7,418 $ 6,846 $ 21,745 $ 20,135 Revenue category Transaction revenues $ 6,654 $ 6,234 $ 19,574 $ 18,504 Revenues from other value added services 764 612 2,171 1,631 Total net revenues (2) $ 7,418 $ 6,846 $ 21,745 $ 20,135 (1) No single country included in the other countries category generated more than 10% of total net revenues. (2) Total net revenues include $ 433 million and $ 391 million for the three months ended September 30, 2023 and 2022, respectively, and $ 1.3 billion and $ 874 million for the nine months ended September 30, 2023 and 2022, 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, including loans and interest receivable held for sale, 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 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 shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding equity incentive awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. During periods when we report net loss, diluted net loss per share is the same as basic net loss per share because the effects of potentially dilutive items would decrease the net loss per share. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions, except per share amounts) Numerator: Net income (loss) $ 1,020 $ 1,330 $ 2,844 $ 1,498 Denominator: Weighted average shares of common stock - basic 1,094 1,154 1,111 1,159 Dilutive effect of equity incentive awards 4 3 4 4 Weighted average shares of common stock - diluted 1,098 1,157 1,115 1,163 Net income (loss) per share: Basic $ 0.93 $ 1.15 $ 2.56 $ 1.29 Diluted $ 0.93 $ 1.15 $ 2.55 $ 1.29 Common stock equivalents excluded from income (loss) per diluted share because their effect would have been anti-dilutive or potentially dilutive 22 14 20 13 NOTE 4— BUSINESS COMBINATIONS AND DIVESTITURES There were no acquisitions accounted for as business combinations or divestitures completed in the three and nine months ended September 30, 2023 and 2022. 14 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) In September 2023, we entered into a definitive agreement to sell Happy Returns to United Parcel Services, Inc. for approximately $ 465 million in cash. The sale of Happy Returns will enable us to focus on our core business and priorities. The transaction closed in the fourth quarter of 2023, and we expect to record a pre-tax gain of approximately $ 329 million, net of expected transaction costs, in restructuring and other charges on the condensed consolidated statements of income (loss) in that period. We concluded that Happy Returns meets the criteria to be classified as held for sale and measured at the lower of its carrying amount or fair value less cost to sell as of September 30, 2023. The assets held for sale consist primarily of $ 81 million of goodwill and $ 13 million of net intangible assets, which are presented within prepaid expenses and other current assets on our condensed consolidated balance sheets as of September 30, 2023. No impairment charges were required in the three months ended September 30, 2023. The sale does not represent a strategic shift that would have a major effect on our operations and financial results, and therefore is not reported as a discontinued operation. NOTE 5— GOODWILL AND INTANGIBLE ASSETS GOODWILL The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2023: December 31, 2022 Goodwill Acquired Adjustments September 30, 2023 (In millions) Total goodwill $ 11,209 $ — $ ( 274 ) $ 10,935 The adjustments to goodwill during the nine months ended September 30, 2023 pertained to foreign currency translation adjustments and reclassification of $ 81 million of goodwill to assets held for sale described in “Note 4—Business Combinations and Divestitures.” INTANGIBLE ASSETS The components of identifiable intangible assets were as follows: September 30, 2023 December 31, 2022 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 $ 1,521 $ ( 1,099 ) $ 422 7 $ 1,664 $ ( 1,092 ) $ 572 7 Marketing related 383 ( 345 ) 38 5 395 ( 339 ) 56 5 Developed technology 1,011 ( 991 ) 20 3 1,099 ( 1,048 ) 51 3 All other 428 ( 344 ) 84 7 438 ( 329 ) 109 7 Intangible assets, net $ 3,343 $ ( 2,779 ) $ 564 $ 3,596 $ ( 2,808 ) $ 788 In the three and nine months ended September 30, 2023, we reclassified approximately $ 36 million of gross intangible assets, with a net carrying amount of $ 13 million as assets held for sale as described in “Note 4—Business Combinations and Divestitures.” In the three months ended September 30, 2023, we retired approximately $ 49 million of fully amortized intangible assets, of which $ 35 million and $ 14 million were included in developed technology and customer lists and user base, respectively. In the nine months ended September 30, 2023, we retired approximately $ 141 million of fully amortized intangible assets, of which $ 79 million and $ 62 million were included in customer lists and user base and developed technology, respectively. Amortization expense for intangible assets was $ 57 million and $ 118 million for the three months ended September 30, 2023 and 2022, respectively. Amortization expense for intangible assets was $ 172 million and $ 356 million for the nine months ended September 30, 2023 and 2022, respectively. 15 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Expected future intangible asset amortization as of September 30, 2023 was as follows (in millions): Fiscal years: Remaining 2023 $ 48 2024 178 2025 148 2026 91 2027 56 Thereafter 43 Total $ 564 NOTE 6— LEASES PayPal enters into various leases, which are primarily real estate operating leases. We use these properties for executive and administrative offices, data centers, product development offices, customer services and operations centers, and warehouses. While a majority of our lease agreements do not contain an explicit interest rate, certain of our lease agreements are subject to changes based on the Consumer Price Index or another referenced index. In the event of changes to the relevant index, lease liabilities are not remeasured and instead are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. The short-term lease exemption has been adopted for all leases with a duration of less than 12 months. PayPal’s lease portfolio includes a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements. As of September 30, 2023, we had no finance leases. The components of lease expense were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Lease expense Operating lease expense $ 39 $ 43 $ 119 $ 128 Sublease income ( 2 ) ( 2 ) ( 6 ) ( 6 ) Lease expense, net $ 37 $ 41 $ 113 $ 122 Supplemental cash flow information related to leases was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 45 $ 44 $ 131 $ 127 Right-of-use (“ROU”) lease assets obtained in exchange for new operating lease liabilities $ ( 23 ) $ 5 $ ( 1 ) $ 99 Other non-cash ROU lease asset activity (1) $ ( 15 ) $ ( 11 ) $ ( 40 ) $ ( 36 ) (1) ROU lease asset impairment. Refer to “Note 17—Restructuring and Other Charges” for further details. 16 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Supplemental balance sheet information related to leases was as follows: September 30, 2023 December 31, 2022 (In millions, except weighted-average figures) Operating ROU lease assets $ 423 $ 574 Current operating lease liabilities 147 151 Operating lease liabilities 449 569 Total operating lease liabilities $ 596 $ 720 Weighted-average remaining lease term — operating leases 5.0 years 5.7 years Weighted-average discount rate — operating leases 4 % 3 % Future minimum lease payments for our operating leases as of September 30, 2023 were as follows: Operating Leases Fiscal years: (In millions) Remaining 2023 $ 44 2024 160 2025 122 2026 108 2027 86 Thereafter 137 Total $ 657 Less: present value discount ( 61 ) Lease liability $ 596 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. As of September 30, 2023, we have additional operating leases, primarily for data centers, which will commence in the first quarter of 2024 or later with minimum lease payments aggregating to $ 244 million and lease terms ranging from five to eight 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, convert, 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, Litecoin, and PayPal USD stablecoin (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 custodians hold 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. As of September 30, 2023, we utilize two third-party custodians; as such, there is concentration risk in the event these custodians are not able to perform in accordance with our agreement. 17 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Due to the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks, we recognize a crypto asset safeguarding liability to reflect our obligation to safeguard the crypto assets held for the benefit of our customers, which is recorded in accrued expenses and other current liabilities on our condensed consolidated balance sheets. We also recognize a corresponding safeguarding asset, which is recorded in prepaid expenses and other current assets on our condensed consolidated balance sheets. The crypto asset safeguarding liability and corresponding safeguarding asset are measured and recorded at fair value on a recurring basis using quoted prices for the underlying crypto assets on the active exchange that we have identified as the principal market at the balance sheet date. The corresponding safeguarding asset may be adjusted for loss events, as applicable. As of September 30, 2023, the Company has not incurred any safeguarding loss events, and therefore, the crypto asset safeguarding liability and corresponding safeguarding asset were recorded at the same value. The following table summarizes the significant crypto assets we hold for the benefit of our customers and the crypto asset safeguarding liability and corresponding safeguarding asset as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 (In millions) Bitcoin $ 479 $ 291 Ethereum 316 250 Other 82 63 Crypto asset safeguarding liability $ 877 $ 604 Crypto asset safeguarding asset $ 877 $ 604 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2023: 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 $ ( 23 ) $ ( 403 ) $ ( 811 ) $ 195 $ 46 $ ( 996 ) Other comprehensive income (loss) before reclassifications 116 110 ( 70 ) 35 ( 40 ) 151 Less: Amount of gain reclassified from accumulated other comprehensive income (loss) (“AOCI”) 7 — — — — 7 Net current period other comprehensive income (loss) 109 110 ( 70 ) 35 ( 40 ) 144 Ending balance $ 86 $ ( 293 ) $ ( 881 ) $ 230 $ 6 $ ( 852 ) 18 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2022: 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 $ 409 $ ( 544 ) $ ( 665 ) $ 180 $ 56 $ ( 564 ) Other comprehensive income (loss) before reclassifications 294 ( 157 ) ( 206 ) 97 11 39 Less: Amount of gain reclassified from AOCI 156 — — — — 156 Net current period other comprehensive income (loss) 138 ( 157 ) ( 206 ) 97 11 ( 117 ) Ending balance $ 547 $ ( 701 ) $ ( 871 ) $ 277 $ 67 $ ( 681 ) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2023: 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 $ 111 $ ( 591 ) $ ( 575 ) $ ( 1 ) $ 128 $ ( 928 ) Other comprehensive income (loss) before reclassifications 92 273 ( 306 ) 231 ( 122 ) 168 Less: Amount of gain (loss) reclassified from AOCI 117 ( 25 ) — — — 92 Net current period other comprehensive income (loss) ( 25 ) 298 ( 306 ) 231 ( 122 ) 76 Ending balance $ 86 $ ( 293 ) $ ( 881 ) $ 230 $ 6 $ ( 852 ) The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2022: 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 $ 199 $ ( 87 ) $ ( 270 ) $ 24 $ ( 2 ) $ ( 136 ) Other comprehensive income (loss) before reclassifications 658 ( 614 ) ( 601 ) 253 69 ( 235 ) Less: Amount of gain reclassified from AOCI 310 — — — — 310 Net current period other comprehensive income (loss) 348 ( 614 ) ( 601 ) 253 69 ( 545 ) Ending balance $ 547 $ ( 701 ) $ ( 871 ) $ 277 $ 67 $ ( 681 ) 19 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table provides details about reclassifications out of AOCI for the periods presented below: Details about AOCI Components Amount of Gains (Losses) Reclassified from AOCI Affected Line Item in the Statements of Income (Loss) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Gains on cash flow hedges — foreign currency exchange contracts $ 7 $ 156 $ 117 $ 310 Net revenues Losses on investments — — ( 23 ) Net revenues Losses on investments — — ( 2 ) — Other income (expense), net 7 156 92 310 Income before income taxes — — — — Income tax expense Total reclassifications for the period $ 7 $ 156 $ 92 $ 310 Net income (loss) OTHER INCOME (EXPENSE), NET The following table reconciles the components of other income (expense), net for the periods presented below: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Interest income $ 124 $ 48 $ 348 $ 90 Interest expense ( 86 ) ( 87 ) ( 260 ) ( 215 ) Net gains (losses) on strategic investments 24 495 205 ( 163 ) Other 11 4 25 ( 49 ) Other income (expense), net $ 73 $ 460 $ 318 $ ( 337 ) 20 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 8— FUNDS RECEIVABLE AND CUSTOMER ACCOUNTS AND INVESTMENTS The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 (In millions) Funds receivable and customer accounts: Cash and cash equivalents $ 9,761 $ 11,363 Time deposits 96 95 Available-for-sale debt securities 16,360 17,349 Funds receivable 8,424 7,457 Total funds receivable and customer accounts $ 34,641 $ 36,264 Short-term investments: Time deposits $ 507 $ 482 Available-for-sale debt securities 4,218 2,593 Restricted cash 6 17 Total short-term investments $ 4,731 $ 3,092 Long-term investments: Time deposits $ 45 $ 55 Available-for-sale debt securities 1,421 2,817 Strategic investments 2,389 2,146 Total long-term investments $ 3,855 $ 5,018 As of September 30, 2023 and December 31, 2022, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows: September 30, 2023 (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 $ 8,851 $ — $ ( 146 ) $ 8,705 Foreign government and agency securities 808 — ( 16 ) 792 Corporate debt securities 1,508 — ( 38 ) 1,470 Asset-backed securities 1,501 2 ( 5 ) 1,498 Municipal securities 579 — ( 6 ) 573 Commercial paper 3,078 — ( 3 ) 3,075 Short-term investments: U.S. government and agency securities 580 — ( 6 ) 574 Foreign government and agency securities 368 — ( 12 ) 356 Corporate debt securities 1,143 — ( 21 ) 1,122 Asset-backed securities 585 1 ( 7 ) 579 Commercial paper 1,588 — ( 1 ) 1,587 Long-term investments: U.S. government and agency securities 336 — ( 20 ) 316 Foreign government and agency securities 34 — ( 2 ) 32 Corporate debt securities 210 — ( 11 ) 199 Asset-backed securities 876 — ( 2 ) 874 Total available-for-sale debt securities (2) $ 22,045 $ 3 $ ( 296 ) $ 21,752 (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.” 21 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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.” Gross amortized cost and estimated fair value balances exclude accrued interest receivable on available-for-sale debt securities, which totaled $ 94 million and $ 65 million at September 30, 2023 and December 31, 2022, respectively, and were included in other current assets on our condensed consolidated balance sheets. 22 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) As of September 30, 2023 and December 31, 2022, the gross unrealized losses and estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments for which an allowance for credit losses was not deemed necessary in the current period, aggregated by the length of time those individual securities have been in a continuous loss position, was as follows: September 30, 2023 (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 $ 3,534 $ ( 22 ) $ 4,504 $ ( 124 ) $ 8,038 $ ( 146 ) Foreign government and agency securities 102 ( 1 ) 513 ( 15 ) 615 ( 16 ) Corporate debt securities 124 — 1,346 ( 38 ) 1,470 ( 38 ) Asset-backed securities 702 ( 3 ) 337 ( 2 ) 1,039 ( 5 ) Municipal securities 389 ( 4 ) 155 ( 2 ) 544 ( 6 ) Commercial paper 2,682 ( 3 ) — — 2,682 ( 3 ) Short-term investments: U.S. government and agency securities 25 — 150 ( 6 ) 175 ( 6 ) Foreign government and agency securities — — 356 ( 12 ) 356 ( 12 ) Corporate debt securities 307 — 793 ( 21 ) 1,100 ( 21 ) Asset-backed securities 188 ( 2 ) 132 ( 5 ) 320 ( 7 ) Commercial paper 1,537 ( 1 ) — — 1,537 ( 1 ) Long-term investments: U.S. government and agency securities — — 316 ( 20 ) 316 ( 20 ) Foreign government and agency securities — — 32 ( 2 ) 32 ( 2 ) Corporate debt securities — — 199 ( 11 ) 199 ( 11 ) Asset-backed securities 251 ( 1 ) 230 ( 1 ) 481 ( 2 ) Total available-for-sale debt securities $ 9,841 $ ( 37 ) $ 9,063 $ ( 259 ) $ 18,904 $ ( 296 ) (1) “—” Denotes gross unrealized loss or fair value of less than $1 million in a given position. 23 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 ( 10 ) 997 ( 34 ) 1,407 ( 44 ) Corporate debt securities 9 ( 1 ) 1,545 ( 81 ) 1,554 ( 82 ) Asset-backed securities 773 ( 12 ) 508 ( 14 ) 1,281 ( 26 ) 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. 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. During the three months ended September 30, 2023, we received $ 772 million in proceeds from the sale of available-for-sale debt securities and incurred gross realized gains and losses which were de minimis and determined using the specific identification method. During the nine months ended September 30, 2023, we received $ 2.7 billion in proceeds from the sale of available-for-sale debt securities and incurred gross realized losses of $ 25 million and de minimis gross realized gains, which were determined using the specific identification method. Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows: September 30, 2023 Amortized Cost Fair Value (In millions) One year or less $ 13,950 $ 13,782 After one year through five years 5,721 5,599 After five years through ten years 2,309 2,307 After ten years 65 64 Total $ 22,045 $ 21,752 Actual maturities may differ from contractual maturities as certain securities may be prepaid. 24 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) STRATEGIC INVESTMENTS Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are primarily investments in privately held companies. Our marketable equity securities have readily determinable fair values and are recorded as long-term investments on our condensed consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), net on our condensed consolidated statements of income (loss). Marketable equity securities totaled $ 541 million and $ 323 million as of September 30, 2023 and December 31, 2022, respectively. Our non-marketable equity securities are recorded in long-term investments on our condensed consolidated balance sheets. The carrying value of our non-marketable equity securities totaled $ 1.8 billion as of September 30, 2023 and December 31, 2022. As of September 30, 2023 and December 31, 2022, we had non-marketable equity securities of $ 168 million and $ 136 million, respectively, where we have the ability to exercise significant influence, but not control, over the investee. We account for these equity securities using the equity method of accounting. The remaining non-marketable equity securities do not have a readily determinable fair value and we measure these equity investments at cost minus impairment, if any, and adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, and our share of earnings or losses from investments accounted for using the equity method are recognized in other income (expense), net on our condensed consolidated statements of income (loss). Measurement Alternative adjustments The adjustments to the carrying value of our non-marketable equity securities accounted for under the Measurement Alternative in the three and nine months ended September 30, 2023 and 2022 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Carrying amount, beginning of period $ 1,691 $ 1,574 $ 1,687 $ 1,268 Adjustments related to non-marketable equity securities: Net additions (1) 4 17 30 74 Gross unrealized gains — 174 23 423 Gross unrealized losses and impairments ( 15 ) — ( 60 ) — Carrying amount, end of period $ 1,680 $ 1,765 $ 1,680 $ 1,765 (1) Net additions include purchases, reductions due to sales of securities, and reclassifications when the Measurement Alternative is subsequently elected or no longer applies. The following table summarizes the cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative, held at September 30, 2023 and December 31, 2022, respectively: September 30, 2023 December 31, 2022 (In millions) Cumulative gross unrealized gains $ 1,159 $ 1,137 Cumulative gross unrealized losses and impairments $ ( 188 ) $ ( 131 ) Unrealized gains (losses) on strategic investments, excluding those accounted for using the equity method The following table summarizes the net unrealized gains (losses) on marketable and non-marketable equity securities, excluding those accounted for using the equity method, held at September 30, 2023 and 2022, respectively: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Net unrealized gains (losses) $ 13 $ 232 $ 200 $ 220 25 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 9— FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES FINANCIAL ASSETS AND LIABILITIES MEASURED AND RECORDED AT FAIR VALUE ON A RECURRING BASIS The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022: September 30, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) (In millions) Assets: Cash and cash equivalents (1) $ 677 $ — $ 677 Short-term investments (2) : U.S. government and agency securities 574 — 574 Foreign government and agency securities 356 — 356 Corporate debt securities 1,122 — 1,122 Asset-backed securities 579 — 579 Commercial paper 1,587 — 1,587 Total short-term investments 4,218 — 4,218 Funds receivable and customer accounts (3) : Cash and cash equivalents 398 — 398 U.S. government and agency securities 8,705 — 8,705 Foreign government and agency securities 930 — 930 Corporate debt securities 1,579 — 1,579 Asset-backed securities 1,498 — 1,498 Municipal securities 573 — 573 Commercial paper 3,075 — 3,075 Total funds receivable and customer accounts 16,758 — 16,758 Derivatives 301 — 301 Crypto asset safeguarding asset 877 — 877 Long-term investments (2),(4) : U.S. government and agency securities 316 — 316 Foreign government and agency securities 32 — 32 Corporate debt securities 199 — 199 Asset-backed securities 874 — 874 Marketable equity securities 541 541 — Total long-term investments 1,962 541 1,421 Total financial assets $ 24,793 $ 541 $ 24,252 Liabilities: Derivatives $ 56 $ — $ 56 Crypto asset safeguarding liability 877 — 877 Total financial liabilities $ 933 $ — $ 933 (1) Excludes cash of $ 6.1 billion not measured and recorded at fair value. (2) Excludes restricted cash of $ 6 million and time deposits of $ 552 million not measured and recorded at fair value. (3) Excludes cash, time deposits, and funds receivable of $ 17.9 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. 26 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 $ 18.7 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. 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 we have 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). 27 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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. As of September 30, 2023 and December 31, 2022, we did not have any assets or liabilities requiring measurement at fair value on a recurring basis with significant unobservable inputs that would require a high level of judgment to determine fair value (Level 3). We elect to account for available-for-sale debt securities denominated in currencies other than the functional currency of our subsidiaries under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the condensed consolidated statements of income (loss) to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the corresponding foreign exchange gains and losses relating to customer liabilities. The following table summarizes the estimated fair value and amortized cost of our available-for-sale debt securities under the fair value option as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Amortized Cost Fair Value Amortized Cost Fair Value (In millions) (In millions) Funds receivable and customer accounts $ 255 $ 247 $ 441 $ 481 The following table summarizes the gains (losses) from fair value changes recognized in other income (expense), net related to the available-for-sale debt securities under the fair value option for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Funds receivable and customer accounts $ ( 5 ) $ ( 70 ) $ 6 $ ( 213 ) ASSETS MEASURED AND RECORDED AT FAIR VALUE ON A NON-RECURRING BASIS The following tables summarize our assets held as of September 30, 2023 and December 31, 2022 for which a non-recurring fair value measurement was recorded during the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively: September 30, 2023 Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) (In millions) Loans and interest receivable, held for sale $ 2,165 $ — $ 2,165 Non-marketable equity securities measured using the Measurement Alternative (1) 159 111 48 Other assets (2) 112 112 — Total $ 2,436 $ 223 $ 2,213 (1) Excludes non-marketable equity securities of $ 1.5 billion accounted for under the Measurement Alternative for which no observable price changes occurred during the nine months ended September 30, 2023. (2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the nine months ended September 30, 2023. See “Note 6—Leases” for additional information. 28 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) December 31, 2022 Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) (In millions) Non-marketable equity investments measured using the Measurement Alternative (1) $ 1,122 $ 724 $ 398 Other assets (2) 165 165 — Total $ 1,287 $ 889 $ 398 (1) Excludes non-marketable equity securities of $ 565 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. The fair value of loans and interest receivables held for sale is classified within Level 3 as we estimate fair value using significant unobservable inputs. The significant unobservable input is the price at which the Company expects to sell the loans based upon our agreement with the global investment firm to purchase these loans. The price is determined based upon certain loan and risk classifications of the portfolio. The following table presents the valuation techniques covering the majority of Level 3 non-recurring fair value measurements and the most significant unobservable inputs used in those measurements as of September 30, 2023: Fair Value (In millions) Methodology Input Low (1) High (1) Weighted Average (1)(2) Loans and interest receivable, held for sale $ 2,165 Price-based Price $ 0.98 $ 1.00 $ 0.99 (1) Prices are measured in relation to $ 1.00 par. (2) Weighted average is calculated based on the fair value of the loans. 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 are classified within Level 3 when we estimate fair value using significant unobservable inputs such as when we remeasure due to impairment and use 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 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 $ 479 million and fair value of approximately $ 406 million as of September 30, 2023. Our notes receivable had a carrying value of approximately $ 441 million and fair value of approximately $ 396 million as of December 31, 2022. Our term debt (including current portion) in the form of fixed rate notes had a carrying value of approximately $ 10.5 billion and fair value of approximately $ 9.5 billion as of September 30, 2023. Our 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. 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 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. 29 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) NOTE 10— DERIVATIVE INSTRUMENTS SUMMARY OF DERIVATIVE INSTRUMENTS Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. We do not use any derivative instruments for trading or speculative purposes. Cash flow hedges We have significant international revenues and expenses 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 12 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in certain 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 or applicable expense line item in the condensed consolidated statements of income (loss) in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same, we conclude the hedge will be perfectly effective. We do not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We report cash flows arising from derivative instruments consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as cash flow hedges are classified in cash flows from operating activities on our condensed consolidated statements of cash flows. As of September 30, 2023, we estimated that $ 86 million of net derivative gains related to our cash flow hedges included in AOCI are expected to be reclassified into earnings within the next 12 months. During the three and nine months ended September 30, 2023 and 2022, 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 condensed consolidated statements of cash flows. We have no t reclassified any gains or losses related to net investment hedges from AOCI into earnings for any of the periods presented. 30 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Foreign currency exchange contracts not designated as hedging instruments We have a foreign currency exposure management program in which we use foreign currency exchange contracts to offset the foreign currency exchange risk of our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities. The gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities are recorded in other income (expense), net, which are offset by the gains and losses on these foreign currency exchange contracts. The cash flows associated with our non-designated derivatives used to hedge foreign currency denominated monetary assets and liabilities are classified in cash flows from operating activities on our condensed consolidated statements of cash flows. FAIR VALUE OF DERIVATIVE CONTRACTS The fair value of our outstanding derivative instruments as of September 30, 2023 and December 31, 2022 was as follows: Balance Sheet Location September 30, 2023 December 31, 2022 (In millions) Derivative Assets: Foreign currency exchange contracts designated as hedging instruments Other current assets $ 105 $ 167 Foreign currency exchange contracts designated as hedging instruments Other assets (non-current) 94 15 Foreign currency exchange contracts not designated as hedging instruments Other current assets 102 62 Total derivative assets $ 301 $ 244 Derivative Liabilities: Foreign currency exchange contracts designated as hedging instruments Other current liabilities $ 19 $ 68 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 37 97 Total derivative liabilities $ 56 $ 298 MASTER NETTING AGREEMENTS - RIGHTS OF SET-OFF Under master netting agreements with certain counterparties to our foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our condensed consolidated balance sheets. Rights of set-off associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities of $ 29 million as of September 30, 2023 and $ 70 million as of December 31, 2022. We have entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The following table provides the collateral posted and received: September 30, 2023 December 31, 2022 (In millions) Cash collateral posted (1) $ 16 $ 24 Cash collateral received (2) $ 138 $ 203 (1) Right to reclaim cash collateral related to our derivative liabilities recognized in other current assets on our condensed consolidated balance sheets. (2) Obligation to return counterparty cash collateral related to our derivative assets recognized in other current liabilities on our condensed consolidated balance sheets. 31 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) EFFECT OF DERIVATIVE CONTRACTS ON CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following tables provide the location in the condensed consolidated statements of income (loss) and amount of recognized gains or losses related to our derivative instruments: Three Months Ended September 30, 2023 2022 (In millions) Net revenues Other income (expense), net Net revenues Other income (expense), net Total amounts presented in the condensed consolidated statements of income (loss) in which the effects of cash flow hedges and net investment hedges are recorded $ 7,418 $ 73 $ 6,846 $ 460 Gains (losses) on derivatives in cash flow hedging relationship: Amount of gains on foreign currency exchange contracts reclassified from AOCI 7 — 156 — Gains (losses) on derivatives in net investment hedging relationship: Amount of gains on foreign currency exchange contracts excluded from the assessment of effectiveness — 20 — 27 Gains (losses) on derivatives not designated as hedging instruments: Amount of gains on foreign currency exchange contracts — 54 — 52 Amount of losses on equity derivative contracts (1) — — — ( 174 ) Total gains (losses) $ 7 $ 74 $ 156 $ ( 95 ) (1) During the three months ended September 30, 2022, equity derivative contracts were entered into and matured in association with the sale of marketable equity securities related to a strategic investment. Nine Months Ended September 30, 2023 2022 (In millions) Net revenues Other income (expense), net Net revenues Other income (expense), net Total amounts presented in the condensed consolidated statements of income (loss) in which the effects of cash flow hedges and net investment hedges are recorded $ 21,745 $ 318 $ 20,135 $ ( 337 ) Gains (losses) on derivatives in cash flow hedging relationship: Amount of gains on foreign exchange contracts reclassified from AOCI 117 — 310 — Gains (losses) on derivatives in net investment hedging relationship: Amount of gains on foreign exchange contracts excluded from the assessment of effectiveness — 79 — 53 Gains (losses) on derivatives not designated as hedging instruments: Amount of (losses) gains on foreign exchange contracts — ( 102 ) — 160 Amount of losses on equity derivative contracts (1) — — — ( 174 ) Total gains (losses) $ 117 $ ( 23 ) $ 310 $ 39 (1) During the nine months ended September 30, 2022, equity derivative contracts were entered into and matured in association with the sale of marketable equity securities related to a strategic investment. The cash flows associated with the equity derivative contracts were classified in cash flows from investing activities on our condensed consolidated statements of cash flows. 32 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The following table provides the amount of pre-tax unrealized gains or losses included in the assessment of hedge effectiveness related to our derivative instruments designated as hedging instruments that are recognized in other comprehensive income (loss): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Unrealized gains on foreign exchange contracts designated as cash flow hedges $ 116 $ 294 $ 92 $ 658 Unrealized gains on foreign exchange contracts designated as net investment hedges 35 97 231 253 Total unrealized gains recognized from derivative contracts designated as hedging instruments in the condensed consolidated statements of comprehensive income (loss) $ 151 $ 391 $ 323 $ 911 NOTIONAL AMOUNTS OF DERIVATIVE CONTRACTS Derivative transactions are measured in terms of the notional amount; however, this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the underlying basis on which the value of foreign currency exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives: September 30, 2023 December 31, 2022 (In millions) Foreign exchange contracts designated as hedging instruments $ 6,336 $ 7,149 Foreign exchange contracts not designated as hedging instruments 9,387 11,840 Total $ 15,723 $ 18,989 NOTE 11— LOANS AND INTEREST RECEIVABLE LOANS AND INTEREST RECEIVABLE, HELD FOR SALE In June 2023, we entered into a multi-year agreement with a global investment firm to sell up to € 40 billion of our eligible consumer installment receivables portfolio, including those held on our balance sheet at closing of the transaction and a forward-flow arrangement for the sale of future originations. Loans and interest receivable, held for sale are recorded at the lower of cost or fair value, determined on an aggregate basis, with valuation changes and any associated charge-offs recorded in restructuring and other charges on our condensed consolidated statements of income (loss). Prior to the decision to sell, this portfolio was reported at outstanding principal balances, net of allowances, including unamortized deferred origination costs and estimated collectible interest and fees. At the time of reclassification, any previously recorded allowance for credit losses for loans and interest receivable outstanding was reversed, resulting in a decrease of approximately $ 33 million in transaction and credit losses in our condensed consolidated statements of income (loss). See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information. During the nine months ended September 30, 2023, we reclassified approximately $ 1.2 billion of eligible consumer installment receivables from loans and interest receivable, net to loans and interest receivable, held for sale. As of September 30, 2023, the total outstanding balance in our held for sale portfolio was $ 2.2 billion, including loans reclassified as held for sale and loans originated as held for sale. 33 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) LOANS AND INTEREST RECEIVABLE, NET 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., which is made available to consumers as a funding source in their PayPal wallet once they are approved for credit. 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. We offer non interest-bearing installment credit products in these markets as well as interest-bearing installment credit products in the U.S. and Germany. Beginning in June 2022, we have purchased receivables related to interest-bearing installment loans extended to U.S. consumers by an independent chartered financial institution (“partner institution”) and are responsible for the servicing functions related to that portfolio. During the nine months ended September 30, 2023 and 2022, we purchased approximately $ 643 million and $ 106 million in consumer receivables, respectively. As of September 30, 2023 and December 31, 2022, the outstanding balance of consumer receivables, which consisted of revolving and installment loans and interest receivable, was $ 4.2 billion and $ 5.9 billion, respectively, net of the participation interest sold to the partner institution of $ 22 million and $ 17 million, respectively. We closely monitor the credit quality of our consumer receivables to evaluate and manage our related exposure to credit risk. Credit risk management begins with initial underwriting and continues through the full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal data, including the consumer’s prior repayment history with our credit products where available. We use delinquency status and trends to assist in making (or, for 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. Consumer receivables delinquency and allowance The following tables present the delinquency status and gross charge-offs of consumer loans and interest receivable by year of origination. The amounts are based on the number of days past the billing date for revolving loans or contractual repayment date for installment loans. The “current” category represents balances that are within 29 days of the billing date or contractual repayment date, as applicable. September 30, 2023 (In millions, except percentages) Revolving Loans Amortized Cost Basis Installment Loans Amortized Cost Basis 2023 2022 2021 2020 2019 Total Percent Consumer loans and interest receivable: Current $ 1,993 $ 1,609 $ 412 $ 11 $ — $ — $ 4,025 95.4 % 30 - 59 Days 26 30 6 1 — — 63 1.5 % 60 - 89 Days 18 22 6 — — — 46 1.1 % 90 - 179 Days 35 37 11 1 — — 84 2.0 % Total $ 2,072 $ 1,698 $ 435 $ 13 $ — $ — $ 4,218 100 % Gross charge-offs for the nine months ended September 30, 2023 $ 95 $ 43 $ 129 $ 5 $ — $ — $ 272 34 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) December 31, 2022 (In millions, except percentages) Revolving Loans Amortized Cost Basis Installment Loans Amortized Cost Basis 2022 2021 2020 2019 2018 Total Percent Consumer loans and interest receivable: 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. The following table summarizes the activity in the allowance for consumer loans and interest receivable for the nine months ended September 30, 2023 and 2022: September 30, 2023 September 30, 2022 Consumer Loans Receivable Interest Receivable Total Allowance (1) Consumer Loans Receivable Interest Receivable Total Allowance (2) (In millions) Beginning balance $ 322 $ 25 $ 347 $ 243 $ 43 $ 286 Reversal of allowance due to reclassification of loans and interest receivable to held for sale ( 33 ) — ( 33 ) — — — Provisions 271 20 291 198 9 207 Charge-offs ( 250 ) ( 22 ) ( 272 ) ( 149 ) ( 22 ) ( 171 ) Recoveries 29 — 29 14 — 14 Other (3) ( 5 ) — ( 5 ) ( 41 ) ( 6 ) ( 47 ) Ending balance $ 334 $ 23 $ 357 $ 265 $ 24 $ 289 (1) Beginning balances, provisions and charge-offs include amounts related to loans and interest receivable prior to their reclassification to loan and interest receivable, held for sale. (2) Excludes allowances from other consumer credit products of $ 2 million at September 30, 2022. (3) Includes amounts related to foreign currency remeasurement. The provision for the nine months ended September 30, 2023 for our consumer receivable portfolio was primarily attributable to growth in installment loans in the U.S. and Japan and U.K. revolving loans as well as a deterioration in credit quality of installment loans in the U.S. In the second quarter of 2023, we updated our expected credit loss models for the U.K. revolving loan product. The updated expected credit loss models utilize certain macroeconomic factors such as forecasted trends in household disposable income and retail e-commerce sales, and no longer consider unemployment. These changes did not have a material impact on our provision recorded in the period. Qualitative adjustments were made to account for limitations in our current expected credit loss models due to uncertainty with respect to the financial health of our borrowers. The increase in charge-offs for the nine months ended September 30, 2023 compared to the same period of the prior year was due to the expansion of our installment products and growth of revolving credit products. The provision for current expected credit losses relating to our consumer receivable portfolio is recognized in transaction and credit losses on our condensed consolidated statements of income (loss). The provision for interest receivable for interest earned on our consumer receivable portfolio is recognized in revenues from other value added services as a reduction to revenue. Loans receivable continue to accrue interest until they are charged off. 35 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products, which we collectively refer to as our merchant finance offerings. We purchase receivables related to credit extended to U.S. merchants by a partner institution and are responsible for the servicing functions related to that portfolio. During the nine months ended September 30, 2023 and 2022, we purchased approximately $ 1.3 billion and $ 2.3 billion in merchant receivables, respectively. As of September 30, 2023 and December 31, 2022, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $ 1.4 billion and $ 2.1 billion, respectively, net of the participation interest sold to the partner institution of $ 55 million and $ 97 million, respectively. Through our PPWC product, merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan or advance based on the overall credit assessment of the merchant. Loans and advances are repaid through a fixed percentage of the merchant’s future payment volume that PayPal processes. Through our PPBL product, we provide merchants access to short-term business financing for a fixed fee based on an evaluation of the applying business as well as the business owner. PPBL repayments are collected through periodic payments until the balance has been satisfied. The interest or fee is fixed at the time the loan or advance is extended and is recognized as deferred revenue in accrued expenses and other current liabilities on our condensed consolidated balance sheets. The fixed interest or fee is amortized into revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period for PPWC based on the merchant’s payment processing history with PayPal. For PPWC, there is a general requirement that at least 10 % of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days. We calculate the repayment rate of the merchant’s future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For PPBL, we receive fixed periodic payments over the contractual term of the loan, which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period, as well as the credit quality of our merchant loans and advances that we extend or purchase, so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a loan or advance, we use, among other indicators, risk models developed internally which utilize information obtained from multiple internal and external data sources to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount and the related interest or fee. Primary drivers of the models include the merchant’s annual payment volume, payment processing history with PayPal, prior repayment history with PayPal’s credit products where available, information sourced from consumer and business credit bureau reports, and other information obtained during the application process. We use delinquency status and trends to assist in making (or, in the U.S., to assist 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. 36 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Merchant receivables delinquency and allowance The following tables present the delinquency status and gross charge-offs of merchant loans, advances, and interest and fees receivable by year of origination. The amounts are based on the number of days past the expected or contractual repayment date for amounts outstanding. The “current” category represents balances that are within 29 days of the expected repayment date or contractual repayment date, as applicable. September 30, 2023 (In millions, except percentages) 2023 2022 2021 2020 2019 Total Percent Merchant loans, advances, and interest and fees receivable: Current $ 988 $ 173 $ 5 $ 30 $ 20 $ 1,216 86.7 % 30 - 59 Days 30 24 2 1 3 60 4.3 % 60 - 89 Days 15 17 — 1 1 34 2.4 % 90 - 179 Days 27 53 2 2 1 85 6.1 % 180+ Days — 4 2 1 1 8 0.5 % Total $ 1,060 $ 271 $ 11 $ 35 $ 26 $ 1,403 100 % Gross charge-offs for the nine months ended September 30, 2023 $ 12 $ 185 $ 13 $ 14 $ 4 $ 228 December 31, 2022 (In millions, except percentages) 2022 2021 2020 2019 2018 Total Percent Merchant loans, advances, and interest and fees receivable: 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 $ 1,979 $ 42 $ 69 $ 54 $ 2 $ 2,146 100 % The following table summarizes the activity in the allowance for merchant loans, advances, and interest and fees receivable for the nine months ended September 30, 2023 and 2022: September 30, 2023 September 30, 2022 Merchant Loans and Advances Interest and Fees Receivable Total Allowance Merchant Loans and Advances Interest and Fees Receivable Total Allowance (In millions) Beginning balance $ 230 $ 18 $ 248 $ 192 $ 9 $ 201 Provisions 135 24 159 31 9 40 Charge-offs ( 204 ) ( 24 ) ( 228 ) ( 75 ) ( 6 ) ( 81 ) Recoveries 19 — 19 27 — 27 Ending balance $ 180 $ 18 $ 198 $ 175 $ 12 $ 187 The provision for the nine months ended September 30, 2023 was primarily attributable to a deterioration in credit quality of loans outstanding. Qualitative adjustments were made to account for limitations in our current expected credit loss models due to uncertainty around the financial health of our borrowers, including the effectiveness of loan modification programs made available to merchants, as described further below. 37 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The increase in the charge-offs for the nine months ended September 30, 2023 compared to the same period of the prior year was due to the expansion of acceptable risk parameters in 2022, which resulted in a deterioration of the overall credit quality of loans outstanding. 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 after receipt of notification of bankruptcy. The provision for credit losses on merchant loans and advances is recognized in transaction and credit losses on our condensed 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 condensed consolidated balance sheets. Charge-offs are recorded as a reduction to our allowance for loans and interest receivable and subsequent recoveries, if any, are recorded as an increase to the allowance for loans and interest receivable. Loan modifications for merchants experiencing financial difficulty In certain instances, we may modify the merchant loans, advances, and interest and fees receivable for which we determine 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 enable us to potentially mitigate losses. Modifications during the three and nine months ended September 30, 2023 were term extensions. These modifications increased the term, while moving the delinquency status to current. The following table details merchant loans, advances, and interest and fees receivable as of September 30, 2023 that were modified through a term extension to a merchant experiencing financial difficulty during the three and nine months ended September 30, 2023, and the financial effect of these modifications: Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Merchant loans, advances, and interest and fees receivables: Amortized cost basis (in millions) $ 37 $ 107 Modifications as % of merchant loans, advances, and interest and fees receivables 3 % 8 % Weighted average term extension (months) 25 24 We closely monitor the performance of the merchant loans, advances, and interest and fees receivable that were modified to extend the term to understand the effectiveness of these modification efforts. The following table depicts the performance of merchant loans, advances, and interest and fees receivable as of September 30, 2023 that have been modified during the nine months ended September 30, 2023: September 30, 2023 (In millions) Merchant loans, advances, and interest and fees receivables: Current $ 86 30 - 59 days past due 7 60 - 89 days past due 4 90 - 179 days past due 10 Total $ 107 A merchant is considered in payment default after a modification when the merchant’s payment is 60 days past their expected or contractual repayment date. Merchant loans, advances, and interest and fees receivable modified to extend the term since January 1, 2023 that subsequently defaulted were not material during the three and nine months ended September 30, 2023. 38 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Allowances for merchant loans, advances, and interest and fees receivable modified due to merchants experiencing financial difficulties are assessed separately from other loans and advances within our portfolio and are determined by estimating current expected credit losses utilizing the modified term. Historical loss estimates are utilized in addition to macroeconomic assumptions to determine current expected credit losses. Further, we may include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses. NOTE 12— DEBT FIXED RATE NOTES In June 2023, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of ¥ 90 billion (approximately $ 603 million as of September 30, 2023). Interest on these notes is payable on June 9 and December 9 of each year, beginning on December 9, 2023. In May 2022, May 2020, and September 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $ 3.0 billion, $ 4.0 billion and $ 5.0 billion, respectively. The notes issued from the June 2023, 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 (except for the June 2023 notes), 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 condensed consolidated statements of income (loss). 39 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) As of September 30, 2023 and December 31, 2022, we had an outstanding aggregate principal amount of $ 10.6 billion and $ 10.4 billion, respectively, related to the Notes. The following table summarizes the Notes: Maturities Effective Interest Rate September 30, 2023 December 31, 2022 (in millions) September 2019 debt issuance: 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: Fixed-rate 1.350 % notes 6/1/2023 1.55 % — 418 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: Fixed-rate 3.900 % notes 6/1/2027 4.06 % 500 500 Fixed-rate 4.400 % notes 6/1/2032 4.53 % 1,000 1,000 Fixed-rate 5.050 % notes 6/1/2052 5.14 % 1,000 1,000 Fixed-rate 5.250 % notes 6/1/2062 5.34 % 500 500 June 2023 debt issuance (1) : ¥ 30 billion fixed-rate 0.813 % notes 6/9/2025 0.89 % 201 — ¥ 23 billion fixed-rate 0.972 % notes 6/9/2026 1.06 % 154 — ¥ 37 billion fixed-rate 1.240 % notes 6/9/2028 1.31 % 248 — Total term debt $ 10,603 $ 10,418 Unamortized premium (discount) and issuance costs, net ( 71 ) ( 74 ) Less: current portion of term debt (2) — ( 418 ) Total carrying amount of term debt $ 10,532 $ 9,926 (1) Principal amounts represent the U.S. dollar equivalent as of September 30, 2023 and December 31, 2022, respectively. (2) The current portion of term debt is included within accrued expenses and other current liabilities on our condensed consolidated balance sheets. The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and amortization of the debt discount. The interest expense recorded for the Notes, including amortization of the debt discount and debt issuance costs, was $ 84 million and $ 250 million for the three and nine months ended September 30, 2023, respectively. The interest expense recorded for the Notes, including amortization of the debt discount, debt issuance costs, and debt extinguishment net gains, was $ 83 million and $ 206 million for the three and nine months ended September 30, 2022, respectively. 40 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) CREDIT FACILITIES Five-year revolving credit facility In June 2023, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $ 5.0 billion, five-year revolving credit facility and terminated the facility entered into in September 2019. The Credit Agreement includes a $ 150 million letter of credit sub-facility and a $ 600 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, 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 September 30, 2023, 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 of 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 will bear interest at either (i) the applicable term benchmark rate plus a margin (based on the Company’s public debt ratings) ranging from 0.750 % to 1.250 %, (ii) the applicable Risk-Free Rate (Sterling Overnight Index Average for loans denominated in pounds sterling and Euro Short-Term Rate for loans denominated in euros) rate plus a margin (based on the Company’s public debt ratings) ranging from 0.750 % to 1.250 %, (iii) the applicable overnight rate plus a margin (based on the Company’s public debt ratings) ranging from 0.750 % to 1.250 % or (iv) a formula based on the prime rate, the federal funds effective rate or the adjusted term Secured Overnight Financing Rate plus a margin (based on the Company’s public debt ratings) ranging from zero to 0.250 %. Subject to certain conditions stated in the Credit Agreement, the Company and any subsidiaries designated as additional borrowers may borrow, prepay and reborrow amounts under the revolving credit facility at any time during the term of the Credit Agreement. The Credit Agreement will terminate and all amounts owing thereunder will be due and payable on June 7, 2028, unless (a) the commitments are terminated earlier, either at the request of the Company or, if an event of default occurs, by the lenders (or automatically in the case of certain bankruptcy-related events), or (b) the maturity date is extended upon the request of the Company, subject to the agreement of the lenders. 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 the Company to meet a quarterly financial test with respect to a maximum consolidated leverage ratio. As of September 30, 2023, no borrowings or letters of credit were outstanding under the Credit Agreement. Accordingly, at September 30, 2023, $ 5.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions to borrowing. Paidy credit agreement In February 2022, we entered into a credit agreement (the “Paidy Credit Agreement”) with Paidy as co-borrower, which provided for an unsecured revolving credit facility of ¥ 60.0 billion, which was modified in September 2022 to increase the borrowing capacity by ¥ 30.0 billion for a total borrowing capacity of ¥ 90.0 billion (approximately $ 603 million as of September 30, 2023). In June 2023, we repaid borrowings on the Paidy Credit Agreement using proceeds from the June 2023 debt issuance. As of September 30, 2023 and December 31, 2022, ¥ 16.0 billion (approximately $ 108 million) and ¥ 64.3 billion (approximately $ 491 million) was drawn down under the Paidy Credit Agreement, respectively, which was recorded in long-term debt on our condensed consolidated balance sheets. At September 30, 2023, ¥ 74.0 billion (approximately $ 495 million) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing. During the three and nine months ended September 30, 2023 and 2022, the total interest expense and fees we recorded related to the Paidy Credit Agreement were de minimis. 41 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) FUTURE PRINCIPAL PAYMENTS As of September 30, 2023, the future principal payments associated with our term debt were as follows (in millions): Remaining 2023 $ — 2024 1,250 2025 1,201 2026 1,404 2027 500 Thereafter 6,248 Total $ 10,603 Other than as provided above, there were no significant changes to the information disclosed in our 2022 Form 10-K. NOTE 13— COMMITMENTS AND CONTINGENCIES COMMITMENTS As of September 30, 2023 and December 31, 2022, approximately $ 5.7 billion and $ 4.9 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. LITIGATION AND REGULATORY MATTERS Overview We are involved in legal and regulatory proceedings on an ongoing basis. Certain of these proceedings are in early stages and may seek an indeterminate amount of damages or penalties or may require us to change or adopt certain business practices. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements at that time. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 13, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies. Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable and reasonably estimable were not material as of September 30, 2023. 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. 42 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Regulatory proceedings 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 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. AUSTRAC had notified PPAU that its enforcement team was investigating the matters reported upon by the external auditor in its August 31, 2020 final report. As a resolution of this investigation, on March 17, 2023, AUSTRAC’s Chief Executive Officer accepted an enforceable undertaking from PPAU in relation to the self-reported issues. The enforceable undertaking does not include a monetary penalty. The entry into and compliance with the enforceable undertaking will not require a change to 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 adversely affect our business. PPAU is required to deliver an Assurance Action Plan (“AAP”) under the enforceable undertaking to demonstrate that the governance and oversight arrangements following the remedial work completed by PPAU are sustainable and appropriate. The enforceable undertaking requires PPAU to appoint an external auditor. The external auditor was appointed on June 22, 2023 and will assess and report on the appropriateness, sustainability and efficacy of the actions to be taken under the AAP. The external auditor’s final report to PPAU and AUSTRAC is due on or before April 16, 2024. The successful completion of the enforceable undertaking is subject to AUSTRAC’s ultimate review and decision based on the external auditor’s final report. We cannot predict the outcome of the external auditor’s final report or AUSTRAC’s decision. Any failure to comply with the enforceable undertaking could result in penalties or require us to change our business practices. 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. 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. In October 2023, we received a CID from the CFPB related to investigation and error-resolution obligations under Regulation E, the presentment of transactions to linked bank accounts, and related matters. The CID requests the production of documents and answers to written questions. We are cooperating with the CFPB in connection with this CID. On November 1, 2023, we received a subpoena from the U.S. SEC Division of Enforcement relating to PayPal USD stablecoin. The subpoena requests the production of documents. We are cooperating with the SEC in connection with this request. 43 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Legal proceedings 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 putative securities class action captioned Kang v. PayPal Holdings, Inc., et al. , Case No. 21-cv-06468, that was filed in the U.S. District Court for the Northern District of California (the “Kang Securities Action”), and name certain of our officers, including our former 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 (“Exchange Act”), 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 June 29, 2023, following the final dismissal of the Kang Securities Action, the Court ordered a stipulation dismissing the California Derivative Actions, without prejudice, and on July 7, 2023, the Court ordered a stipulation dismissing the Delaware Derivative Action, without prejudice. 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”). On March 13, 2023, the lead plaintiff filed an amended and consolidated complaint. 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 alleged violations of Sections 10(b) of the Exchange Act against the Company, as well as its former Chief Executive Officer, Chief Strategy, Growth and Data Officer, and former Chief Financial Officer (collectively, the “Individual Defendants,” and together with the Company, “Defendants”), and for alleged violations of Sections 20(a) and 20A of the Exchange Act against the Individual Defendants. The complaint alleges that certain public statements made by Defendants 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. On April 4, 2023, a putative shareholder derivative action captioned Nelson v. Daniel Schulman, et. al. , Case No. 23-cv-01913, was filed in the U.S. District Court for the District of New Jersey (the “Nelson Action”) purportedly on behalf of the Company. The Shah and Nelson Actions are based on the same alleged facts and circumstances as the PPH Securities Action, and name certain of our officers, including our former Chief Executive Officer and former Chief Financial Officer, and members of our Board of Directors, as defendants. The Shah and Nelson Actions allege claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, waste of corporate assets, gross mismanagement and violations of the Exchange Act, and seek to recover damages on behalf of the Company. The Shah and Nelson Actions have been stayed pending further developments in the PPH Securities Action. On December 20, 2022, a civil lawsuit captioned State of Hawai‘i, by its Office of Consumer Protection, v. PayPal, Inc., and PayPal Holdings, Inc., Case No. 1CCV-22-0001610, was filed in the Circuit Court of the First Circuit of the State of Hawai‘i (the “Hawai‘i Action”). The Hawai‘i Action asserts claims for unfair and deceptive acts and practices under Hawai‘i Revised Statutes Sections 480-2(a) and 481A-3(a). Plaintiff seeks injunctive relief as well as unspecified penalties and other monetary relief. On July 14, 2023, the court denied Defendants’ motion to dismiss the complaint. Trial is scheduled to begin in August 2024. 44 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) General matters Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions, particularly in cases where we are introducing new products or services in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time-consuming and costly to defend and resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements on unfavorable terms or make substantial payments to settle claims or to satisfy damages awarded by courts. From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) 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. 45 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions. OFF-BALANCE SHEET ARRANGEMENTS As of September 30, 2023 and December 31, 2022, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources. PROTECTION PROGRAMS We provide merchants and consumers with protection programs for certain transactions completed on our payments platform. These programs are intended to protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our Purchase Protection Program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our Seller Protection Programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs are considered assurance-type warranties under applicable accounting standards for which we estimate and record associated costs in transaction and credit losses during the period the payment transaction is completed. At September 30, 2023 and December 31, 2022, the allowance for transaction losses was $ 67 million and $ 66 million, respectively. The allowance for negative customer balances was $ 230 million and $ 212 million at September 30, 2023 and December 31, 2022, respectively. The following table shows changes in the allowance for transaction losses and negative customer balances related to our protection programs for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in millions) Beginning balance $ 346 $ 378 $ 278 $ 355 Provision 329 254 915 956 Realized losses ( 417 ) ( 394 ) ( 970 ) ( 1,157 ) Recoveries 39 50 74 134 Ending balance $ 297 $ 288 $ 297 $ 288 NOTE 14— STOCK REPURCHASE PROGRAMS During the nine months ended September 30, 2023, we repurchased approximately 64 million shares of our common stock for approximately $ 4.4 billion at an average price of $ 69.06 , excluding excise tax. These shares were purchased in the open market under our stock repurchase programs authorized in July 2018 and June 2022. As of September 30, 2023, a total of approximately $ 11.5 billion remained available for future repurchases of our common stock under our June 2022 stock repurchase program. The Inflation Reduction Act of 2022 imposed a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. Beginning in the first quarter of 2023, we have reflected the applicable excise tax in treasury stock on our condensed consolidated balance sheet. During the nine months ended September 30, 2023, we recorded $ 39 million in excise tax within treasury stock on our condensed consolidated balance sheet. NOTE 15— STOCK-BASED PLANS In May 2023, our stockholders approved an additional authorization of 34.6 million shares to the Amended and Restated PayPal Holdings, Inc. 2015 Equity Incentive Award Plan (the “Plan”). In June 2023, the Company filed a post-effective amendment to the registration statement for the PayPal Holdings, Inc. 2022 Inducement Plan (“Inducement Plan”), which enabled 2.6 million shares previously issuable under the Inducement Plan to be included in the 34.6 million additional shares issuable under the Plan. 46 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) STOCK-BASED COMPENSATION EXPENSE Stock-based compensation expense for our equity incentive plans are measured based on their estimated fair value at the time of grant and recognized over the award’s vesting period. The impact on our results of operations of recording stock-based compensation expense under our equity incentive plans for the three and nine months ended September 30, 2023 and 2022 was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In millions) Customer support and operations $ 79 $ 56 $ 227 $ 196 Sales and marketing 44 27 132 114 Technology and development 156 115 453 380 General and administrative 115 41 315 317 Total stock-based compensation expense $ 394 $ 239 $ 1,127 $ 1,007 Capitalized stock-based compensation expense $ 14 $ 12 $ 38 $ 40 NOTE 16— INCOME TAXES Our effective tax rate for the three and nine months ended September 30, 2023 was 18 % and 21 %, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 was 16 % and 34 %, respectively. The difference between our effective tax rate and the U.S. federal statutory rate of 21% in the three and nine months ended September 30, 2023 was primarily the result of foreign income taxed at different rates and discrete tax adjustments, including tax expense related to stock-based compensation. The difference between our effective tax rate and the U.S. federal statutory rate of 21% for the three and nine months ended September 30, 2022 was primarily the result of foreign income taxed at different rates, and for the nine months ended September 30, 2022, tax expense related to the intra-group transfer of intellectual property. NOTE 17— RESTRUCTURING AND OTHER CHARGES During the first quarter of 2023, management initiated a global workforce reduction intended to focus resources on core strategic priorities, and improve our cost structure and operating efficiency. The associated restructuring charges during the three and nine months ended September 30, 2023 were $ 3 million and $ 120 million, respectively. We primarily incurred employee severance and benefits costs, substantially all of which have been accrued for as of March 31, 2023. The following table summarizes the restructuring reserve activity during the nine months ended September 30, 2023: Employee Severance and Benefits and Other Associated Costs (In millions) Accrued liability as of January 1, 2023 $ 24 Charges 120 Payments ( 136 ) Accrued liability as of September 30, 2023 $ 8 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 during the three and nine months ended September 30, 2022 were $ 23 million and $ 114 million, respectively. We primarily incurred employee severance and benefits costs, as well as associated consulting costs under this strategic reduction. The strategic actions associated with this plan were substantially completed by the fourth quarter of 2022. 47 Table of Contents PayPal Holdings, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 $ 15 million and $ 58 million in the three and nine months ended September 30, 2023, respectively, and $ 29 million and $ 64 million in the three and nine months ended September 30, 2022, 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. In the nine months ended September 30, 2023, we recognized a gain of $ 17 million due to the sale of an owned property. We also incurred a loss of $ 12 million related to another owned property held for sale in the nine months ended September 30, 2023. During the three and nine months ended September 30, 2023, approximately $ 15 million and $ 49 million, respectively, of losses were recorded in restructuring and other charges in order to measure loans and interest receivable, held for sale, at the lower of cost or fair value. NOTE 18— SUBSEQUENT EVENTS As described in “Note 1—Overview and Summary of Significant Accounting Policies,” in June 2023 we entered into a multi-year agreement with a global investment firm to sell up to € 40 billion of eligible consumer installment receivables. In October 2023, we began selling those receivables and as of October 31, 2023, $ 1.4 billion of such receivables, which were classified as held for sale, have been sold. Following the sale, the global investment firm became the owner of the receivables sold and we no longer hold an ownership interest in these receivables. This transaction was accounted for as a sale, based on our determination that it met the necessary criteria for such accounting including legal isolation of transferred assets, ability of the transferee to pledge or exchange the transferred assets without constraint, and the transfer of control. Accordingly, we no longer record these loan and interest receivables on our consolidated financial statements. We also concluded that our continuing involvement in the arrangement does not negate this determination. 48 Table of Contents